64 T.C.M. (CCH) 80
ENERGY RESOURCES LIMITED PARTNERSHIP, BAUMGARDNER OIL COMPANY, TAX MATTERS PARTNER, Petitioner
COMMISSIONER OF INTERNAL REVENUE, Respondent
Nos. 20022-87, 15977-88.
United States Tax Court
July 13, 1992
HELD: Partnership possessed sufficient incidents of ownership to entitle it to take deductions and credits at issue, if otherwise qualified. Partnership continued to be engaged in its trade or business and did not retire asset during years at issue; therefore, partnership was entitled to depreciation deductions for years at issue, partnership was permitted to amortize costs over years at issue and thus was not required to take increased amortization in 1983, partnership was entitled to an investment tax credit for 1983, and partnership was not required to recapture during any of the years at issue the investment tax credits taken in 1982 or 1983.
Theodore W. Hirsh, for petitioner.
Deborah Y. Clark, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined adjustments in the partnership items of Energy Resources Limited Partnership (ERLP) as follows:
The issues for decision are: (1) Whether as a preliminary matter ERLP had sufficient incidents of ownership to entitle it to the deductions and credits at issue when it did not possess legal title; (2) whether ERLP is entitled to depreciation for the years at issue; (3) whether ERLP may amortize its costs during the years at issue and thus should not have increased amortization for 1983; (4) whether ERLP is entitled to an investment tax credit for 1983; (5) whether ERLP must recapture in 1983 100 percent of the investment tax credit taken on its 1982 return; and (6) in the alternative, whether ERLP must recapture in 1984 80 percent of the investment tax credit taken on the 1982 return and 100 percent of the investment tax credit taken on the 1983 return. All of these questions are integrally related to the questions of whether the closing of an oil re-refining facility (the facility) in July 1983 constituted an abandonment of the business such that ERLP was no longer engaged in the trade or business or whether the facility was retired at that time. 
FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation and attached exhibits are incorporated herein by this reference. The facts as found in our opinion in Energy Resources Limited Partnership v. Commissioner, T.C. Memo. 1990-240, also are incorporated by this reference. We repeat here the facts as stated in our previous opinion to the extent necessary for an understanding of the present issues. ERLP was organized in 1981 as a Pennsylvania limited partnership. It was formed for the purposes of constructing and operating the facility, which was located in Southhampton Township, in Franklin County, Pennsylvania. The facility was expected to convert used lubricating oil (feedstock) into clean fuel oil, lubricating oil, and an asphaltic type of product, all of which could be sold and reused. A consulting engineer for the project was hired in 1981. At the time of ERLP's formation, the capital interests of the partners were as follows:
|| Capital Interest Percent
| Baumgardner Oil Co., General Partner
| Elmer R. Baumgardner, Limited Partner
| Robert C. Embry, Limited Partner
Petitioner Baumgardner Oil Co. (Baumgardner Oil), of Fayetteville, Pennsylvania, is the tax matters partner for ERLP for the years 1983 through 1985 and was the general partner of ERLP during all relevant periods. Baumgardner Oil was in the business of collecting used oil, processing it, and reselling it as fuel oil. Elmer R. Baumgardner (Mr. Baumgardner) was the president of Baumgardner Oil. Robert C. Embry's (Mr. Embry) initial role in ERLP was to obtain financing. In order to assist in financing construction of the facility, the Franklin County Industrial Development Authority of Franklin County, Pennsylvania (the Authority), pursuant to a resolution adopted in November 1981, resolved to issue revenue bonds. The Authority's resolution stated that the project for which the proceeds would be used was the " Acquisition and construction of new facilities to re-refine used lubricating oil." Although the resolution had contemplated a lease/purchase arrangement, an Installment Sale Agreement (Agreement) dated December 1, 1981, between ERLP and the Authority was used instead. The Agreement provided that the Authority would issue bonds in an aggregate principal amount of $5 million to provide it with funds to pay the cost of financing the project. By means of the terms of Article II of the Agreement, the Authority was to acquire and finance the project (which by definition included the land upon which the project was constructed) in the following manner: Under section 2.1 (the financing) of the Agreement, the Authority was to " undertake the acquisition, construction, financing and sale" to ERLP of the project. Under section 2.2 (transfer of portions of project under construction), those portions of the project that already had been built or were under construction were to be conveyed to the Authority. ERLP, however, was to be " entitled to physical possession and control of the Project at all times prior, during and subsequent to vesting of right, title and interest to the Project in it, and will be liable at all such times for all risk, loss and damages with respect to the Project." Under section 2.3 (award of construction contracts), ERLP was to have " full responsibility for preparing, administering, amendies [sic], the Construction Contracts." Under section 2.4 (provisions with respect to title), the construction contracts were to provide that " Title to the Project will vest in the Authority as payment to the contractor for the materials, equipment and machinery * * * is made." That section also provided: The Company [ERLP] and the Authority agree that all of the Company's right, title and interest to the Project will vest in the Authority pursuant to the Construction Contracts: that the Project will remain personal property of the Authority until title thereto vests in the Company pursuant to Section 3.1 hereof, notwithstanding any attachment to the land; and that the Authority's title to the Project shall constitute ownership and not a security interest. Section 2.5 (issuance of bonds) provided that the Authority was to " issue, sell and deliver the Bonds to provide funds for the financing. If for any reason the Bonds are not issued, sold and delivered, the Authority shall have no obligation to cause the acquisition and construction of the Project." Section 2.6 (application of bond proceeds) provided that the proceeds received from the sale of the bonds were to be placed in various accounts to pay for placement costs, to service the debt incurred in connection with the bond sales, to meet any payments not made by ERLP on its Note, and in the Construction Fund. Section 2.7 (disbursements from the construction fund) provided that funds in the Construction Fund were to be disbursed " to or at the order of the Company to pay the capital costs of the Project" . ERLP covenanted that it would request funds from the Construction Fund only " to pay capital costs of acquiring, constructing and installing those components of the Project" which were identified in the project budget or in amendments thereto or to pay bond issuance costs that were not covered by other accounts and interest on the bonds " prior to the substantial completion of the Project" . This section further provided that The Trustee may condition any disbursement from the Construction Fund upon its receipt of such additional information and documentation as it may reasonably require to evidence the truth and accuracy of the statements and representations contained in a Company's Certificate and Requisition. Under section 2.8 (investment of trust funds), the trustee was to invest the trust funds for the account of ERLP under ERLP's direction and any net loss from such investments was to be reimbursed by ERLP to the Trust Fund. Any funds remaining in the Construction Fund after the project was completed were to be used to redeem the bonds. Under Article III of the Agreement, the project eventually was to be sold by the Authority to ERLP. Section 3.1 (vesting of title) provided: Upon payment in full of the Promissory Note issued hereunder, and after receiving a certificate from the Trustee that Authority's obligation to make payments of principal, interest, or premium, if any, on the Bonds has been fully discharged * * *, the Authority shall grant and convey to the Company all of the Authority's right, title and interest in the Project, and title, together with any related property interests, shall vest in the Company. * * * The Authority shall take no action which would encumber its right, title and interest in the Project, except such action as may be consented to in writing by the Company and SBA * * *. Under section 3.2 (purchase of project by Company), ERLP agreed to purchase the project from the Authority for a purchase price equal to the principal amount of the bonds issued by the Authority, to be evidenced by a promissory note (Note). Under section 3.3 (form, amount and installment payments) ERLP was to pay to the Authority installment payments as set forth in the Note. Article IV of the Agreement deals with ERLP's responsibilities in connection with the Project. Under section 4.1 (completion of project) ERLP agreed to complete the project and, in the...