Consolidated Freightways, Inc. v. C.I.R.

• Citation: 708 F.2d 1385
• Decision Date: 17 June 1983
• Docket Number: 82-7426,Nos. 82-7366,s. 82-7366
• Parties: 83-1 USTC P 9420 CONSOLIDATED FREIGHTWAYS, INC., and Affiliates, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant, v. CONSOLIDATED FREIGHTWAYS, INC., and Affiliates, Petitioners-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 1385

708 F.2d 1385

83-1 USTC P 9420

CONSOLIDATED FREIGHTWAYS, INC., and Affiliates, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant, v. CONSOLIDATED FREIGHTWAYS, INC., and Affiliates, Petitioners-Appellees.

Nos. 82-7366, 82-7426.

United States Court of Appeals Ninth Circuit.

Argued and Submitted March 18, 1983.

Decided June 17, 1983.

James E. Merritt, Washington, D.C., for Consolidated Freightways.

William A. Whitledge, Washington, D.C., for C.I.R.

On Appeal from a Decision of the United States Tax Court.

Before CHOY and SNEED, Circuit Judges, and RAFEEDIE ^*, District Judge.

SNEED, Circuit Judge:

This case involves two principal issues. The first is whether appellant Consolidated Freightways' truck loading docks qualify for an investment tax credit. Related to that issue is whether the lighting fixtures and overhead doors in the loading docks are structural components, and therefore ineligible for the investment tax credit. The second principal issue is whether certain deposits with a surety are deductible under section 461(f) of the Internal Revenue Code of 1954.

The Tax Court held the loading docks did not qualify for the tax credit, but allowed credit for the lighting fixtures and overhead doors. The Tax Court also held that the taxpayer's deposits with the surety were not deductible under section 461(f) as money transferred to provide for the satisfaction of a contested liability. 74 T.C. 768 (1980). We affirm the Tax Court's denial of the tax credit for the loading docks and of the section 461(f) deduction. We reverse the Tax Court's grant of a tax credit for the lighting fixtures and overhead doors.

I. THE INVESTMENT TAX CREDIT CLAIM

A. Truck Loading Docks

Consolidated Freightways claimed an investment tax credit for the construction of truck loading docks on its income tax returns for 1966-1970. ¹ The Commissioner disallowed the claim under section 48 of the Internal Revenue Code, which provides that "a building and its structural components" are not property eligible for an investment tax credit, and the Tax Court rejected Consolidated's suit for redetermination of deficiencies. Consolidated in this appeal argues, first, that the Tax Court failed to apply the proper test for deciding whether the loading docks are buildings, and, second, that an application of the proper test would establish that the loading docks are not buildings, and are therefore eligible for the investment tax credit. We disagree.

Treasury Regulation Sec. 1.48-1(e)(1) states that:

The term "building" generally means any structure or edifice enclosing a space within its walls, and usually covered by a roof, the purpose of which is, for example, to provide shelter or housing, or to provide working, office, parking, display, or sales space. The term includes, for example, structures such as apartment houses, factory and office buildings, warehouses, barns, garages, railway or bus stations, and stores. ²

In interpreting this Regulation, courts have used two tests to decide whether a structure is a building: (1) the "appearance test"--does the structure look like a building; and (2) the "functional test"--does the structure function like a building.

1. Appearance Test

The Tax Court held that the functional test is the primary means of determining whether a structure is a building. It did not reach the appearance test, except in a footnote. 74 T.C. at 794-95, 796 n. 11. Consolidated argues that the Tax Court erred in failing to apply the appearance test, and that the appearance test would establish that the docks are not buildings because they lack permanent walls. Consolidated is mistaken.

In Thirup v. Commissioner, 508 F.2d 915, 919 (9th Cir.1974), we stated that we "thoroughly agree ... [with the] recent authorities ... [who have] abandon[ed] the appearance test," and we employed the functional test and held that greenhouses are not buildings. See Brown-Forman Distillers Corp. v. United States, 499 F.2d 1263, 1271 (Ct.Cl.1974) ("the real inquiry is whether [the structures] are functioning or being used as 'buildings' "); Satrum v. Commissioner, 62 T.C. 413, 416 (1974) (applying only the functional test). But cf. A.C. Monk & Co. v. United States, 686 F.2d 1058, 1061 (4th Cir.1982); (placing major emphasis on functional test, but still looking to appearance); Consolidated Freightways, Inc. v. United States, 620 F.2d 862, 870, 223 Ct.Cl. 443 (Ct.Cl.1980) (same). Thus, the Tax Court's failure to employ the functional test is consistent with our approach in Thirup.

Consolidated contends, however, that the Tax Court was the first court to hold that a structure that does not look like a building is nonetheless a building for investment tax credit purposes. Consolidated is wrong. The docks appear to be buildings, as the Tax Court said at 74 T.C. at 796 n. 11. The photographs of the docks confirm this. The docks, although they lack normal walls, are mostly enclosed by overhead doors. Consolidated insists that the docks cannot be buildings because buildings must have permanent walls. This argument was advanced--and rejected--in both A.C. Monk, 686 F.2d at 1063, and Consolidated Freightways, 620 F.2d at 870 & n. 17, and in Yellow Freight System, Inc. v. United States, 538 F.2d 790, 796 & n. 9 (8th Cir.1976). We agree with these courts that, for the purposes of the investment tax credit, a structure without permanent walls may constitute a building.

2. Functional Test

To apply the functional test we must determine whether the structure functions like a building--does it "provide shelter ... or furnish working [or] office ... space, or exist for another purpose that could be listed with the enumerated purposes without violating the constraining rules of ejusdem generis." Thirup, 508 F.2d at 919. If it functions as a building because, for example, it furnishes working space to employees, it is then necessary to consider the relationship between the "nature" of the employee activities inside the structure and the structure's primary function: does it "provide working space for employees that is more than merely incidental to the principal function or use of the structure"? Id. ³

The Tax Court held that, in looking at the " 'nature' of human activity" in the structure, "an important, but not the sole, point of inquiry is the quantity and quality of human activity in the structure." Id. It then found that "a substantial purpose of the docks is to provide a working space in which the dockworkers can efficiently move freight," and that the "purpose of the dock[s] is far more than 'incidentally' to provide working space for employees ... [since h]uman activities inside the docks were essential to the function of the docks." Id. at 795-96 (emphasis in original). Therefore, the docks were "buildings."

Consolidated contends that the Tax Court erred in looking at the quantity of human activity in the docks, and in incorporating that criterion into its findings. It also asserts that the Tax Court failed to apply, and make findings on, the "proper" Thirup tests, which Consolidated claims are: (1) whether the docks are "specialized structures whose utility is principally and primarily a significantly contributive factor in the actual manufacturing or production of the product itself," Thirup, 508 F.2d at 919; and (2) whether the docks are "specialized structure[s] not reasonably adaptable to other possible uses," A.C. Monk, 686 F.2d at 1061. We shall address each of these contentions.

It is true that the Thirup court found "unpersuasive" the distinction between buildings and other structures based on the amount of human activity in the structures. 508 F.2d at 919. The Tax Court, however, did not rely solely on that criterion. As Thirup requires, the Tax Court looked at the purpose of the loading docks to see whether the function of providing shelter was "more than merely incidental" to that purpose. This requires an examination of the quantity of human activity in the docks. However, the Tax Court did not make the "amount of human activity" the controlling criterion. It merely helped the court to determine that human activity was more than merely incidental to the function of the docks. The Tax Court's finding that a substantial purpose of the docks was to provide working space was a response to the "more than merely incidental" test employed by the Court of Claims in Consolidated Freightways, 620 F.2d at 872-73. There the court said: "[I]n determining whether the structure provides working space for employees which is more than merely incidental to the principal function or use of the structure, we must examine the frequency of the human activity in the structure, how essential such activity is to the basic process or use involved and how substantial that activity is." (Emphasis added). Nothing there is inconsistent with Thirup.

Second, Consolidated errs when it assumes that the Thirup court intended that its "significantly contributive factor to the actual manufacturing or production" language alter or amend the functional test. The court was referring to a passage in Treas.Reg. Sec. 1.48-1(e)(1)--subsections (i) and (ii)--which qualifies for the tax credit those structures which are essentially equipment, or which are an integral part of the manufacturing process such as a blast furnace. The Tax Court considered, and properly rejected, Consolidated's claim that the loading docks fell within either of these categories. 74 T.C. at 796-97.

Third, while we did not specifically use the "structure not reasonably adaptable to other possible uses" test in Thirup, we did cite to Brown-Forman Distillers, 499 F.2d at 1271, which applied that test. In Thirup the greenhouses were essentially equipment, or part of the manufacturing process. Without them, the taxpayer's plants would not have grown. In contrast, here the loading docks, the purpose...