L & B Corp. v. C.I.R.
| Decision Date | 25 November 1988 |
| Docket Number | No. 87-2387,87-2387 |
| Citation | 862 F.2d 667 |
| Parties | -335, 88-2 USTC P 9596 L & B CORPORATION, a Nebraska corporation, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. Larry A. LARSEN and Betty J. Larsen, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. ESTATE OF Howard C. LARSEN, Deceased, Maxine J. Larsen, Executrix and Maxine J. Larsen, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Paul A. Rauth, Omaha, Neb., for appellant.
Thomas R. Lamons, Dept. of Justice, Washington, D.C., for appellee.
Before HEANEY and MAGILL, Circuit Judges, and LARSON, * Senior District Judge.
L & B Corporation, Larry A. Larsen, Betty Larsen, the estate of Howard Larsen, Maxine J. Larsen, Lance Sterling Larsen and Ashley Larsen, partners in the partnerships of Larsen Realty, Millard Warehouse--Des Moines (Millard-DM), and Millard Warehouse--Denison (Millard-D), appeal a decision of the tax court denying investment tax credits for refrigerated structures and associated paved truck turnaround areas and railroad tracks.
The individual partners claimed investment tax credits in 1979 and 1980 pursuant to U.S. Internal Revenue Code, 26 U.S.C. Sec. 38, for the cost of constructing these facilities. The Commissioner of Internal Revenue originally allowed a credit for the refrigeration equipment used in the structures and the railroad trackage but disallowed a credit for the cost of constructing the structures themselves. 1 The Commissioner also disallowed a credit for the truck turnaround areas which had subsequently been added to the facilities. On appeal, the Tax Court held that the refrigerated structures, the truck turnarounds, or the railroad tracks were not "buildings" within the meaning of the Internal Revenue Code. The Tax Court denied any tax credit, however, as it found that none of the property was used in manufacturing, production or extraction, as required under the Code. 2
The partners argue on appeal that an investment tax credit should be given for the cost of the refrigerated structures, truck turnarounds and railroad tracks because they are all used in the process of rapidly freezing meat, an act which constitutes the processing of meat within the meaning of the Internal Revenue Code. The Commissioner argues that freezing does not constitute the "processing of meat" because it improves neither the quality nor the marketability of the product. Furthermore, the Commissioner challenges the Tax Court's determination that the structures are not "buildings" within the meaning of the Code and Treasury Regulations.
We reverse the Tax Court's holding that the refrigerated structures are not buildings within the meaning of the Internal Revenue Code. We also reverse the Tax Court's holding that the rapid freezing of meat is not the "processing of meat." We hold that the partners may not claim a tax credit for the structures but may claim a credit for the truck turnaround areas and those railroad tracks used to transport meat to the structures.
The partners claimed investment tax credits for the cost of constructing or improving several refrigerated structures located in Omaha, Nebraska; Lincoln, Nebraska; Des Moines, Iowa; and Denison, Iowa. The refrigerated structures are all constructed in a similar manner. They rest on a foundation of poured concrete and concrete block footings. The floors of the structures are 6-inch poured concrete slabs. Beneath the concrete floor is a 6-inch layer of polystyrene insulation, which serves to maintain cold temperatures inside the structures. Beneath the insulation and extending under the loading dock is a layer of gravel. Clay pipes within the gravel layer serve to remove waste heat from compressors inside the structures, preventing the ground below the floor from freezing, buckling or heaving.
The walls are made of steel and concrete blocks. The roof is made of corrugated steel and is covered with nine inches of insulation. A single-ply membrane roof covers the insulation.
The partners installed storage racks, refrigeration coils and blowers inside the refrigerated structures. The racks are bolted to the concrete floor, and the coils and blowers are attached to the ceiling above the racks. The storage racks are designed to facilitate the circulation of air over and around the meat stored on the racks. The racks are removable, but holes where the bolts entered the concrete floor would have to be plugged. The lighting systems in these facilities are especially adaptable to extremely low temperatures. An elaborate sprinkler system has been designed to prevent water from freezing in the pipes. The refrigeration equipment, including the coils and blowers, could be removed without structural damage.
Local meat packers, such as Swift, Iowa Beef Packers, and Farmland Foods, ship large quantities of fresh meat to these refrigerated structures. The meat, usually boxed or packaged with labels or brand names, is unloaded at the rail and truck docks adjacent to the structures, placed on pallets, and taken into special compartments inside the structures, called blast freezers, to be rapidly frozen. When this process is finished, the meat is stored in the other refrigerated compartments until shipped back to the packers or to third party purchasers by truck or rail. The rail facilities at Millard-D and Millard-DM accommodated the partnership's export business. The railroad tracks at Millard-DM were used for both in-shipments and out-shipments. Those tracks at Millard-D were used almost exclusively for out-shipments.
During 1979 and 1980, the facilities handled as much as 20 million pounds of meat per week. Although the facilities received some pre-frozen meat, an estimated 99% of all meat received went through the blast freezing process.
The sole issue on appeal is whether, under section 38 and section 48(a)(1)(B) of the Internal Revenue Code, 3 the refrigerated structures, the truck turnarounds and the railroad tracks are "other tangible property," other than buildings, used as an integral part of manufacturing or production. 4 The issues before this Court are whether the refrigerated structures constitute buildings and whether any of the property is being used in manufacturing or production.
Section 48 of the Internal Revenue Code authorized a tax credit for tangible property, excluding buildings, used in manufacturing industries. Although the Code does not define what constitutes a "building," the Treasury Regulations restate major portions of legislative history and give some indication of what types of structures Congress intended to exclude from the tax credit provision.
Section 1.48-1(e)(1) of the Treasury Regulations defines a building and its structural components as:
* * * any structure or edifice enclosing a space within its walls, and usually covered by a roof, the purposes of which is, for example, to provide shelter or housing, or to provide working, office, parking, display, or sales space. The term includes, for example, structures such as apartment houses, factory and office buildings, warehouses, barns, garages, railway or bus stations, and stores.
26 C.F.R. Sec. 1.48-1(e)(1) (emphasis added).
The regulation and the relevant legislative history define a "building" in terms of physical appearance and function. Yellow Freight System, Inc. v. United States, 538 F.2d 790, 796 (8th Cir.1976). The test that this Court and others have used to categorize structures is: 1) whether the structures resemble buildings; and 2) whether they function as buildings.
The Tax Court held, and this Court concurs, that the structures look like buildings. Tax Court Opinion, at 23. "The structures are permanent structures of substantial dimensions which enclose spaces surrounded by walls and covered by roofs." Id.
We disagree, however, with the Tax Court's conclusion with respect to the second question. We believe that the refrigerated structures do function as buildings for several reasons.
First, Congress and the Treasury Regulations specifically list a warehouse as a building. 26 C.F.R. Sec. 1.48-1(e); H.R.Rep. No. 1447, supra (1962-3 Cum.Bull. at 516); S.Rep. No. 1881, supra (1962-3 Cum.Bull. at 859).
Second, the Tax Court applied an unduly restrictive version of the function test in this case. Following Munford, Inc. v. Commissioner, 87 T.C. 463 (1986) aff'd 849 F.2d 1398 (11th Cir.1988), 5 the Tax Court held that the structures in the present case are not "buildings" because they do not primarily provide working space for humans. Tax Court Opinion, at 25. We believe that this holding ignores the full definition in Treas.Reg. Sec. 1.48-1(e)(1), which specifically includes structures that provide shelter, housing, working space, office space, parking, display areas, or sales space within the definition of "buildings." Nothing, either in the Code or in the Regulations, implies that this space must be primarily occupied by humans to qualify as a building.
Moreover, the Tax Court's test contradicts Congress' instruction that the term "building" be given its commonly accepted meaning. H.R.Rep. No. 1447, supra (1962-3 Cum.Bull. at 516); S.Rep. No. 1881, supra (1962-3 Cum.Bull. at 859). In Munford, the Eleventh Circuit acknowledged that the Tax Court has formulated a narrower definition of "building" than was intended by Congress. That court stated:
In reviewing this determination, we begin with the premise that "in the investment tax credit context, the term 'building' has become a term of art," notwithstanding Congress' original intent that the term be accorded its commonly accepted meaning.
Munford, 849 F.2d at 1403, citing Munford, 87 T.C. at 478. Thus, the Tax Court's definition nullifies Congress' intent. We decline to follow...
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