Catron v. Comm'r of Internal Revenue, Docket Nos. 2115-66
| Decision Date | 16 May 1968 |
| Docket Number | Docket Nos. 2115-66,3862-66. |
| Parties | ROBERT E. CATRON AND MAXINE CATRON, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTEUGENE D. CATRON, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Frank F. Catron, for the petitioners.
Larry K. Hercules, for the respondent.
Petitioners Robert E. Catron and Eugene D. Catron are brothers who were engaged as partners in an apple-farming operation in Nebraska during 1962. That year they purchased and erected a pre-fabricated, steel, frameless Quonset-type structure to be used in connection with their apple business. Two-thirds of the Quonset facility which was 120 feet long and 40 feet wide, provided space for petitioners' selection, grading, and boxing operations. The other one-third of the facility was sealed off by a floor-to-ceiling wall in which there was a large refrigerator-type door opening into the working area of the structure. This portion of the structure was heavily insulated inside and refrigerated so that, in effect, a 40-foot-square refrigerator was created at one end of the structure to provide cold storage for the boxed applies. These were placed in the cold-storage for the boxed apples. These were placed in the cold-storage room by employees using forklifts. Upon sale, the boxes of apples were removed from the cold-storage facility and shipped into interstate commerce. No other work or functions were performed in the refrigerated cold-storage structure. Held: Neither the sorting-working-boxing area of the facility nor the applied insulation therein qualifies for the investment credit. However, the refrigerated area provided no working space and was a storage facility which qualified as sec. 38 property for investment credit purposes, within the definition of ‘storage facility’ as provided by sec. 1.48-1(d)(5), Income Tax Regs. While buildings and their structural components cannot constitute sec. 38 property, sec. 48(a)(1)(B), I.R.C. 1954, storage facilities used in connection with an activity specified in clause (i) of sec. 48(a)(1)(B) do. The cold-storage facility here involved so qualifies.
Respondent determined a deficiency against petitioners Robert E. and Maxine Catron, docket No. 2115-66, in the amount of $689.25 for the taxable year 1962. Respondent also determined a deficiency for the same year against petitioner Eugene D. Catron, docket No. 3862-66, in the amount of $562.53. 1 The cases have been consolidated for all purposes. The issue in both docket numbers is the same— i.e., whether an apple storage and packing facility erected by the petitioners, or portions thereof, qualify as ‘section 38 property’ under the Internal Revenue Code of 1954.2
All of the facts have been stipulated, and along with accompanying exhibits, are incorporated herein by this reference and adopted as our findings.
Petitioners Robert E. Catron and Maxine Catron are husband and wife with residence in Kansas City, Mo. For the taxable year 1962, they timely filed a joint income tax return with the district director of internal revenue for the western district of Missouri. Petitioner Eugene D. Catron is an individual with residence in Lexington, Mo. For the taxable year 1962 he also filed an individual income tax return with the district director for the western district of Missouri. Maxine Catron is a petitioner herein solely by reason of having filed a joint return with her husband. Accordingly, she will not hereinafter be referred to as petitioner. The plural usage, ‘petitioners,’ shall have reference to petitioner Robert E. Catron and petitioner Eugene D. Catron, who are brothers.
The Catron brothers were engaged as partners in an apple-farming venture near Nebraska City, Nebr., during the taxable year 1962. During this year the partnership purchased and erected a metal Quonset-type prefabricated structure for use in the storing, selection, and packaging of apples. The Quonset structure, hereinafter referred to as the facility, or the storage facility, is marketed as the ‘Behlen Curvet’ by its manufacturers and/or distributors. It is specifically intended for agricultural uses, including the storage of commodities such as grain, and comes in various lengths and widths available as ordered.
The facility erected by petitioners rests on a concrete slab. It is 120 feet long and 40 feet wide, with the entire southernmost one-third of its length (40 feet) being a separate cold-storage area. The one-third of the facility which is refrigerated is separated from the rest of the interior area by a partition from floor to ceiling in which there is only one opening, a refrigerator door into the storage facility; it is insulated with an applied spray insulation which is at least 2 inches in thickness. This insulation is in turn covered by a heavy coat of aluminum paint. The remaining two-thirds of the structure is not refrigerated but is insulated with a spray insulation approximately 1 inch in thickness. Within this portion of the facility apple' are washed, graded, sorted, packed, and a small portion are stored until their sale. The refrigerated area is used for storage only. It is in effect a room-size refrigerator suitable only for storage purposes.
During 1962, generally 10 persons were employed at one time within the facility, working for the most part in the nonrefrigerated area. They performed the following duties: One man emptied boxes of apples onto a conveyor belt which is the heart of the Catron brothers' sorting and selection system. This electrically operated belt or grader lies basically along one lengthwise wall of the nonrefrigerated area and is used for the sorting, culling, and grading of apple crops grown in petitioners' orchard; the device is approximately 60 feet in length and rounds a corner for an additional 15 feet. Two women sorted spoiled apples from the grader belt. One man formed previously cut cardboard into boxes. Four women transferred the apples by grade or size from the working line into the boxes, and two men stacked the packed boxes, either in the nonrefrigerated area or in the refrigerated room by using forklifts.
Along the other lengthwise wall, opposite the grader-conveyor belt in the nonrefrigerated area, there is storage space available for the stacking of empty boxes, bags, bushels, and packaging supplies during the season or seasons, when apples are graded and packed. When the sorting and packing of apples are completed for the year, this area is available for common or dry storage of apples.
In the center of the nonrefrigerated area and running lengthwise is an aisle separating the dry-storage area along one wall from the grading and sorting area along the opposite wall. It is in this space that the persons who handle and package the apples dispose of the apples coming off the grader-conveyor.
A large portion of the apples which have been processed are stored in the refrigerated storage area, and many of these are later shipped through interstate commerce. During 1962 petitioners processed, graded, and packed their apples pursuant to standards set by the Agricultural Marketing Act of 1946, as amended.
On their respective returns for the year 1962, petitioners claimed the investment credit provided by section 38 for various partnership properties. They computed the credit based, inter alia, on the total cost of the apple selection, packing, and storage facility described above. Respondent has disallowed the portion of the claimed credit based upon the cost of the entire facility described and its insulation. His disallowance is based upon the simple proposition that the facility in question is not property subject to the investment credit, or so-called ‘section 38 property.’ The parties have stipulated that the only issues in these cases are whether the structure and its applied insulation are section 38 properties.
On brief, petitioners contend that the cold-storage refrigeration area of their facility constitutes a storage facility under section 38 and that the nonrefrigerated area of the facility constitutes a facility for the purpose and use of extraction under section 38. They also contend that their arched prefabricated-steel Quonset structure is not a building because it has no walls nor a roof; ‘it is impossible to determine where the sides end and the roof begins.’ Finally, they urge that all of the insulation applied to the inside walls of the building itself qualifies as section 38 property because it is not a structural component of a building even if the Quonset itself is a building of some sort.
Respondent argues that a structure is either a building or section 38 property ‘but not partly both.’ He avers that the buildings and their structural components do not qualify for the investment credit and that petitioners' entire structure— refrigerated storage room, non-refrigerated portion, insulation and all— cannot qualify. It logically follows, he concludes, that rooms or areas within a building do not qualify as section 38 property, and that there can be no allocation of the credit based upon a portion of the cost of a building even if these areas constitute storage facilities.
Section 38 property is defined by section 48(a)(1), and one of the few clear rules stated by section 48(a)(1) is that buildings and their structural components do not qualify as section 38 property. Section 48(a)(1) provides, in pertinent part, as follows:
SEC. 48. DEFINITIONS; SPECIAL RULES.
(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
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