Satrum v. Comm'r of Internal Revenue
| Decision Date | 27 June 1974 |
| Docket Number | Docket No. 5079-72. |
| Citation | 62 T.C. 413 |
| Parties | MELVIN SATRUM AND THORDIS SATRUM, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Charles L. Johnson, for the petitioners.
Joseph M. Wetzel, for the respondent.
Petitioner's egg-producing operations were contained within several sheet metal, quonset-type structures. Each was designed specifically for housing chickens, provided the proper environment, and required a minimum of human maintenance and supervision. Held, the structures were integrally related to the property housed within; they are not ‘buildings' but rather ‘other tangible property’ within the meaning of sec. 48(a)(1)(B), and qualify for the investment credit as ‘section 38 property.’
The Commissioner determined deficiencies in the petitioners' Federal income taxes as follows:
+--------------------+
¦Year ¦Deficiency ¦
+------+-------------¦
¦ ¦ ¦
+------+-------------¦
¦1967 ¦$7,240 ¦
+------+-------------¦
¦1968 ¦14,698 ¦
+------+-------------¦
¦1969 ¦48,990 ¦
+--------------------+
The parties have made certain concessions leaving for adjudication the issue of whether certain structures, known as egg-producing facilities, were ‘building(s)‘ within the meaning of section 48(a)(1)(B), I.R.C. 1954, 1 thereby making petitioners' investment in such structures ineligible for the investment credit provided by section 38.
Some of the facts have been stipulated and are so found. The stipulation of facts, together with attached exhibits, are incorporated herein by this reference.
Petitioners Melvin Satrum and Thordis Satrum are husband and wife, and resided at Woodburn, Oreg., at the time of the filing of their petition herein. The petitioners filed joint Federal income tax returns for the calendar years 1967, 1968, and 1969 with the Internal Revenue Service Western Service Center at Ogden, Utah. At all relevant times the petitioners used the cash basis method of accounting. We will hereinafter refer to Melvin Satrum as ‘petitioner.’
During the years at issue petitioner was a farmer engaged principally in the business of producing eggs for sale. His egg business was conducted as a sole proprietorship known as ‘Valley View Egg Farm.’ The petitioner expended the following amounts in the construction and remodeling of walls, concrete slab base, and roof of the egg-producing facilities used in this business:
+----------------+
¦Year ¦Amount ¦
+------+---------¦
¦ ¦ ¦
+------+---------¦
¦1967 ¦$21,000 ¦
+------+---------¦
¦1968 ¦3,500 ¦
+------+---------¦
¦1969 ¦49,284 ¦
+----------------+
These expenditures do not relate to the costs or installation of equipment or machinery used in the egg-producing facilities. The petitioners claimed an investment credit in respect of the expenditures above under the provisions of section 38.
Each egg-producing facility is a rectangular structure, 240 feet long and 51 feet wide. The height ranges from some 8 feet where the side walls are in contact with the roof to in excess of 14 feet at the roof's uppermost point or peak. The outer walls are constructed of corrugated metal, resembling a quonset hut. The walls actually consist of three separate partial walls, containing louvers, designed specifically to control ventilation.
The floors are made of concrete slab with a thickness of 2 inches. The floor slopes approximately 1/2 inch for every 8 feet in length and is designed to provide a continuous water flow for the chickens.
The roof supports 13 air coolers controlled by thermostats which provide forced air throughout the structure. The roof, because of the weight, is supported by braces 8 feet apart throughout the structure.
Each facility houses 20,000 chickens in double-decked cages. The roof braces help support the cages and the cages are separated by aisles. At the end of each structure is a small area where eggs may be stacked prior to placement in cooler rooms. Running next to the cages are troughs for feed and water. The cages themselves are sloped, thereby causing eggs which have been freshly laid to roll forward onto trays from which they are collected.
During the years at issue the petitioner employed seven individuals. The normal duties carried on inside the egg-producing facilities were threefold: (1) Egg gathering from trays below the cages, a chore carried out by two employees and requiring between 2 and 2 1/2 hours to complete; (2) feeding of chickens, requiring one employee on an electric feeder 40 minutes; (3) removal of chicken droppings, requiring 30 minutes and one employee with a forklift-type machine which scrapes dropping boards below the cages. During these operations employees will check for dead chickens and remove them.
Every 20 to 24 months the chickens will no longer lay eggs profitably and must be removed. Petitioner will hire 14 to 16 youths, who carry the chickens out of the structure and load them on trucks to be sold later. It takes approximately 5 hours to carry out the chickens from one structure. Twenty thousand (20,000) new chickens are brought in during 1 day, requiring approximately 10 hours.
OPINIONWe have been called upon to determine whether petitioner's investment in the walls, roof, and floors of an egg-producing facility qualify for the credit provided in section 38.2 Among the requirements necessary to qualify for the credit, and the only requirement at issue with the parties, is that the property for which the credit is sought must be ‘section 38 property,‘ as defined by section 48, which states in part:
SEC. 48. (a) SECTION 38 PROPERTY.—
(1) IN GENERAL.— Except as provided in this subsection, the term ‘section 38 property’ means—
(A) tangible personal property, or
(B) other tangible property (not including a building and its structural components) but only if such property—
(i) is used as an integral part of manufacturing, production, or extraction * * * , or
(ii) constitutes a research or storage facility used in connection with any of the activities referred to in clause (i), * * *
In the instant case the respondent has concluded that the facility's outer structure was ‘a building.’ Petitioner contends that the structure was ‘other tangible property’ used as an integral part of production.
Under the broad authority granted him by section 38(b), respondent has defined the term ‘building’ as follows:
Sec. 1.48-1(e) Definition of building and structural components. (1) Buildings and structural components thereof do not qualify as section 38 property. The term ‘building’ generally means any structure or edifice enclosing a space within its walls, and usually covered by a roof, the purpose 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. * * * Such term does not include * * * (ii) a structure which houses property used as an integral part of an activity specified in section 48(a)(1)(B)(i) if the use of the structure is so closely related to the use of such property that the structure clearly can be expected to be replaced when the property it initially houses is replaced. Factors which indicate that a structure is closely related to the use of the property it houses include the fact that the structure is specifically designed to provide for the stress and other demands of such property and the fact that the structure could not be economically used for other purposes. Thus, the term ‘building’ does not include such structures as oil and gas storage tanks, grain storage bins, silos, fractionating towers, blast furnaces, basic oxygen furnaces, coke ovens, brick kilns, and coal tipples.
While the legislative history of the investment credit indicates that ‘building’ is to be given its commonly accepted meaning (H. Rept. No. 1447, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 516; S. Rept. No. 1881, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 858-859), it is clear that the courts have concluded that certain structures, though outwardly resembling buildings, were not considered so for purposes of section 48(a)(1)(B). Brown & Williamson Tobacco Corp. v. United States, 369 F.Supp. 1283 (W.D. Ky. 1973) (tobacco sheds), affirmed per curiam 491 F.2d 1258 (C.A. 6, 1974); Robert E. Catron, 50 T.C. 306 (1968)(refrigerated portion of corrugated metal quonset hut).3 The respondent, too, has reached a similar conclusion with respect to certain structures: Rev. Rul. 72-223, 1972-1 C.B. 17 (hydroelectric powerplant); Rev. Rul. 71-489, 1971-2 C.B. 64 (permanent refrigeration facility); Rev. Rul. 69-557, 1969-2 C.B. 3 (); Rev. Rul. 68-132, 1968-1 C.B. 14 (). The courts have generally applied a ‘function’ or ‘use’ test to determine whether a structure was a building or other tangible property. Central Citrus Co., 58 T.C. 365 (1972); Robert E. Catron, supra at 310-311.
In the instant case there is little doubt in our mind that the structure was specially designed as an integral part of the egg-producing process. The sides of the structure did not have a normal wall, but rather had three louvered wall sections to enable proper control of ventilation. Closely spaced beams, which supported the roof and numerous coolers located on the roof, were also necessary supports for the cages where the chickens were housed. Further the concrete floor sloped to provide a continuous water flow. Because of the sheet metal construction, the closely spaced beams, and the sloping floor, we do not believe that this structure could be economically used for any purpose other than for the specific purpose for which it was designed. Moreover we think it reasonable to expect replacement of the entire facility, if the...
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