849 F.2d 1398 (11th Cir. 1988), 87-8306, Munford, Inc. v. C.I.R.

Docket Nº:87-8306.
Citation:849 F.2d 1398
Party Name:MUNFORD, INC., Plaintiff-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Defendant-Appellee.
Case Date:July 21, 1988
Court:United States Courts of Appeals, Court of Appeals for the Eleventh Circuit
 
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Page 1398

849 F.2d 1398 (11th Cir. 1988)

MUNFORD, INC., Plaintiff-Appellant,

v.

COMMISSIONER OF INTERNAL REVENUE, Defendant-Appellee.

No. 87-8306.

United States Court of Appeals, Eleventh Circuit

July 21, 1988

Page 1399

David D. Aughtry, George A. Hrdlicka, Robert I. White, Shelley Cashion, Chamberlain, Hrdlicka, White, Johnson, & Williams, Houston, Tex., for plaintiff-appellant.

Michael L. Paup, Chief Appellate Section, Tax Div., Roger M. Olsen, Michael C. Durney, Gary R. Allen, Thomas R. Lamons, U.S. Dept. of Justice, Washington, D.C., for defendant-appellee.

Appeal from the Tax Court of the United States (Georgia Case).

Before HATCHETT and CLARK, Circuit Judges, and LYNNE [*], Senior District Judge.

HATCHETT, Circuit Judge.

In this appeal, we affirm the United States Tax court's ruling upholding the Commissioner of Internal Revenue's (Commissioner) determination that appellant, Munford, Inc., is not entitled to an investment tax credit with respect to certain structural components of an addition to its refrigerated warehouse.

I. FACTS

During its taxable year ended December 30, 1976, Munford, Inc., owned and operated twelve refrigerated warehouses in the southeastern United States, including a facility located in Atlanta, Georgia (the "Gateway Facility"). During that year, Munford completed the construction of and began operating an addition (the Addition) to the Gateway Facility. The Addition consists of three areas: (1) a refrigerated portion comprising approximately 34,650 square feet; (2) a loading dock and staging area used for loading and unloading trucks, encompassing approximately 3,900 square feet; and (3) a covered rail dock for unloading goods shipped by rail, comprising approximately 1,030 square feet. Since its inception, Munford has used the Addition to store prepackaged frozen foods, at sub-freezing temperatures, on behalf of frozen food processors. The food processors retain title to the frozen food products pending delivery to their customers in the southeastern United States. These customers consist primarily of grocery store chains and other food service organizations, including schools and cafeterias.

On its consolidated federal income tax returns for the taxable years ending January 3, 1974 and January 1, 1976, Munford claimed investment tax credit carrybacks

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from its taxable year ended December 30, 1976, with respect to $581,437 of costs relating to the Addition. Following an audit, the Commissioner disallowed the claimed investment tax credit, except as to certain interior parts of the refrigerated portion of the Addition, such as pipe insulation, valves, and motors.

Following a trial, the Tax Court determined that the Commissioner properly disallowed the investment tax credit to the extent claimed for costs allocable to the structural elements of the refrigerated area. The Tax Court also: (1) disagreed with the Commissioner's finding that the refrigerated area of the Addition constitutes a "building" for purposes of the investment tax credit, and (2) rejected Munford's contention that the structural elements of the refrigerated area constitute property "in the nature of machinery" so as to qualify for an investment tax credit as "tangible personal property" within the meaning of section 48(a)(1)(A) of the Internal Revenue Code.

Having determined that the refrigerated area of the Addition did not qualify as "tangible personal property" within the meaning of section 48(a)(1)(A), the Tax Court considered whether it could qualify as "other tangible property." The Tax Court concluded that the refrigerated area could qualify for an investment tax credit only as "other tangible property" within the meaning of section 48(a)(1)(B) of the Code only if it was used as an integral part of, or in connection with, a "qualifying activity," such as manufacturing or production. Because Munford conceded that the refrigerated portion of the Addition was not used as an integral part of, or in connection with, a "qualifying activity" as delineated in section 48(a)(1)(B), the court held that the refrigerated area was ineligible for an investment tax credit under that section. Consequently, the Tax Court upheld the Commissioner's determination that Munford is not entitled to an investment tax credit to an extent greater than that allowed by the Commissioner. Munford now appeals. 1

The sole issue in this appeal is whether Munford is entitled to an investment tax credit under section 38 of the Internal Revenue Code with respect to the entire cost of the refrigerated portion of the Addition.

The Commissioner contends that Munford is entitled to an investment tax credit only with respect to certain interior cooling elements of the Addition. 2

II.

The investment tax credit, added to the Internal Revenue Code in 1962, Pub.L. 87-834, 76 Stat. 967 (1962), "[was] designed to increase economic productivity, output, and growth by creating a tax incentive for the purchase of machinery, equipment, and other property used to produce goods or run a business." Illinois Cereal Mills, Inc. v. Commissioner of Internal Revenue, 789 F.2d 1234, 1236 (7th Cir.), cert. denied, --- U.S. ----, 107 S.Ct. 600, 93 L.Ed.2d 600 (1986). See also A.C. Monk & Co. v. United States, 686 F.2d 1058, 1060 (4th Cir.1982); H.R.Rep. No. 1447, 87th Cong., 2d Sess. 11 (1962); S.Rep. No. 1881, 87th Cong., 2d Sess. 11 (1962), U.S.Code Cong. & Admin.News 1962, pp. 3297. The credit provisions of the Code, in effect during the relevant tax year for this appeal, allowed a credit, offset directly against income tax liability, for investment in certain types of depreciable property or capital equipment.

In order to qualify for an investment tax credit, property must meet the definition of "section 38 property" which, in turn, is defined in section 48(a)(1) of the Code. In 1976, the tax year in question, section 48(a) defined "section 38 property," in pertinent part, as follows:

Page 1401

(a) Section 38 Property--

(1) In general.--Except as provided in this subsection, the term 'section 38 property' means--

(A) tangible personal property, or

(B) other tangible property (not including a building and its structural components) but only if such property--

(i) is used as an integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electrical energy, gas, water, or sewage disposal services, or

(ii) constitutes a research facility used in connection with any of the activities referred to in clause (i), or

(iii) constitutes a facility used in connection with any of the activities referred to in clause (i) for the bulk storage of fungible commodities (including commodities in a liquid or gaseous state)....

Such term includes only property with respect to which depreciation (or amortization in lieu of depreciation) is allowable and having a useful life (determined as of the time such property is placed in service) of three years or more.

26 U.S.C. Sec. 48(a)(1) (1976). Thus, the Code establishes two ways that property may qualify as section 38 property: (1) by qualifying as "tangible personal property" within the meaning of section 48(a)(1)(A), or (2) by qualifying as "other tangible property" other than a building and its structural components if such property is used as an integral part of, or used in connection with, one of the qualifying activities delineated in section 48(a)(1)(B)(i).

Munford concedes that when enacting the investment tax credit provisions as part of the Revenue Act of 1962, Congress specifically excluded buildings and their structural components from eligibility for the credit. As the Fourth Circuit acknowledged in A.C. Monk & Co.:

In not allowing credits for investments in buildings and their structural components, Congress felt that businesses would respond more greatly to net price reductions in integral manufacturing and production machinery than in buildings and that such investments would further the economy-spurring goals of the tax credit more than would investments in buildings.

A.C. Monk & Co., 686 F.2d at 1060 (citing H.R.Rep. No. 1447, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 405, 413) (footnote omitted) (emphasis added).

In accord with the Fourth Circuit's observation in A.C. Monk & Co., the Commissioner notes that under Treasury Regulation Sec. 1.48-1(c), the term "tangible personal property" does not include "land and improvements thereto, such as buildings or other inherently permanent structures (including items which are structural components of such buildings or structures)." 3

Page 1402

Because in the Commissioner's view, the Addition constitutes a building, he contends that the Addition is thereby categorically excluded from the definition of the term "tangible personal property." In response, Munford, while denying that the Addition is a "building" for purposes of the investment tax credit, contends that the Addition is, in essence, a "giant refrigerator or freezer"; therefore, it constitutes "tangible personal property" because it is "property which is in the nature of machinery" described in the penultimate sentence of Treasury Regulation section 1.48-1(c).

III. WHETHER THE ADDITION IS A BUILDING

We first address the issue of whether the Tax Court's determination that the Addition is not a building, is clearly erroneous. See Royster v. Commissioner of Internal Revenue, 820 F.2d 1156, 1157 (11th Cir.1987) (review of Tax Court's factual determinations is governed by the "clearly erroneous" standard of Fed.R.Civ.P. 52(a)); Turner v. Commissioner of Internal Revenue, 812 F.2d 650, 654 (11th Cir.1987) (same).

Although Congress did not provide a definition for the term "building" for purposes of the investment...

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