Thirup v. C. I. R., 73-2351

• Decision Date: 23 December 1974
• Docket Number: No. 73-2351,73-2351
• Parties: , 75-1 USTC P 9158 Arne THIRUP and Pauline Thirup, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 915

508 F.2d 915

39 A.L.R.Fed. 299, 75-1 USTC P 9158

Arne THIRUP and Pauline Thirup, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.

No. 73-2351.

United States Court of Appeals, Ninth Circuit.

Dec. 23, 1974.

George E. Link, Thelen, Marrin, Johnson & Bridges, San Francisco, Cal., for appellants.

Scott P. Crampton, Asst. Atty. Gen., Tax Div., U.S. Dept. of Justice, Washington, D.C., for appellee.

Before ELY and WALLACE, Circuit Judges, and JAMESON, ^* Senior District Judge.

OPINION

ELY, Circuit Judge:

This is a tax case in which Arne and Pauline Thirup, the appellants, claim a $4,755.41 tax credit pursuant to section 38 of the Internal Revenue Code for investments in greenhouses used in their business of growing and selling cut flowers. After concluding that the greenhouses were 'buildings' as that term is used in section 48 of the Code, and therefore ineligible for the investment tax credit, the Commissioner of Internal Revenue disallowed the Thirups' claimed credit, and the Tax Court upheld the Commissioner's decision. Arne Thirup, 59 T.C. 122 (1972). We reverse.

During 1966, the year for which their tax liability is in dispute, the Thirups conducted their flower business through a sole proprietorship known as Pajaro Valley Greenhouses (hereinafter, 'Pajaro Valley'). Pajaro Valley's greenhouses were located near Watsonville, California, but the business sold its cut flowers, mainly roses and carnations, throughout the United States.

In 1966, the appellants spent $79,841.39 to build one new greenhouse (the 'principal' greenhouse) and to improve several existing greenhouses by replacing, with more durable fiber glass, the ployethylene plastic that had previously formed their sides and roofs. The principal greenhouse was a completely enclosed rectangular structure, 400 feet long and 200 feet wide. Its sides and walls were sheets of corrugated fiber glass attached with special nails to a wooden frame consisting of large beams set vertically into the ground and topped with an A-shaped frame roof of lighter wood. The structure had no floor, and the appellants' flowers grew directly from the soil enclosed by the greenhouse. Panes of flat fiber glass, set on metal hinges and framed in wood, formed rows of windows at the top of the structure.

The taxpayers designed and equipped their greenhouses to provide a total interior environment for the commercial production of flowers. ¹ The greenhouses shielded the growing plants from the outside elements, but they also did more. Their translucent fiber glass walls, windows, and roofs diffused the sunlight that fell on the flowers so that the flower stems would not bend directly toward the sun but instead would grow long and straight for the commercial market. The greenhouses were equipped with automatic temperature control systems so that when the temperature inside the structures rose above a fixed level, electric motors opened the windows to the outside. If the temperature became too cool, automatic valves in steam pipes located at different levels inside the structures opened to admit heat. Other pipes in the greenhouses carried water and liquid fertilizer to the plants, and generating devices located in each greenhouse released small amounts of carbon dioxide into the interior air. Beneath the greenhouses' soil floors were systems of steam pipes which the appellants periodically opened to sterilize the growing area.

The roses and carnations growing inside Pajaro Valley's greenhouses required a substantial amount of human care. Before young plants were set into the greenhouse floors, it was necessary for employees to turn and fertilize the soil and mix it with beneficial additives. After the plants had begun to bloom, workers harvested the carnations once, and the roses twice, each day. In addition, the workers routinely moved through the greenhouses to pull weeds, spray chemical, prune the plants, adjust plant supports, or perform other, similar, tasks.

Pajaro Valley employed from 20 to 25 workers in 1966, at least half of whom spent most of each workday harvesting and caring for the plants inside the greenhouses. The Tax Court found that the greenhouse workers sometimes remained inside the greenhouses for lunch and work breaks, and that during these breaks the workers often rested on tables, benches, and boxes that had been placed in the aisles between flowerbeds and along the greenhouse walls for storing tools and affording workers access to the tips of tall plants. Pajaro Valley's other employees normally worked at tasks outside the greenhouses, but during peak seasons some of the 'outside' employees were assigned 'inside' work. The Tax Court found that the appellants' employees spent approximately half of their aggregate working time inside the greenhouses.

Section 48 of the Internal Revenue Code defines the types of property eligible for the investment tax credit (known as 'section 38 property'):

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

(i) is used as an integral part of

(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), . . ..

Here, the Commissioner agrees that the greenhouses are 'other tangible property' under subsection 48(a)(1)(B) and that the greenhouses are 'used as an integral part of . . . production . . .' under subsection 48(a)(1)(B)(i). The only dispute between the parties is whether the greenhouses are 'buildings,' which the parenthetical part of subsection 48(a)(1)(B) declares ineligible for the investment tax credit. ²

Exercising the authority granted him by section 38(b) of the Internal Revenue Code, the Commissioner has defined the term 'building' as the term is used in section 48:

Treas. Reg. 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 includes any such structure constructed by, or for, a lessee even if such structure must be removed, or ownership of such structure reverts to the lessor, at the termination of the lease. Such term does not include (i) a structure which is essentially an item of machinery or equipment, or (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.

In holding that the appellants' greenhouses were 'buildings,' the Tax Court relied on the reasoning set forth in Sunnyside Nurseries, 59 T.C. 113 (1972), ³ which was a companion case to Thirup and which also involved greenhouses. In Sunnyside, the Court applied two tests in deciding that the greenhouses were 'buildings' within section 48.

The first test merely involved consideration of the outward appearance of the structures: since the greenhouses looked like buildings, they must be 'buildings.' This test, which can be called the appearance test, is attractively simple, and it draws some support from the following sentence from the Commissioner's definition: 'The term 'building' generally means any structure or edifice enclosing a space within its walls, and usually covered by a roof . . ..' Treas.Reg. 1.48-1(e)(1). The quoted statement appears in substantially the same form in both of the Congressional committee reports on the investment tax credit. H.R.Rep.No.1447, 87th Cong., 2d Sess. A18 (1962) (1962-3 Cum. Bull. 405, 516); S.Rep.No.1881, 87th Cong., 2d Sess. 154 (1962) (1962-3 Cum. Bull. 707, 858).

Considering the Congressional history as a whole, however, it is hardly deniable that the intent of Congress in its creation of the investment tax credit was to encourage improvements in the quality and quantity of American industrial products. We think that the appearance test is too imprecise to achieve this Congressional purpose. We note that the other courts that recently have considered the appearance test also have rejected it. See Brown-Forman Distillers Corp. v. United States, 499 F.2d 1263, 1271-1272 (Ct.Cl. 1974) (large, warehouselike structures designed to control temperature and humidity for the proper aging of bourbon whiskey are not 'buildings'); Melvin Satrum, 62 T.C. 413 (1974) (reviewed by the full Court) (structures specially designed to provide a beneficial environment for chickens in a commercial egg-producing business are not 'buildings,' despite two dissenting opinions emphasizing, inter alia, the structures' appearance). The Commissioner himself has also declined, on occasion, to apply the appearance test. See, e.g., Rev.Rul. 359, 1971-2 Cum. Bull. 62 (a facility for the bulk...