Barrenechea v. C. I. R., 083090 FEDTAX, 5911-88

Docket Nº:5911-88.
Opinion Judge:COHEN, JUDGE:
Party Name:LUIS BARRENECHEA AND ESTATE OF LORENE BARRENECHEA, DECEASED, D. DEWAYNE CASEY, EXECUTOR, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Donn Kemble, for the petitioners. Joyce M. Resnick and Frank R. Bailey, for the respondent.
Case Date:August 30, 1990
Court:United States Tax Court
 
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60 T.C.M. (CCH) 638

LUIS BARRENECHEA AND ESTATE OF LORENE BARRENECHEA, DECEASED, D. DEWAYNE CASEY, EXECUTOR, Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 5911-88.

United States Tax Court

August 30, 1990

Donn Kemble, for the petitioners.

Joyce M. Resnick and Frank R. Bailey, for the respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

COHEN, JUDGE:

Respondent determined deficiencies of $95,867, $44,432, and $8,724 in petitioners' Federal income taxes for 1979, 1980, and 1983, respectively.

After concessions, the issues remaining for decision are whether petitioners are entitled to investment tax credits on a steel manufacturing structure (craneway), a Cincinnati Press Brake, a chain link fence, a fire hydrant, a rail spur, and a slump block wall, and whether respondent's reallocation of income and expenses was appropriate.

Respondent objects to the use of the term ‘ craneway‘ as applied to the steel manufacturing structure in issue in this case. Our use of the term is for purposes of convenience, and no implication is intended, by this usage, that the structure in issue is not a building for purposes of sections 48(a)(1) and 1245(a)(3). Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended and in effect for the years in issue.

FINDINGS OF FACT

Some of the facts have been stipulated, and the facts set forth in the stipulations are incorporated in our findings by this reference. Luis Barrenechea (petitioner) resided in Villa Park, California, when he filed the petition in this case.

BACKGROUND

Petitioner was employed in the metal fabrication business starting in 1950, first with Pascoe Steel Corporation (Pascoe), then with Amcord, Inc. (Amcord), and more recently with Bartec Industries, Inc. (Bartec). Pascoe was a large producer of metal building systems, specializing in the engineering, manufacturing, and erection of buildings for industry, hangars, craneways, schools, and service stations. While employed by Pascoe, petitioner held the positions of plant superintendent, production manager, vice president of manufacturing and construction, and executive vice president.

Amcord was a diversified international manufacturing company listed on the New York and Pacific Stock Exchanges. When Pascoe was acquired by Amcord, petitioner became a director and the president and chief operating officer of Amcord.

During his 32 years of employment with Pascoe and Amcord, petitioner oversaw the manufacturing operations of the firms. During the years in issue, petitioner held a contractor's license issued by the State of California. Pascoe operated under petitioner's contractor's license. While petitioner was employed by Pascoe, Pascoe constructed approximately 600 craneways, including five craneways for its own use in plants in various parts of the United States. Petitioner oversaw the construction of approximately 20 craneways. Petitioner supervised the gathering of information needed to determine size, speed, height, and tonnage requirements. Petitioner would use this information to determine the best design for the particular craneway and bridge cranes under construction.

Amcord was sold in 1979, and petitioner subsequently left its employ. In September 1981, petitioner purchased approximately 61.5 percent of the stock of Bartec, a company similarly engaged in metal fabrication and the erection of structural steel for building-type structures. From 1981 through the years in issue, petitioner was actively employed as an officer of Bartec. Petitioner and his wife acquired the remaining stock of Bartec in September 1982. Whereas Pascoe had its own product lines, buildings, and structures, Bartec worked primarily on high-rise buildings from plans and specifications provided by architects and engineers.

At the time petitioner acquired an interest in Bartec in 1981, he determined that Bartec needed a new facility. Bartec had only 2 years remaining on its lease, the lessor was contemplating tearing the structure down, and the structure was very old and small. Petitioner agreed to acquire, improve, and lease a new facility to Bartec. In late 1981 or early 1982, petitioner located property 12 miles from Bartec's existing facility. He purchased this property individually, because neither Bartec nor the owner of the minority interest in Bartec had cash to invest.

Petitioner determined that Bartec could not continue in the steel fabricating business without a craneway. In March 1982, petitioner began to design and construct a craneway. Petitioner did not hire a general contractor; rather, he oversaw the construction of the craneway himself.

In February 1982, petitioner acquired approximately 4 acres of improved real property in Orange, California, that had been used as a lumberyard. Existing improvements on this property included an office building, a 6,000-square-foot block construction warehouse, parking lot, rail spur, fire hydrant, chain link fence, slump block wall, and landscaping. The total cost was $1,400,000. In March 1982, petitioner set up an office on this property and, along with a secretary and a construction coordinator, commenced construction of the craneway structure in issue.

Petitioner designed the craneway; financed its construction; obtained government permits for construction and occupancy; contracted for a soil engineering investigation; contracted with Pascoe for the engineering of the structural components; contracted with Bartec for the purchase, delivery, and erection of steel; contracted with Pascoe for the purchase, delivery, and assembly of pre-engineered roof and side components; contracted for site grading; and contracted to increase substantially the size of the parking lot. Petitioner supervised several workers who performed a variety of tasks to complete the craneway for occupation by Bartec, including moving the rail spur, moving the fire hydrant, digging footings, pouring concrete, and installing plumbing and an electrical distribution system. The structure in issue is the first craneway that petitioner built for himself. There was no substantial difference between the craneway designed and constructed by petitioner for Bartec and other craneways that had been designed and constructed for Pascoe.

The total cost of the craneway was $561,418.70. Construction of the craneway was completed in September 1982. Four overhead bridge cranes, fabricated by Bartec at a cost of approximately $140,000, were installed in the craneway in or before September 1982.

APPEARANCE AND FUNCTION

Petitioner's craneway resembled a large, empty rectangular box. The structure was approximately 525 feet long, 120 feet wide, and contained two 60-foot longitudinal girders, each supported by exterior columns and interior columns that ran the length...

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