SCOTUS Reports

Tag: Tangible Personal Property

  • Norwest Corp. v. Commissioner, 108 T.C. 358 (1997): When Computer Software Qualifies as Tangible Personal Property for Tax Credits

    Norwest Corp. v. Commissioner, 108 T. C. 358 (1997)

    Computer software can be considered tangible personal property eligible for investment tax credit if it is acquired without exclusive intellectual property rights.

    Summary

    Norwest Corporation purchased operating and applications software for use in its banking operations, subject to nonexclusive, nontransferable license agreements. The key issue was whether this software qualified as tangible personal property eligible for the investment tax credit (ITC). The Tax Court held that the software was indeed tangible property for ITC purposes, distinguishing it from prior rulings based on the absence of exclusive intellectual property rights in the purchase. This decision was grounded in a broad interpretation of tangible personal property and the legislative intent to encourage technological investments, impacting how software acquisitions are treated for tax purposes.

    Facts

    Norwest Corporation and its subsidiaries purchased operating and applications software from third-party developers for use in their banking and financial services. The software was delivered on magnetic tapes and disks and was subject to license agreements granting Norwest a nonexclusive, nontransferable right to use the software indefinitely. Norwest did not acquire any exclusive copyright or other intellectual property rights, nor was it allowed to reproduce the software outside its affiliated group.

    Procedural History

    The Commissioner of Internal Revenue determined deficiencies in Norwest’s federal income taxes for the years 1983-1986, denying the investment tax credit claimed on the software expenditures. Norwest petitioned the Tax Court, which ultimately held that the software was tangible personal property eligible for the ITC.

    Issue(s)

    1. Whether computer software, acquired under nonexclusive, nontransferable license agreements, qualifies as tangible personal property eligible for the investment tax credit.

    Holding

    1. Yes, because the software was acquired without any associated exclusive intellectual property rights, and such an acquisition aligns with the legislative intent to encourage investments in technological advancements.

    Court’s Reasoning

    The Tax Court’s decision hinged on a broad interpretation of the term “tangible personal property” as intended by Congress when enacting the ITC. The court distinguished this case from previous rulings like Ronnen v. Commissioner by noting that Norwest did not acquire any exclusive copyright rights, focusing instead on the tangible medium (tapes and disks) on which the software was delivered. The court rejected the “intrinsic value” test used in prior cases, arguing it led to inconsistent results. Instead, it emphasized the nature of the rights acquired, aligning with the legislative purpose to promote economic growth through investments in productive facilities, including technological assets like software. The majority opinion was supported by several concurring judges but faced dissent arguing for adherence to precedent classifying software as intangible.

    Practical Implications

    This ruling expanded the scope of what can be considered tangible personal property for tax credit purposes, potentially affecting how businesses structure software acquisitions to maximize tax benefits. It suggests that companies should carefully consider the terms of software licenses, as those without exclusive intellectual property rights might qualify for the ITC. This decision could influence future tax planning strategies and has been cited in subsequent cases dealing with the classification of software and other digital assets for tax purposes. Businesses in technology-dependent sectors may find this ruling advantageous for claiming tax credits on software investments, although the dissent indicates ongoing debate on this issue.

  • Texas Instruments v. Commissioner, 98 T.C. 628 (1992): Investment Tax Credit Eligibility for Licensed Seismic Data Tapes

    Texas Instruments Incorporated and Its Consolidated Subsidiaries v. Commissioner of Internal Revenue, 98 T. C. 628 (1992)

    The Investment Tax Credit (ITC) is not available for the original speculative data tapes used to produce copies for sale, even if the copies are used by customers for exploration on the Outer Continental Shelf.

    Summary

    Texas Instruments sought an Investment Tax Credit for costs related to creating seismic data tapes used in oil and gas exploration on the Outer Continental Shelf. The tapes were stored outside the U. S. more than 50% of the time. The Tax Court ruled that while the tapes were tangible personal property, they were not eligible for the ITC because Texas Instruments did not use them directly for exploration purposes; instead, they licensed the data to customers who used the copies. The decision hinged on the distinction between the original tapes and the copies used by customers, emphasizing that only the latter were used for the statutorily defined purposes.

    Facts

    Texas Instruments, through its subsidiaries Geophysical Service Incorporated and Geophysical Service Inc. , collected and processed seismic data on the Outer Continental Shelf. This data was recorded on magnetic tapes, which were then used to create copies sold to oil companies under nonexclusive licenses. The original tapes were stored in Canada more than 50% of the time during the years in question. Texas Instruments did not claim the ITC on its tax return but later sought it in court.

    Procedural History

    Texas Instruments filed a petition in the U. S. Tax Court to claim the ITC for the costs of creating the seismic data tapes. The Tax Court, after reviewing the case, issued a decision that the original tapes were not eligible for the ITC.

    Issue(s)

    1. Whether the speculative data tapes constituted tangible personal property under section 48 of the Internal Revenue Code.
    2. Whether the speculative data tapes were used for the purpose of exploring for resources on the Outer Continental Shelf, making them eligible for the ITC under section 48(a)(2)(B)(vi).

    Holding

    1. Yes, because the speculative data tapes were tangible media on which the seismic data was recorded, following the precedent set in Texas Instruments Inc. v. United States.
    2. No, because the original tapes were not used directly by Texas Instruments for exploration purposes but were used to produce copies sold to customers who used them for exploration.

    Court’s Reasoning

    The court applied the precedent from Texas Instruments Inc. v. United States, which held that seismic data tapes and films are tangible personal property because their value is dependent on their physical manifestation. However, the court distinguished the use of the original tapes from the copies. The original tapes were used by Texas Instruments to produce copies for sale, while the copies were used by customers for exploration. The court emphasized that for the ITC, the property must be used by the taxpayer for the statutorily defined purposes, not merely by the end-user. The court also considered congressional reports and regulatory interpretations, concluding that an ultimate use test was not supported by the statute or its legislative history.

    Practical Implications

    This decision clarifies that for ITC eligibility, the focus is on the use of the property by the taxpayer, not the end-user. Companies involved in similar data licensing should carefully consider the distinction between their use of original data storage media and the use of copies by customers. This ruling may affect how businesses structure their data collection and licensing agreements to optimize tax benefits. Subsequent cases have cited this decision in distinguishing between the use of original property and copies for tax credit purposes, reinforcing the need for direct use by the taxpayer claiming the credit.

  • Munford, Inc. v. Commissioner, 87 T.C. 463 (1986): When Refrigerated Structures Qualify for Investment Tax Credits

    Munford, Inc. v. Commissioner, 87 T. C. 463 (1986)

    A refrigerated storage facility is not tangible personal property eligible for an investment tax credit under Section 38 unless it functions as machinery and is not an inherently permanent structure.

    Summary

    Munford, Inc. sought an investment tax credit for an addition to its refrigerated food storage facility. The Tax Court ruled that the truck and rail loading platforms were ineligible buildings, while the refrigerated area, though not a building, was not tangible personal property. The court emphasized the distinction between tangible personal property under Section 48(a)(1)(A) and other tangible property under Section 48(a)(1)(B), holding that the refrigerated area did not qualify under either category due to its inherently permanent nature and lack of use in a qualifying activity.

    Facts

    Munford, Inc. constructed an addition to its refrigerated facility in Atlanta, used for storing final-processed frozen foods. The addition included a refrigerated area (34,650 sq ft), a truck loading platform (3,900 sq ft), and a rail loading platform (1,030 sq ft). Munford claimed an investment tax credit under Section 38 for costs related to the addition, arguing it was tangible personal property. The IRS allowed the credit only for certain refrigeration system components, denying it for the structural elements and loading platforms.

    Procedural History

    Munford appealed to the U. S. Tax Court after the IRS denied the investment tax credit for most of the addition’s costs. The court heard arguments on whether the entire addition, or parts thereof, qualified as tangible personal property under Section 48(a)(1)(A).

    Issue(s)

    1. Whether the truck loading platform and rail loading platform of the addition are “buildings” ineligible for the investment tax credit under Section 48(a)(1)(A)?
    2. Whether the refrigerated area of the addition constitutes tangible personal property under Section 48(a)(1)(A), thus qualifying for the investment tax credit?

    Holding

    1. Yes, because the loading platforms provide working space for employees and resemble traditional buildings in function and appearance.
    2. No, because although the refrigerated area is not a building, it is an inherently permanent structure and does not function as machinery, failing to meet the criteria for tangible personal property under Section 48(a)(1)(A).

    Court’s Reasoning

    The court applied a functional test to determine that the loading platforms were buildings due to their use as workspaces. For the refrigerated area, the court found it was not a building but was an inherently permanent structure, ineligible for the credit under Section 48(a)(1)(A). The court rejected Munford’s argument that the refrigerated area was “property in the nature of machinery,” distinguishing it from cases like Weirick v. Commissioner. The court emphasized the statutory distinction between tangible personal property and other tangible property, noting that the refrigerated area would need to be used in a qualifying activity to be eligible under Section 48(a)(1)(B), which it was not. The court also noted that the structural elements of the refrigerated area were not closely related to the refrigeration system to be considered a single asset in the nature of machinery.

    Practical Implications

    This decision clarifies that large, inherently permanent refrigerated structures do not qualify for investment tax credits under Section 48(a)(1)(A) unless they function as machinery. Practitioners should carefully distinguish between tangible personal property and other tangible property, ensuring clients’ assets meet the specific criteria for each category. Businesses should consider the use of their facilities in qualifying activities to potentially claim credits under Section 48(a)(1)(B). Subsequent cases have cited Munford in distinguishing between structures eligible for different types of tax credits. For example, structures similar to Munford’s refrigerated area might still qualify for other tax benefits if used in qualifying activities like manufacturing or bulk storage of fungible commodities.

  • McKenzie v. Commissioner, 85 T.C. 875 (1985): Investment Tax Credit Eligibility for Agricultural and Horticultural Structures

    McKenzie v. Commissioner, 85 T. C. 875 (1985)

    The investment tax credit does not apply to structures used for non-agricultural or non-food production activities, nor to general purpose structures that can be economically used for other purposes.

    Summary

    In McKenzie v. Commissioner, the petitioners claimed investment tax credits for a dog and cat kennel and a horse barn, arguing these were single purpose agricultural structures. The U. S. Tax Court held that neither qualified for the credit: the kennel was not used for agricultural or food production, and the horse barn was a general purpose structure. The court clarified that for a structure to qualify as “section 38 property,” it must be specifically designed, constructed, and used for agricultural or food production activities, and horses do not count as livestock for these purposes. This decision underscores the narrow scope of the investment tax credit for agricultural structures and the importance of the structure’s specific design and use.

    Facts

    Jerrold and Sally McKenzie purchased a property that included a dog and cat kennel and a horse barn. They claimed investment tax credits for these structures, asserting they were single purpose agricultural or horticultural structures. The kennel was designed for temporary boarding of pets, with specific sanitation and comfort features. The horse barn was a general purpose “Lester” building, modified by the McKenzies for their Arabian horse activities. The McKenzies also made subsequent improvements to the barn.

    Procedural History

    The McKenzies filed their tax returns for 1973 and 1976, claiming investment tax credits for the kennel and horse barn. After the IRS denied these claims, the McKenzies filed amended returns and a petition in the U. S. Tax Court challenging the IRS’s disallowance of the credits.

    Issue(s)

    1. Whether the McKenzies’ dog and cat kennel qualifies as a single purpose agricultural or horticultural structure under section 48(a)(1)(D)?
    2. If not, whether the boarding area of the kennel is tangible personal property under section 48(a)(1)(A)?
    3. Whether the McKenzies’ horse barn qualifies as a single purpose agricultural or horticultural structure under section 48(a)(1)(D)?
    4. Whether horses are considered livestock under section 48(p)(2)?

    Holding

    1. No, because the kennel was not used for agricultural or food production activities.
    2. No, because the boarding area is an inherently permanent structure and not tangible personal property.
    3. No, because the horse barn is a general purpose structure that can be economically used for other purposes.
    4. No, because horses are not considered livestock under the applicable regulations.

    Court’s Reasoning

    The court analyzed the statutory language of section 48 and the legislative history, emphasizing that the investment tax credit for agricultural structures was intended for those used in agricultural or food production activities. The kennel, used for temporary boarding of household pets, did not meet this criterion. The court also applied the regulations defining tangible personal property, determining that the kennel’s boarding area was an inherently permanent structure and thus ineligible. For the horse barn, the court found that it was not specifically designed and constructed for a single purpose related to livestock, as it was a general purpose building capable of other uses. Additionally, the court upheld the regulation excluding horses from the definition of livestock, finding it consistent with the statute’s intent.

    Practical Implications

    This decision limits the scope of the investment tax credit to structures specifically designed and used for agricultural or food production, excluding those used for non-agricultural purposes like pet boarding. It also clarifies that general purpose structures do not qualify, even if modified for a specific use. Taxpayers and practitioners must carefully consider the design, construction, and use of structures when claiming investment tax credits. The ruling may affect how similar claims are evaluated in future cases, emphasizing the need for structures to be narrowly tailored to qualifying activities. Subsequent cases have distinguished this ruling when structures are more directly involved in agricultural production processes.

  • Piggly Wiggly Southern, Inc. v. Commissioner, 84 T.C. 739 (1985): When Equipment is ‘Placed in Service’ for Depreciation and Investment Tax Credit Purposes

    Piggly Wiggly Southern, Inc. v. Commissioner, 84 T. C. 739 (1985)

    Equipment is considered ‘placed in service’ for depreciation and investment tax credit purposes when it is in a state of readiness and available for a specifically assigned function in an operating trade or business.

    Summary

    Piggly Wiggly Southern, Inc. sought depreciation and investment tax credits for equipment installed in new, relocated, and remodeled stores. The court held that only the equipment in remodeled stores, which were operational during the fiscal year of purchase, qualified for the credits. Equipment in new and relocated stores, which did not open until the following fiscal year, did not qualify. Additionally, HVAC units installed to meet the environmental needs of refrigeration equipment were classified as tangible personal property, qualifying for investment tax credits for both 1977 and 1979 installations.

    Facts

    Piggly Wiggly purchased new equipment for its supermarkets during the fiscal years 1977 and 1979. Equipment in remodeled stores was installed and operational during the purchase year, while equipment in new and relocated stores was installed but the stores did not open until the following fiscal year. The company also installed HVAC units to maintain the necessary temperature and humidity for its refrigeration equipment. The IRS disallowed depreciation and investment tax credits for the new and relocated stores’ equipment and questioned the classification of the HVAC units as tangible personal property.

    Procedural History

    The IRS issued a notice of deficiency for Piggly Wiggly’s fiscal years 1977 and 1979. Piggly Wiggly petitioned the Tax Court, which ruled that equipment in remodeled stores qualified for depreciation and investment tax credits as it was ‘placed in service’ during the fiscal year of purchase. The court also determined that the HVAC units qualified as tangible personal property under the ‘sole justification’ test, thus eligible for investment tax credits.

    Issue(s)

    1. Whether equipment purchased by Piggly Wiggly during fiscal years 1977 and 1979 for use in new, relocated, or remodeled stores was ‘placed in service’ during those years, qualifying for depreciation and investment tax credits.
    2. Whether central heating and air-conditioning units installed by Piggly Wiggly in its stores qualified as ‘section 38 property’ for investment tax credit purposes.

    Holding

    1. Yes, because equipment in remodeled stores was in use during the fiscal year of purchase, but no for equipment in new and relocated stores as they were not open for business until the following year.
    2. Yes, because the HVAC units met the ‘sole justification’ test, being essential for the operation of the refrigeration equipment, and thus constituted tangible personal property.

    Court’s Reasoning

    The court determined that for equipment to be ‘placed in service,’ it must be in a state of readiness and available for use in an operating business. The court cited regulations and prior cases, noting that equipment in remodeled stores met this criterion as it was operational during the purchase year. For new and relocated stores, the court found that since the stores were not open until the following year, the equipment was not yet in service. Regarding the HVAC units, the court applied the ‘sole justification’ test from the regulations, finding that the units were installed solely to meet the environmental needs of the refrigeration equipment, thus qualifying as tangible personal property. The court rejected the IRS’s argument that the units were installed for customer comfort, emphasizing their essential role in maintaining equipment functionality.

    Practical Implications

    This decision clarifies that equipment must be in use within an operating business to qualify for depreciation and investment tax credits. Businesses should carefully time the installation and use of new equipment to align with their fiscal year to maximize tax benefits. The ruling on HVAC units provides guidance on distinguishing between structural components and tangible personal property, particularly in industries where equipment requires specific environmental conditions. This case has influenced subsequent rulings on similar tax credit issues, particularly in retail and manufacturing sectors where equipment readiness and environmental controls are critical.

  • Westroads, Inc. v. Commissioner, 69 T.C. 682 (1978): Investment Tax Credit Eligibility for Electrical Generating Equipment

    Westroads, Inc. v. Commissioner, 69 T. C. 682 (1978)

    Electrical generating equipment installed for profit and used to supply electricity to tenants qualifies for investment tax credit as tangible property used in furnishing electrical energy services.

    Summary

    Westroads, Inc. , owner of a shopping center, installed electrical generating equipment to sell electricity to its tenants, utilizing waste heat for heating and cooling. The IRS denied an investment tax credit under section 38, arguing the equipment was a structural component of the building. The U. S. Tax Court held that the equipment qualified for the credit because it was tangible personal property used as an integral part of furnishing electrical energy services, not merely a structural component. This decision hinges on the equipment’s use for generating profit from electricity sales, distinguishing it from cases where such equipment was deemed integral to the building itself.

    Facts

    Westroads, Inc. owned and operated a regional shopping center in Omaha, Nebraska. To enhance profitability, Westroads installed a ‘total energy system’ that included electrical generating equipment powered by three dual-fuel engines. The system generated electricity for sale to tenants, with waste heat used to supplement heating and air conditioning. The equipment was installed in the fiscal year ending January 31, 1969, with additional standby equipment added in 1973. Westroads claimed an investment tax credit for the cost of the generating equipment, which the IRS disallowed, asserting it was a structural component of the building.

    Procedural History

    The IRS issued a notice of deficiency to Westroads for the taxable year ending January 31, 1973, disallowing the claimed investment tax credit. Westroads petitioned the U. S. Tax Court for a redetermination of the deficiency. The Tax Court, after considering the evidence and arguments, ruled in favor of Westroads, allowing the investment tax credit for the electrical generating equipment.

    Issue(s)

    1. Whether the electrical generating equipment installed by Westroads qualifies as section 38 property under section 48(a)(1)(A) as tangible personal property?
    2. Whether the equipment qualifies as section 38 property under section 48(a)(1)(B) as tangible property used as an integral part of furnishing electrical energy services?

    Holding

    1. Yes, because the dual-fuel engines and generators constitute tangible personal property under the common understanding of the term.
    2. Yes, because the installation was used as an integral part of supplying electrical energy to tenants, not as a structural component of the building, and was installed to generate profit.

    Court’s Reasoning

    The court applied sections 38 and 48 of the Internal Revenue Code, which define section 38 property as either tangible personal property or other tangible property used as an integral part of furnishing electrical energy services, excluding structural components of buildings. The court found that the electrical generating equipment, including the engines and generators, was tangible personal property. Additionally, the court emphasized that the equipment’s primary purpose was to generate and sell electricity to tenants, thus qualifying as an integral part of furnishing electrical energy services. The court distinguished this case from others where similar equipment was deemed structural components, noting that Westroads’ equipment was installed for profit, not merely as part of the building’s infrastructure. The court also referenced Revenue Ruling 70-103, which supported the classification of standby equipment as tangible personal property eligible for the investment tax credit.

    Practical Implications

    This decision clarifies that equipment installed for the purpose of generating and selling electricity to tenants, rather than for building maintenance or operation, may qualify for the investment tax credit. Legal practitioners should analyze the primary purpose of equipment installations when advising clients on potential tax credits. Businesses operating commercial properties may consider installing their own energy systems to increase profitability and take advantage of tax incentives. This ruling has influenced subsequent cases, such as Hayden Island, Inc. v. United States, where the court considered the profit motive in determining tax credit eligibility. The decision also highlights the importance of distinguishing between equipment used for profit and that used as a structural component of a building when applying for tax credits.

  • Whiteco Industries, Inc. v. Commissioner, 65 T.C. 664 (1975): When Outdoor Advertising Signs Qualify as Tangible Personal Property for Investment Tax Credit

    Whiteco Industries, Inc. v. Commissioner, 65 T. C. 664 (1975)

    Outdoor advertising signs can qualify as tangible personal property for the purpose of the investment tax credit under IRC section 38.

    Summary

    Whiteco Industries, Inc. sought to claim an investment tax credit for its outdoor advertising signs. The Tax Court ruled that these signs constituted tangible personal property under IRC section 48(a)(1)(A), qualifying them for the credit. The decision hinged on the signs being non-permanent structures, designed to be moved and reused, which distinguished them from inherently permanent structures like buildings. This ruling clarified the criteria for tangible personal property, impacting how businesses in similar industries could claim tax credits for their assets.

    Facts

    Whiteco Industries, Inc. was engaged in the business of providing outdoor advertising using signs placed along major highways. These signs were erected on leased land and consisted of a sign face attached to wooden poles and stringers. The signs were designed to last for the term of advertising contracts, typically 3 to 5 years, and were frequently moved due to lease expirations or changes in land use. The signs could be disassembled and reassembled with minimal damage, with only the portion of poles surrounded by concrete being wasted.

    Procedural History

    The Commissioner of Internal Revenue determined deficiencies in Whiteco’s federal corporate income taxes for the years 1967-1971, disallowing the investment tax credit claimed for the outdoor advertising signs. Whiteco petitioned the U. S. Tax Court, which consolidated related cases. The Tax Court ruled in favor of Whiteco, holding that the signs were tangible personal property eligible for the investment credit.

    Issue(s)

    1. Whether outdoor advertising signs constitute “tangible personal property” under IRC section 48(a)(1)(A), thereby qualifying for the investment tax credit under IRC section 38.

    Holding

    1. Yes, because the outdoor advertising signs were not inherently permanent structures and met the criteria for tangible personal property as defined by the IRC and interpreted by the court.

    Court’s Reasoning

    The court applied several criteria to determine whether the signs were tangible personal property: mobility, expected length of affixation, ease of removal, potential damage upon removal, and the manner of affixation. The signs were found to be readily movable, not designed for permanent installation, and subject to frequent relocation due to lease terms or changes in land use. The court emphasized that the signs were not “inherently permanent structures,” as they could be disassembled and reassembled with minimal damage, distinguishing them from fixtures like buildings. The court also noted that the legislative history and IRS regulations did not intend to narrowly define tangible personal property, and previous rulings had allowed similar or more permanent structures to qualify for the credit. The Commissioner’s argument that advertising displays were excluded from the credit was rejected, as the legislative intent was unclear and did not specifically address the type of signs used by Whiteco.

    Practical Implications

    This decision expanded the scope of what constitutes tangible personal property for tax purposes, allowing businesses in the advertising industry to claim investment tax credits for non-permanent structures. It established that the mobility and intended use of a structure are key factors in determining eligibility for the credit. The ruling influenced subsequent cases and IRS rulings, reinforcing the principle that tax law should be applied based on the functional and economic characteristics of property rather than strict adherence to state law definitions of fixtures. Businesses should assess their assets’ mobility and intended use when considering tax credit eligibility, and tax practitioners must consider these factors when advising clients on similar assets.

  • Weirick v. Commissioner, 62 T.C. 446 (1974): Classifying Ski Lift Components as Tangible Personal Property for Investment Credit

    Weirick v. Commissioner, 62 T. C. 446 (1974)

    Ski lift cable-support and holddown towers qualify as tangible personal property eligible for investment credit, but earthen ramps do not, while wooden ramps do.

    Summary

    In Weirick v. Commissioner, the Tax Court ruled that ski lift cable-support and holddown towers, as well as wooden passenger ramps, are tangible personal property eligible for investment credit under IRC section 38. The court held that these structures, though inherently permanent, function as machinery integral to the ski lift’s operation. However, earthen ramps were deemed inherently permanent structures and thus ineligible for the credit. This decision was based on the legislative intent to incentivize investment in machinery and the functional unity of the ski lift components.

    Facts

    The petitioners, shareholders of a ski resort company and partners in a ski resort partnership, claimed investment credits for ski lift construction costs. These costs included cable-support and holddown towers, and loading and unloading ramps. The towers were made of tubular steel, bolted or welded to concrete foundations, and designed to last the life of the ski lift. Wooden ramps rested on small concrete pads and were not firmly attached, while earthen ramps were constructed by raising the ground’s elevation.

    Procedural History

    The Commissioner disallowed the investment credits for the towers and ramps, leading the petitioners to appeal to the United States Tax Court. The court considered whether these components qualified as tangible personal property under IRC section 48(a)(1)(A) or as elevators under section 48(a)(1)(C).

    Issue(s)

    1. Whether the cable-support and holddown towers are tangible personal property under IRC section 48(a)(1)(A), eligible for investment credit.
    2. Whether the wooden and earthen loading and unloading ramps are tangible personal property under IRC section 48(a)(1)(A), eligible for investment credit.
    3. Whether the ski lift, including its towers and ramps, qualifies as an elevator under IRC section 48(a)(1)(C).

    Holding

    1. Yes, because the towers, though inherently permanent, function as machinery integral to the ski lift’s operation.
    2. Yes for wooden ramps, because they are not inherently permanent; No for earthen ramps, because they are inherently permanent structures.
    3. No, because a ski lift does not qualify as an elevator under the legislative intent of section 48(a)(1)(C).

    Court’s Reasoning

    The court’s reasoning focused on the legislative intent behind the investment credit to stimulate investment in machinery. The court found that the cable-support and holddown towers, despite being inherently permanent, were integral to the ski lift’s operation, akin to machinery. The towers and sheave assemblies were designed as a unitary mechanism, with the towers serving no other economic purpose than supporting the sheave assemblies. The wooden ramps were not inherently permanent due to their movability, qualifying them as tangible personal property. In contrast, earthen ramps were classified as inherently permanent structures and ineligible for the credit. The court rejected the argument that the ski lift qualified as an elevator under section 48(a)(1)(C), as this provision was intended for elevators and escalators in buildings.

    Practical Implications

    This decision clarifies that ski lift components like cable-support and holddown towers, and wooden ramps, can be treated as tangible personal property for investment credit purposes. Taxpayers in similar industries should analyze ski lift components based on their function as machinery rather than their permanence. The ruling distinguishes between wooden and earthen ramps, impacting how ski resorts structure their investments. Subsequent cases and IRS guidance may reference this decision when classifying similar structures. This case underscores the importance of understanding the legislative intent behind tax provisions when determining eligibility for investment credits.

  • Everhart v. Commissioner, 61 T.C. 328 (1973): Defining Tangible Personal Property for Investment Tax Credit

    Everhart v. Commissioner, 61 T. C. 328 (1973)

    A sewage disposal system installed underground is not considered tangible personal property eligible for the investment tax credit under section 38 of the Internal Revenue Code.

    Summary

    In Everhart v. Commissioner, the U. S. Tax Court ruled that a sewage disposal system installed at a shopping center did not qualify as tangible personal property under section 48(a)(1)(A) of the Internal Revenue Code, thus ineligible for the investment tax credit. The Everharts, owners of the shopping center, argued that the system should be considered personal property, but the court found it to be an inherently permanent structure and a structural component of the shopping center, despite its prefabricated nature and potential removability. The decision underscores the importance of distinguishing between personal and real property for tax purposes, affecting how businesses classify assets for investment credits.

    Facts

    C. C. and Clara Everhart owned a shopping center in Mosheim, Tennessee, which included a laundromat, restaurant, grocery store, barber shop, and beauty shop. In 1968, following a health department directive to address pollution from the laundromat’s sewage, the Everharts installed a sewage disposal system designed to treat sewage from the entire center and their nearby residence. The system, costing $17,497. 75, was a prefabricated unit buried underground, anchored to a concrete foundation, and connected to the shopping center buildings and residence via underground pipes.

    Procedural History

    The Everharts filed for an investment tax credit on their 1968 tax return, claiming the sewage disposal system as section 38 property. The Commissioner of Internal Revenue determined a deficiency in their tax, leading the Everharts to petition the U. S. Tax Court. The court heard the case and ultimately ruled in favor of the Commissioner, denying the investment credit.

    Issue(s)

    1. Whether the sewage disposal system installed by the Everharts qualifies as “tangible personal property” under section 48(a)(1)(A) of the Internal Revenue Code, thus eligible for the investment tax credit.

    Holding

    1. No, because the sewage disposal system is an inherently permanent structure and a structural component of the shopping center, not qualifying as tangible personal property.

    Court’s Reasoning

    The court applied the definition of tangible personal property from section 1. 48-1(c) of the Income Tax Regulations, which excludes buildings and other inherently permanent structures. Despite the system’s prefabricated and self-contained nature, the court deemed it inherently permanent due to its installation method—buried underground, anchored to a concrete foundation, and connected to the shopping center via underground pipes. The court also considered the system a structural component necessary for the operation of the shopping center, as per section 1. 48-1(e)(2) of the regulations. Furthermore, the court noted that part of the system served the Everharts’ personal residence, which would not qualify for depreciation and thus not for the investment credit. The court emphasized that movability alone does not determine property classification, and the Everharts failed to carry the burden of proof required to qualify for the credit.

    Practical Implications

    This decision clarifies that for tax purposes, the classification of property as tangible personal property for investment credits requires careful analysis of the property’s permanency and its role in the operation of related structures. Businesses must ensure that assets claimed for investment credits are not considered inherently permanent or structural components of buildings. This ruling impacts how similar installations, such as utility systems, are classified for tax purposes and may influence business decisions regarding the installation and tax treatment of such systems. Subsequent cases and IRS rulings have continued to refine these distinctions, often citing Everhart as a precedent for denying investment credits for systems integral to building operations.

  • Roberts v. Commissioner, 60 T.C. 861 (1973): Determining Tangible Personal Property for Investment Tax Credit

    Roberts v. Commissioner, 60 T. C. 861 (1973)

    The court ruled that a steel tower and concrete base of an amusement device are not tangible personal property for the purpose of the investment tax credit under section 38 of the Internal Revenue Code.

    Summary

    In Roberts v. Commissioner, the issue was whether the steel tower and concrete base of the ‘Astro Needle,’ an amusement ride, qualified as tangible personal property under section 48(a)(1)(A) of the Internal Revenue Code, thus eligible for the investment tax credit. The Tax Court held that these components, due to their permanent nature and attachment to the realty, did not qualify as tangible personal property. The decision was based on the legislative intent to distinguish between personal property and other tangible property, emphasizing the permanency and attachment of the structures involved.

    Facts

    Burra, Inc. , constructed the ‘Astro Needle,’ a 200-foot amusement device at Myrtle Beach, S. C. , in 1968. The device included a steel tower and a concrete base, which were designed to be permanent at the specific site. The tower was made of welded or bolted steel sections, and the base was a large concrete structure set on numerous pilings driven into the ground. The petitioners claimed an investment credit on their tax returns for the cost of the tower and base, asserting they were tangible personal property under section 48(a)(1)(A) of the Internal Revenue Code.

    Procedural History

    The Commissioner of Internal Revenue determined deficiencies in the petitioners’ income taxes, disallowing the investment credit for the tower and base. The petitioners contested this in the U. S. Tax Court, which heard the consolidated cases of multiple petitioners. The court issued its decision on September 6, 1973, ruling in favor of the Commissioner.

    Issue(s)

    1. Whether the steel tower and concrete base of the ‘Astro Needle’ qualify as tangible personal property under section 48(a)(1)(A) of the Internal Revenue Code, thus eligible for the investment tax credit?

    Holding

    1. No, because the tower and base are inherently permanent structures attached to the realty and do not meet the criteria for tangible personal property as defined by the Internal Revenue Code and its legislative history.

    Court’s Reasoning

    The court’s reasoning centered on the legislative intent behind the definition of tangible personal property for investment tax credit purposes. Congress intended to broadly define personal property but exclude inherently permanent structures annexed to the realty. The court analyzed the ‘Astro Needle’s’ components, finding that the concrete base, set upon deep pilings, and the steel tower, firmly anchored to the base, were designed to be permanent at a specific site. The court rejected the petitioners’ argument that the device’s machinery-like nature qualified it as personal property, citing cases and revenue rulings where similar structures were deemed not to be personal property due to their permanency. The court emphasized that the ‘Astro Needle’ could not be separated from the realty without significant difficulty, thus classifying it as an ‘other tangible property’ under section 48(a)(1)(B), not eligible for the investment credit.

    Practical Implications

    This decision clarifies the criteria for determining whether a structure qualifies as tangible personal property for investment tax credit purposes. It emphasizes the importance of the permanency and attachment of structures to the realty in this determination. Legal practitioners must assess the nature of a structure’s attachment and its intended permanency when advising clients on potential investment credits. Businesses in the amusement industry or similar sectors must consider the tax implications of constructing permanent structures. This ruling has influenced subsequent cases and IRS guidance, such as in the classification of other amusement structures and similar permanent installations, reinforcing the distinction between personal and other tangible property for tax purposes.