Gibson & Assocs., Inc. v. Comm'r of Internal Revenue

• Decision Date: 24 February 2011
• Docket Number: No. 5863–08.,5863–08.
• Citation: 136 T.C. No. 10,136 T.C. 195
• Parties: GIBSON & ASSOCIATES, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

136 T.C. 195

136 T.C. No. 10

GIBSON & ASSOCIATES, INC., Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 5863–08.

United States Tax Court.

Feb. 24, 2011.

P is an engineering and heavy construction company that primarily erects or rehabilitates streets, bridges, airport runways, and other related real property (collectively, real property). P's rehabilitation services relate mainly to real property that is substantially dilapidated or damaged from a casualty. P also repairs and maintains real property. P reported on its Federal income tax return for the taxable year ended June 30, 2006, that its receipts are “domestic production gross receipts” (DPGR) eligible for a deduction under sec. 199, I.R.C., and claimed a $63,435 deduction under that section. R determined in the notice of deficiency that none of P's receipts qualified as DPGR.

Held: P's receipts are DPGR to the extent P erected or substantially renovated real property, and the extent to which P substantially renovated real property turns on whether P's activities with respect to each freestanding item of real property that operated and performed a discrete function in and of itself: (1) Materially increased the value of the real property, (2) substantially prolonged the useful life of the real property, and/or (3) adapted the real property to a different or new use.

Held, further, P's activities materially increased the value of the real property, substantially prolonged the useful life of the real property, and/or adapted the real property to a different or new use to the extent that P's activities were not repairs (within the meaning of sec. 263(a), I.R.C.), unrelated to P's primary business.

Held, further, P's activities did not materially increase the value of the real property, substantially prolong the useful life of the real property, and/or adapt the real property to a different or new use to the extent that P's activities repaired or otherwise maintained real property unrelated to P's primary business. Charles D. Lieser, for petitioner.

George E. Gasper, for respondent.

PARIS, Judge:

Petitioner petitioned the Court to redetermine respondent's determination of a $21,568 deficiency in its Federal income tax for its taxable year ended June 30, 2006 (subject year). The deficiency results from respondent's determination that petitioner may not deduct $63,435 under section 199(a).¹ Respondent disallowed that deduction after determining that petitioner had no “domestic production gross receipts” (DPGR) within the meaning of section 199(c)(4). Petitioner reported that its DPGR totaled $26,053,570.²

Respondent now concedes that petitioner had DPGR of $13,849,246, and petitioner concedes that it incorrectly reported $259,156 of the $26,053,570 as DPGR.³ We decide whether the remaining $11,945,168 ($26,053,570–$13,849,246–$259,156) (disputed amount) is DPGR. We hold it is to the extent stated herein.

FINDINGS OF FACT

Some facts were stipulated. The stipulation of facts and the exhibits submitted therewith are incorporated herein by this reference. Petitioner is a family-owned corporation that reports its income and expenses on the basis of a fiscal year ending on June 30. Its principal place of business was in Texas when its petition was filed.

Petitioner is an engineering and heavy highway construction company that primarily erects or rehabilitates streets, bridges, airport runways, and other major components or substantial structural parts of real property (primarily, infrastructure) in Texas, Oklahoma, Arkansas, and Kansas. Petitioner specializes in structural rehabilitation, epoxy injection, concrete paving, bridge jacking, lead abatement, and protective coatings. Petitioner also maintains and repairs infrastructure and other real property.

Petitioner works through its employees. During the subject year, petitioner employed approximately 90 individuals. These employees were mainly engineers or heavy construction workers, and petitioner paid them over $3 million in salary and wages. Petitioner hired and retained additional employees in subsequent years.

Petitioner worked on 136 construction projects during the subject year. Petitioner realized $25,892,869 of gross receipts from these projects, including $16,324,032 of gross receipts from State or Federal projects paid for with Federal funds.⁴ Petitioner reported the $25,794,414 (and the now conceded $259,156) as DPGR and claimed a $63,435 deduction under section 199.⁵ Respondent determined that petitioner could not deduct the $63,435 because petitioner had no DPGR.

Petitioner placed its construction projects into three categories. The first category, “casualty” projects, involved work that petitioner performed on infrastructure that was significantly damaged by an act of God or by a casualty such as a fire or an overheight or an overweight vehicle hitting or traveling on a bridge. The second category, “new construction” projects, involved work that petitioner performed primarily as a subcontractor on contractors' multimillion dollar projects involving major rehabilitation of real property (primarily, infrastructure). The third category, “rehabilitation” projects, involved work that petitioner performed as a contractor rehabilitating dilapidated real property (primarily, infrastructure). Petitioner classified its projects into these three categories after reviewing the bid sheets and the other data in its files and after talking to individuals involved with the projects. Petitioner's bid sheets were papers that petitioner prepared to calculate and place a bid on a project offered to contractors (or subcontractors). Each bid sheet contained an estimate of the amounts and types of costs that petitioner expected to incur in performing the project.

Petitioner further characterized its projects as: (1) Substantial renovation or (2) repair or maintenance. Petitioner characterized a project as substantial renovation if petitioner concluded that its work on the project: (1) Substantially prolonged the useful life of real property; (2) materially increased the value of real property; or (3) adapted real property to a new or different use. Petitioner categorized its construction projects as repair or maintenance if petitioner concluded that its work on the project: (1) Was necessary to keep real property (or a component thereof) functioning on a short-term basis or (2) included cosmetic or aesthetic work.

Appendixes A, B, and C list petitioner's projects (other than 32 projects which are the subject of the parties' concessions discussed supra p. 3) as categorized by petitioner. The appendixes show for each of those 104 remaining projects (disputed projects): (1) The job number, (2) the general type of work that petitioner performed, (3) the final contract amount, (4) the revenue that petitioner earned for the subject year, (5) whether the project was paid for with Federal funds, and (6) petitioner's characterization of the project as repair or maintenance, substantially prolonging the useful life of real property, materially increasing the value of real property, and/or adapting real property to a different or new use. The specific work that petitioner performed on each project is as follows:

Casualty Projects

05–1021

Petitioner performed this project for the Texas Department of Transportation (TxDOT). Petitioner strengthened a bridge at Highway 123 and McArthur Boulevard. The bridge had been critically damaged by a fire caused by an overturned fuel truck, and most of the bridge was closed. Petitioner strengthened the columns and spans of the bridge using carbon fiber reinforced polymer and structural patching. Petitioner concluded that this work substantially prolonged the useful life of the bridge and materially increased its value.

05–1023

Petitioner performed this project for the North Texas Tollway Authority (NTTA). Petitioner shored up an overhead emergency sign structure on the North Texas Tollway after the sign was damaged. Petitioner's work allowed the NTTA to keep the sign in place. The sign would have been demolished absent petitioner's work. Petitioner concluded that this work substantially prolonged the useful life of the sign.

05–1025

Petitioner performed this project for the TxDOT. Petitioner worked on a bridge near Pampa, Texas, on U.S. Highway 83. The work rehabilitated damaged concrete beams so that the bridge could reopen to traffic and carry its design loads. Petitioner concluded that this work substantially prolonged the useful life of the bridge and materially increased its value.

05–1029

Petitioner performed this project for the Oklahoma Department of Transportation (ODOT). Petitioner worked on a bridge in Oklahoma County, Oklahoma, on Interstate Highway 40 over Anderson Road. The work rehabilitated damaged concrete beams so that the bridge could reopen to traffic and carry its design loads. Petitioner concluded that this work substantially prolonged the useful life of the bridge and materially increased its value.

05–1045

Petitioner performed this project for the ODOT. Petitioner worked on a steel bridge on U.S. Highway 64 and 129 West Avenue between Tulsa and Sand Springs, Oklahoma. The work rehabilitated damaged concrete beams so that the bridge could reopen to traffic and carry its design loads. Petitioner concluded that this work substantially prolonged the useful life of the bridge and materially increased its value.

05–1054

Petitioner performed this project for the TxDOT. Petitioner worked on a bridge near McKinney, Texas, in Farmersville, Texas, on U.S. Highway 380 and Main Street. The work rehabilitated and/or replaced damaged concrete beams so that the bridge could reopen to traffic and carry its design loads. Petitioner also performed some concrete work. Petitioner concluded that this work substantially prolonged the useful life of the bridge and materially increased its value.

05–1056

Petitioner performed this project for the TxDOT. Petitioner...