McKenzie v. Comm'r of Internal Revenue

• Decision Date: 27 November 1985
• Docket Number: Docket No. 670-82.
• Citation: 85 T.C. No. 52,85 T.C. 875
• Parties: JERROLD L. McKENZIE AND SALLY A. McKENZIE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

85 T.C. 875

85 T.C. No. 52

JERROLD L. McKENZIE AND SALLY A. McKENZIE, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 670-82.

United States Tax Court

Filed November 27, 1985.

Ps claimed investment tax credits with respect to their dog and cat kennel an horse barn. The kennel had a boarding area specifically designed for the temporary boarding of dogs, the design of which facilitated sanitation needs and animal comfort. The horse barn was a general purpose ‘Lester‘ building, the design of which Ps varied for their Arabian horse breeding and showing activities. The horse barn could economically be used for other purposes.

HELD, the kennel is not a single purpose agricultural or horticultural structure within the meaning of sec. 48(a)(1)(D) and sec. 48(p), I.R.C. 1954.

HELD FURTHER, the boarding area portion of the kennel is not ‘a structure which is essentially an item of machinery or equipment‘ under sec. 1.48-1(e)(1), Income Tax Regs., and thus is not ‘tangible personal property‘ under sec. 48(a)(1)(A), I.R.C. 1954.

HELD FURTHER, the boarding area portion of the kennel is an inherently permanent structure within the meaning of sec. 1.48- 1(c), Income Tax Regs., and thus is not ‘tangible personal property‘ under sec. 48(a)(1)(A), I.R.C. 1954. Whiteco Industries, Inc. v. Commissioner, 65 T.C. 664 (1975) applied.

HELD FURTHER, Ps' horse barn was not specifically designed and constructed for housing, raising, and feeding a particular type of livestock within the meaning of sec. 48(p)(2), I.R.C. 1954 and sec. 1.48-10(d), Income Tax Regs., and thus is not a qualifying single purpose agricultural or horticultural structure under sec. 48(a)(1)(D) and sec. 48(p), I.R.C. 1954.

HELD FURTHER, Ps' horses are not livestock within the meaning of sec. 48(p)(2), I.R.C. 1954, and sec. 1.48-10(b)(3), Income Tax Regs. Validity of regulation upheld. JOHN P. RAYNOR, for the petitioners.

ROBERT L. ARCHAMBAULT, for the respondent.

PARKER, JUDGE:

Respondent determined deficiencies in petitioners' Federal income taxes in the amounts of $1,510 and $890 for the taxable years 1973 and 1976, respectively. Respondent also denied petitioners' refund claim asserted in amended returns filed for 1973 and 1976, and petitioners now assert an overpayment of taxes in that regard. On their original and amended returns, petitioners claimed investment tax credits, which give rise to various issues under the statute and regulations governing such credits.

The issues for decision are as follows:

1. Whether petitioners' dog and cat kennel is a single purpose agricultural or horticultural structure within the meaning of section 48(a)(1)(D). ¹ Specifically, the issue is whether the kennel qualifies as a single purpose livestock structure under section 48(p)(2).

2. If not, whether the boarding area of that kennel is ‘tangible personal property‘ as that term is used in section 48(a)(1)(A). That in turn involves issues under the pertinent regulations as to whether or not the boarding area is an inherently permanent structure and whether or not the boarding area is an item of machinery or equipment.

3. Whether petitioners' horse barn is a single purpose agricultural or horticultural structure within the meaning of section 48(a)(1)(D). That involves issues as to whether the structure was specifically designed, constructed, and used as a single purpose livestock structure under section 48(p)(2) and whether horses are livestock within the meaning of section 48(p)(2) and section 1.48- 10(b)(3), Income Tax Regs.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The written and oral stipulations of facts and the exhibits attached to the written stipulation are incorporated herein by this reference.

Petitioners Jerrold L. McKenzie and Sally A. McKenzie, husband and wife, resided at 12104 Capehart Road, Papillion, Nebraska, at the time they filed their petition in this case. Petitioners filed 1973 and 1976 joint Federal income tax returns (Forms 1040) and amended 1973 and 1976 returns (Forms l040X) with the Internal Revenue Service Center in Ogden, Utah.

I. THE KENNEL FACILITY

Pursuant to an Omaha Board of Realtors Uniform Purchase Agreement dated February 17, 1976, petitioner Jerrold L. McKenzie purchased 11.8 acres of land with improvements thereon, located at 12104 Capehart Road, Papillion, Nebraska. The total purchase price for the property was $100,000. Improvements on the property included a residence, a dog and cat kennel (the kennel facility), and a small shed. The uniform purchase agreement does not contain any allocation of the $100,000 purchase price between the land and the improvements, or among the various improvements. The parties stipulated that $24,000 of the $100,000 purchase price is allocable to the kennel facility. ²

The kennel facility constitutes real property under state law. The kennel facility is principally a concrete and cinderblock structure enclosing approximately 1,350 square feet. The walls are approximately eight feet tall and are imbedded in a concrete foundation. It is a permanent structure fixed to the ground with a foundation. The facility could not be moved without destruction of the property. It is basically a facility for temporarily boarding pet dogs and cats while their owners are absent. Petitioners have never used the kennel facility for any other purpose.

The kennel facility consists of two principal areas, the ‘front structure‘ and the ‘boarding structure.‘ These two areas would be separate structures if they did not share a common wall. They have separate roofs attached to their respective walls. The front structure measures 30.5 feet in width by 15.5 feet in depth, or approximately 473 square feet. Just inside the front door to the front structure are the reception and office areas. The reception and office areas are separated by an ‘L‘ shaped counter that encloses the office area. When a customer comes in to leave his pet, he fills out the necessary paperwork on the front part of the counter. Such paperwork includes a general release form and an information sheet on which the customer states, inter alia, the pet's food and medication requirements, its veterinarian, and its anticipated length of stay. Petitioners prepare the food to be served to the boarded pets on the side part of the counter. Petitioners also use the top of the counter to store the individual medications required by the boarded animals.

To the right of the counter and the reception area is a food storage area. During 1976, petitioners used this area to store large quantities of dog food. They bought large quantities of dog food at a wholesale rate, and then sold much of it to their customers. This enabled petitioners to reduce their cost of feeding the dogs they boarded. These sales took place in the reception area. Petitioners no longer purchase and store large quantities of dog food. They now use the food storage area to store smaller quantities of dog food and as a place to put temporary cages to keep animals when they have an overflow of animals to be boarded. Petitioners intend to install between five and ten permanent cat cages in the food storage area.

To the left of the reception and office areas is a separate room known as the cat room. Cages used to board cats are located in the cat room. Two or three times a day petitioners clean these cages and the litter boxes in them, and change the cats' water. Petitioners feed the cats twice a day. A bathtub raised to waist level is also located in the cat room. Petitioners bathe boarded animals in the tub. An animal is bathed at its owner's request, if it gets extremely dirty, and/or before it is returned to its owner. Petitioners also use the tub to wash the dishes used to feed the boarded animals. Petitioners have never used the cat room for any other purpose. There is also a small bathroom in the cat room for petitioners' use.

Petitioners board dogs in the rear part of the kennel facility (the boarding structure). The boarding structure is 60 feet long and approximately 14.5 feet wide. It encompasses approximately 877 square feet. ³ A door in the wall common to the front structure and the boarding structure opens from the office area directly into the boarding structure. A concrete aisle approximately four feet in width runs down the center of the boarding structure from the office door to the far end of the boarding structure. The aisle provides access to 37 individual dog pens (the inside runs) that run down both long walls of the boarding structure. Each inside run is four feet long (measuring from the outer wall of the boarding structure in towards the center aisle). The inside runs vary from 2-1/2 to 4 feet in width. ⁴ Each inside run is separated from the runs on either side of it by a concrete wall that is four feet tall. The top of each inside run is enclosed with chain-link fencing. The front of each inside run (i.e. the side facing the center aisle) consists of a chain-link fence gate.

Gutters run the length of the boarding structure on either side of the center aisle, in front of each row of inside runs. The gutters run into large drains at the south end of the boarding structure (the end adjoining the front structure). The concrete floors of the inside runs slope to the center of the boarding structure so that water runs into the gutters and then to the drains. The center aisle is crowned (i.e. higher in the middle than on the sides) so that water on it also runs into the gutters.

The boarding structure is heated by overhead heaters and cooled with air conditioning for animal comfort. Additionally, radiant floor heaters are embedded in the concrete floors of the inside runs so that the concrete floors are not too cold for the animals to lie or sleep on. The boarding structure is also fully equipped with plumbing and electricity.

A dog in an inside run can gain access to a corresponding pen outside the boarding...