Munford, Inc. v. Comm'r of Internal Revenue
| Decision Date | 18 August 1986 |
| Docket Number | Docket No. 13720-83. |
| Citation | 87 T.C. 463,87 T.C. No. 25 |
| Parties | MUNFORD, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
During its taxable year ended December 30, 1976, petitioner placed in service an addition to a refrigerated facility for the storage of frozen food products. The addition comprised a 3,900 square foot truck loading platform, a 1,030 square foot rail loading platform and a 34,650 square foot refrigerated area. Petitioner sought an investment tax credit under sec. 38 I.R.C. 1954, with respect to costs relating to the addition, contending that the structure constitutes tangible personal property under sec. 48(a)(1)(A). Respondent allowed the credit only with respect to certain refrigeration system components of the refrigerated area. HELD, the truck loading platform and the rail loading platform are ‘buildings‘ and as such, costs relating thereto are not eligible for the credit under sec. 48(a)(1)(A) and secs. 1.48-1(c) and 1.48-1(e), Income Tax Regs. HELD, FURTHER, the refrigerated area of the addition is not a building for purposes of the investment tax credit. HELD, FURTHER, the costs relating to the refrigerated area of the addition are not eligible for the credit other than as allowed by respondent. Neither the siructural elements of the refrigerated area, nor the refrigerated area as a whole constitutes ‘property which is in the nature of machinery‘ within the meaning of the penultimate sentence of sec. 1.48-1(c), Income Tax Regs.; they are not tangible personal property under sec. 48(a)(1)(A). Weirick v. Commissioner, 62 T.C. 446 (1974), distinguished. Herschel M. Bloom, Ralph B. Levy, and Peter J. Genz, for the petitioners.
Lourdes M. Desantis and Donald W. Williamson, Jr., for the respondent.
Respondent determined deficiencies in petitioner's Federal income tax as follows:
+-------------------------------+
¦Taxable year ended--¦Deficiency¦
+--------------------+----------¦
¦Jan. 3, 1974 ¦$50,343 ¦
+--------------------+----------¦
¦Jan. 2, 1975 ¦48,831 ¦
+--------------------+----------¦
¦Jan. l, 1976 ¦445,755 ¦
+-------------------------------+
After concessions, the issues are (1) whether petitioner is entitled to an investment tax credit under section 38 1 with respect to an addition to a refrigerated storage facility to an extent greater than allowed by respondent and (2) whether petitioner is entitled to depreciate the addition to the refrigerated storage facility using the 200 percent declining balance method of depreciation under section 167(b)(2) and an eight year useful life. 2
Some of the facts have been stipulated and are so found.
Petitioner, Munford, Inc., had its principal place of business in Atlanta, Ga. at the time it filed the petition herein.
Petitioner is the common parent of an affiliated group of corporations which filed consolidated Federal income tax returns for all the taxable years in issue. For the taxable year 1971, petitioner filed its consolidated Federal income tax return on a calendar year basis. For taxable years beginning after December 31, 1971, petitioner filed its consolidated returns on a 52-53 week basis, with each taxable year ending on the Thursday nearest December 31. Petitioner used the accrual method of accounting.
Petitioner was founded in 1909 as an ice and coal supply company. Petitioner opened its first convenience food store in 1949 and, during the 1950's, expanded its business activities to include the ownership and operation of commercial refrigerated facilities. Petitioner acquired a chain of building material stores in 1962, and opened retail gift stores in 1965. Beginning in 1975, petitioner expanded its operations to include dairy processing divisions. During the years in issue, petitioner was thus engaged in a variety of businesses.
Issue 1. Investment Tax Credit
During its taxable year ended December 30, 1976, 3 petitioner owned and operated 12 refrigerated facilities in the southeastern United States, including a facility located at Xavier Drive, S.W., Atlanta, Ga. (herein the ‘Gateway Facility‘). During that year, petitioner completed the construction of, and began operating, an addition to the Gateway Facility (herein the ‘Addition‘) which is the subject of this proceeding. The Addition, the operation and construction of which are described in greater detail herein, consists of three areas: (1) a refrigerated portion comprising approximately 34,650 square feet; (2) a structure used as a loading dock and staging area for loading and unloading trucks, comprising approximately 3,900 square feet and (3) a structure used as a covered rail dock for unloading goods shipped by rail, comprising approximately 1,030 square feet.
Since the time it was put into operation, the Addition has been used exclusively by petitioner to receive and store on behalf of frozen food processors final-processed, packaged frozen foods at low temperature, pending delivery to the customers of such processors in the southeastern United States. These customers consist primarily of grocery store chains and other food service organizations, such as schools and cafeterias. Approximately 150 food processors use the Gateway Facility on a regular basis. All products that arrive at the Addition are packaged and labeled by the processor prior to delivery to the Addition. The Addition is not used either to process or to manufacture frozen foods.
Approximately 25 to 30 percent of the frozen food products stored at the Addition arrive aboard refrigerated railroad boxcars that run along a spur line adjacent to the rear of the Addition. The boxcars are not owned or operated by petitioner. All other frozen food products stored at the Addition arrive by refrigerated tractor trailer trucks operated by independent common carriers.
The Gateway Facility has approximately 50 employees who handle the movement of frozen foods in and out of the entire facility. The movement of food products in and out of the Addition is generally handled by a work crew consisting of a foreman and two or three helpers drawn from the 50 employees.
Upon arriving at the Addition, boxes of frozen foods are removed from the boxcars and from the tractor trailers by petitioner's employees using forklifts, and then counted and placed on pallets. The food products are then stored in the refrigerated area of the Addition on large pallet racks in the same cartons or boxes in which they were shipped by the food processors. Legal title to the frozen foods stored in the Addition is not taken by petitioner, but rather, is retained by the frozen food processors. When frozen food cartons or boxes are unloaded and placed in the refrigerated portion of the Gateway Addition, the frozen food processor receives a credit to the inventory which it has stored in the Addition.
After storage, frozen foods are generally shipped out of the Addition via tractor trailer trucks. When a truck is fully loaded and ready to leave the Addition, its driver signs a bill of lading and assumes the risk of transporting the frozen foods. As part of its service to customers, petitioner arranges for frozen foods to be shipped from the Addition to a 15-state region encompassing all of the southeastern United States. Upon receiving a release from a frozen food processor authorizing a shipment, the traffic department at the Gateway Facility arranges for a commercial trucker to make the delivery. When the refrigerated truck arrives at the Gateway Facility, all merchandise scheduled for delivery to that particular destination or region, regardless of ownership, is culled, grouped, and loaded by forklifts onto the waiting truck. This process is called ‘consolidation‘ and is designed to give petitioner's customers the benefit of the cheaper rates charged by truckers for transporting full loads. Petitioner charges its customers a special consolidation fee for this service. Petitioner pays the freight bill on the shipment of goods from the Addition on behalf of the frozen food processors and then bills each processor for its proportionate share of the total freight bill.
When the frozen food cartons or boxes are shipped out of the Addition, the frozen food processor receives a debit to its inventory. To ensure that the oldest merchandise in storage is shipped out first, each pallet of frozen foods is tagged with an inventory control number that allows petitioner's employees, with the assistance of a computerized, first-in, first-out (FIFO) inventory control system, to locate the oldest stored merchandise for each customer. Petitioner charges each processor which stores frozen foods within the Addition a one-time handling and storage fee based on the weight of the stored products. This fee is in addition to any applicable consolidation fee and freight bill reimbursement.
The refrigerated area of the Addition is maintained at a temperature ranging from minus five degrees Fahrenheit (-5 degrees F) to zero degrees Fahrenheit (0 degrees F). Due to the low temperature, petitioner's employees work within the refrigerated area of the Addition only to load and unload frozen foods, take inventory, and perform occasional repairs or maintenance. Because of the cold temperature, they generally do not stay within the area more than 12 minutes at a time. To protect against the cold, the employees wear cold weather gear, including coveralls, parkas, hats and gloves while working in this area. Such gear is not worn by petitioner's employees when loading or unloading goods from the refrigerated boxcars or trucks.
Petitioner's employees enter and exit the refrigerated area of the Addition almost exclusively on electrically powered forklifts, which are used to move the frozen food products in and out of the Addition. They also generally use forklifts to move about the loading dock areas.
Petition...
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