Opinion

Gibson & Associates, Inc. v. Commissioner

136 T.C. 195
136 T.C. No. 10
2011 U.S. Tax Ct. LEXIS 9

Court: United States Tax Court
Filed: Feb 24, 2011
Status: Published
Author: Paris
On the bench: Paris
Cited by: 18 cases
Authority: More cited than 66.6%

holding that we “may embrace or reject an expert’s opinion in toto, or we may pick and choose the portions of the opinion we choose to adopt”

How later courts described this case

holding that we “may embrace or reject an expert’s opinion in toto, or we may pick and choose the portions of the opinion we choose to adopt”
“The name of the AJCA and the statute’s wage limitation on the amount of the deduction under section 199(a) indicate that Congress intended that section 199 create jobs in the United States and otherwise strengthen the U.S. economy.”
“[T]he statute’s wage limitation on the amount of the deduction under section 199(a) indicate[s] that Congress intended that section 199 create jobs * * * and otherwise strengthen the U.S. economy.”
addressing the same limitation in former section 199

Written by the judges who cited it.

The opinion

GIBSON & ASSOCIATES, INC., PETITIONER v. COMMISSIONER

OF INTERNAL REVENUE, RESPONDENT

Docket No. 5863–08. Filed February 24, 2011.

P is an engineering and heavy construction company that

primarily erects or rehabilitates streets, bridges, airport run-

ways, and other related real property (collectively, real prop-

erty). P’s rehabilitation services relate mainly to real property

that is substantially dilapidated or damaged from a casualty.

P also repairs and maintains real property. P reported on its

Federal income tax return for the taxable year ended June 30,

2006, that its receipts are ‘‘domestic production gross receipts’’

(DPGR) eligible for a deduction under sec. 199, I.R.C., and

claimed a $63,435 deduction under that section. R determined

in the notice of deficiency that none of P’s receipts qualified

as DPGR. Held: P’s receipts are DPGR to the extent P erected

or substantially renovated real property, and the extent to

which P substantially renovated real property turns on

whether P’s activities with respect to each freestanding item

of real property that operated and performed a discrete func-

tion in and of itself: (1) Materially increased the value of the

real property, (2) substantially prolonged the useful life of the

real property, and/or (3) adapted the real property to a dif-

ferent or new use. Held, further, P’s activities materially

increased the value of the real property, substantially pro-

longed the useful life of the real property, and/or adapted the

real property to a different or new use to the extent that P’s

activities were not repairs (within the meaning of sec. 263(a),

I.R.C.), unrelated to P’s primary business. Held, further, P’s

activities did not materially increase the value of the real

property, substantially prolong the useful life of the real prop-

erty, and/or adapt the real property to a different or new use

to the extent that P’s activities repaired or otherwise main-

tained real property unrelated to P’s primary business.

195

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196 136 UNITED STATES TAX COURT REPORTS (195)

Charles D. Lieser, for petitioner.

George E. Gasper, for respondent.

PARIS, Judge: Petitioner petitioned the Court to redeter-

mine respondent’s determination of a $21,568 deficiency in

its Federal income tax for its taxable year ended June 30,

2006 (subject year). The deficiency results from respondent’s

determination that petitioner may not deduct $63,435 under

section 199(a). 1 Respondent disallowed that deduction after

determining that petitioner had no ‘‘domestic production

gross receipts’’ (DPGR) within the meaning of section

199(c)(4). Petitioner reported that its DPGR totaled

$26,053,570. 2

Respondent now concedes that petitioner had DPGR of

$13,849,246, and petitioner concedes that it incorrectly

reported $259,156 of the $26,053,570 as DPGR. 3 We decide

whether the remaining $11,945,168 ($26,053,570 –

$13,849,246 – $259,156) (disputed amount) is DPGR. We hold

it is to the extent stated herein.

FINDINGS OF FACT

Some facts were stipulated. The stipulation of facts and

the exhibits submitted therewith are incorporated herein by

this reference. Petitioner is a family-owned corporation that

reports its income and expenses on the basis of a fiscal year

ending on June 30. Its principal place of business was in

Texas when its petition was filed.

Petitioner is an engineering and heavy highway construc-

tion company that primarily erects or rehabilitates streets,

bridges, airport runways, and other major components or

substantial structural parts of real property (primarily, infra-

structure) in Texas, Oklahoma, Arkansas, and Kansas. Peti-

1 Unless otherwise indicated, section references are to the Internal Revenue Code of 1986

(Code), as amended, and Rule references are to the Tax Court Rules of Practice and Procedure.

Dollar amounts are rounded.

2 As relevant here and discussed infra, the deduction under sec. 199(a) equals 3 percent of

the lesser of a taxpayer’s qualified production activities income (QPAI) or the taxpayer’s taxable

income (as computed without the deduction under sec. 199(a)), and a taxpayer’s QPAI equals

the taxpayer’s DPGR less the sum of its cost of goods sold (allocable to the DPGR) plus certain

expenses and other items. Petitioner’s reported deduction of $63,435 equals 3 percent of its re-

ported taxable income (as computed without the deduction).

3 Petitioner reported that its DPGR totaled $26,053,570 but now asks the Court to find that

its DPGR totaled $25,794,414 (i.e., $259,156 less than reported). Petitioner concedes explicitly

that $98,455 of the $259,156 is not DPGR, and we consider petitioner also to concede that the

remaining $160,701 ($259,156 – $98,455) is not DPGR as well.

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(195) GIBSON & ASSOCIATES, INC. v. COMMISSIONER 197

tioner specializes in structural rehabilitation, epoxy injection,

concrete paving, bridge jacking, lead abatement, and protec-

tive coatings. Petitioner also maintains and repairs infra-

structure and other real property.

Petitioner works through its employees. During the subject

year, petitioner employed approximately 90 individuals.

These employees were mainly engineers or heavy construc-

tion workers, and petitioner paid them over $3 million in

salary and wages. Petitioner hired and retained additional

employees in subsequent years.

Petitioner worked on 136 construction projects during the

subject year. Petitioner realized $25,892,869 of gross receipts

from these projects, including $16,324,032 of gross receipts

from State or Federal projects paid for with Federal funds. 4

Petitioner reported the $25,794,414 (and the now conceded

$259,156) as DPGR and claimed a $63,435 deduction under

section 199. 5 Respondent determined that petitioner could

not deduct the $63,435 because petitioner had no DPGR.

Petitioner placed its construction projects into three cat-

egories. The first category, ‘‘casualty’’ projects, involved work

that petitioner performed on infrastructure that was signifi-

cantly damaged by an act of God or by a casualty such as a

fire or an overheight or overweight vehicle hitting or trav-

eling on a bridge. The second category, ‘‘new construction’’

projects, involved work that petitioner performed primarily

as a subcontractor on contractors’ multimillion dollar projects

involving major rehabilitation of real property (primarily,

infrastructure). The third category, ‘‘rehabilitation’’ projects,

involved work that petitioner performed as a contractor

rehabilitating dilapidated real property (primarily, infra-

structure). Petitioner classified its projects into these three

categories after reviewing the bid sheets and the other data

in its files and after talking to individuals involved with the

projects. Petitioner’s bid sheets were papers that petitioner

prepared to calculate and place a bid on a project offered to

contractors (or subcontractors). Each bid sheet contained an

4 A project may be paid for with Federal funds if the Secretary of Transportation concludes

that the project is a cost-effective means of extending the useful life of a Federal-aid highway.

See 23 U.S.C. sec. 116 (2006); see also id. sec. 101(a)(31) (defining the word ‘‘Secretary’’ for pur-

poses of tit. 23 as the ‘‘Secretary of Transportation’’).

5 Petitioner used the percentage of completion method under sec. 460 to compute its taxable

income.

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198 136 UNITED STATES TAX COURT REPORTS (195)

estimate of the amounts and types of costs that petitioner

expected to incur in performing the project.

Petitioner further characterized its projects as: (1)

Substantial renovation or (2) repair or maintenance. Peti-

tioner characterized a project as substantial renovation if

petitioner concluded that its work on the project: (1) Substan-

tially prolonged the useful life of real property; (2) materially

increased the value of real property; or (3) adapted real prop-

erty to a new or different use. Petitioner categorized its

construction projects as repair or maintenance if petitioner

concluded that its work on the project: (1) Was necessary to

keep real property (or a component thereof) functioning on a

short-term basis or (2) included cosmetic or aesthetic work.

Appendixes A, B, and C list petitioner’s projects (other

than 32 projects which are the subject of the parties’ conces-

sions discussed supra p. 196) as categorized by petitioner.

The appendixes show for each of those 104 remaining

projects (disputed projects): (1) The job number, (2) the gen-

eral type of work that petitioner performed, (3) the final con-

tract amount, (4) the revenue that petitioner earned for the

subject year, (5) whether the project was paid for with Fed-

eral funds, and (6) petitioner’s characterization of the project

as repair or maintenance, substantially prolonging the useful

life of real property, materially increasing the value of real

property, and/or adapting real property to a different or new

use. The specific work that petitioner performed on each

project is as follows:

Casualty Projects

05–1021

Petitioner performed this project for the Texas Department

of Transportation (TxDOT). Petitioner strengthened a bridge

at Highway 123 and McArthur Boulevard. The bridge had

been critically damaged by a fire caused by an overturned

fuel truck, and most of the bridge was closed. Petitioner

strengthened the columns and spans of the bridge using

carbon fiber reinforced polymer and structural patching. Peti-

tioner concluded that this work substantially prolonged the

useful life of the bridge and materially increased its value.

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05–1023

Petitioner performed this project for the North Texas Toll-

way Authority (NTTA). Petitioner shored up an overhead

emergency sign structure on the North Texas Tollway after

the sign was damaged. Petitioner’s work allowed the NTTA to

keep the sign in place. The sign would have been demolished

absent petitioner’s work. Petitioner concluded that this work

substantially prolonged the useful life of the sign.

05–1025

Petitioner performed this project for the TxDOT. Petitioner

worked on a bridge near Pampa, Texas, on U.S. Highway 83.

The work rehabilitated damaged concrete beams so that the

bridge could reopen to traffic and carry its design loads. Peti-

tioner concluded that this work substantially prolonged the

useful life of the bridge and materially increased its value.

05–1029

Petitioner performed this project for the Oklahoma Depart-

ment of Transportation (ODOT). Petitioner worked on a bridge

in Oklahoma County, Oklahoma, on Interstate Highway 40

over Anderson Road. The work rehabilitated damaged con-

crete beams so that the bridge could reopen to traffic and

carry its design loads. Petitioner concluded that this work

substantially prolonged the useful life of the bridge and

materially increased its value.

05–1045

Petitioner performed this project for the ODOT. Petitioner

worked on a steel bridge on U.S. Highway 64 and 129 West

Avenue between Tulsa and Sand Springs, Oklahoma. The

work rehabilitated damaged concrete beams so that the

bridge could reopen to traffic and carry its design loads. Peti-

tioner concluded that this work substantially prolonged the

useful life of the bridge and materially increased its value.

05–1054

Petitioner performed this project for the TxDOT. Petitioner

worked on a bridge near McKinney, Texas, in Farmersville,

Texas, on U.S. Highway 380 and Main Street. The work

rehabilitated and/or replaced damaged concrete beams so

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200 136 UNITED STATES TAX COURT REPORTS (195)

that the bridge could reopen to traffic and carry its design

loads. Petitioner also performed some concrete work. Peti-

tioner concluded that this work substantially prolonged the

useful life of the bridge and materially increased its value.

05–1056

Petitioner performed this project for the TxDOT. Petitioner

worked on a bridge on Farm-to-Market 157 over Interstate

Highway 30 in Tarrant County, Texas. The work rehabili-

tated damaged concrete beams so that the bridge could

reopen to traffic and carry its design loads. Petitioner con-

cluded that this work substantially prolonged the useful life

of the bridge and materially increased its value.

05–1059

Petitioner performed this project for the TxDOT. Petitioner

worked on a bridge on Interstate Highway 37 and U.S. High-

way 181 in Corpus Christi, Texas. The work rehabilitated

damaged concrete beams so that the bridge could reopen to

traffic and carry its design loads. Petitioner concluded that

this work substantially prolonged the useful life of the bridge

and materially increased its value.

05–1060

Petitioner performed this project for the NTTA. Petitioner

worked on a highway. Petitioner’s work consisted of ‘‘PGBT

fire damage’’. Petitioner concluded that this work was repair

or maintenance.

05–1064

Petitioner performed this project for the ODOT. Petitioner

worked on a bridge on Interstate Highway 40 at Choctaw

Road. The work rehabilitated damaged concrete beams so

that the bridge could reopen to traffic and carry its design

loads. Petitioner concluded that this work substantially pro-

longed the useful life of the bridge and materially increased

its value.

05–1065

Petitioner performed this project for the TxDOT. Petitioner

worked on a bridge on Interstate Highway 35 at Corinth

Street. The work rehabilitated damaged concrete beams so

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that the bridge could reopen to traffic and carry its design

loads. Petitioner concluded that this work substantially pro-

longed the useful life of the bridge and materially increased

its value.

05–999

Petitioner performed this project for the ODOT. Petitioner

worked on a bridge at Randall Avenue and Interstate High-

way 40 in Oklahoma. Petitioner sealed joints, patched the

bridge deck, and retrofitted beam ends. Petitioner also

removed existing lead paint (a perceived hazardous mate-

rial), blasted the bridge to remove corrosion, and applied a

protective paint coating designed to prevent future corrosion.

Petitioner concluded that this work substantially prolonged

the useful life of the bridge.

06–1072

Petitioner performed this project for the ODOT. Petitioner

worked on a bridge at County Road and Interstate Highway

40 in Custer County, Oklahoma. Petitioner replaced struc-

tural steel portions of the bridge to return the bridge to its

original load carrying capacity. Petitioner concluded that this

work substantially prolonged the useful life of the bridge and

materially increased its value.

06–1073

Petitioner performed this project for the ODOT. Petitioner

worked on a bridge at Ladd Road and Interstate Highway 35

in McClain County, Oklahoma. Petitioner’s work strength-

ened the bridge and returned the bridge to its original load

carrying capacity. Petitioner concluded that this work

substantially prolonged the useful life of the bridge and

materially increased its value.

06–1074

Petitioner performed this project for the ODOT. Petitioner

worked on a bridge at Interstate Highway 244 and the 23d

Street Ramp in Tulsa, Oklahoma. Petitioner strengthened

the columns of the bridge to resist future impact damage

from derailed train cars in a nearby railroad yard. Petitioner

concluded that this work substantially prolonged the useful

life of the bridge.

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202 136 UNITED STATES TAX COURT REPORTS (195)

06–1078

Petitioner performed this project for the ODOT. Petitioner

worked on a bridge on State Highway 266 and U.S. Highway

169 in Tulsa County, Oklahoma. Petitioner rehabilitated

damaged concrete beams so that the bridge could reopen to

traffic and carry its design loads. Petitioner concluded that

this work substantially prolonged the useful life of the

bridge.

06–1084

Petitioner performed this project for the TxDOT. Petitioner

worked on a bridge on Interstate Highway 37 and Sundown

Bridge in Texas. Petitioner rehabilitated damaged concrete

beams so that the bridge could reopen to traffic and carry its

design loads. Petitioner concluded that this work substan-

tially prolonged the useful life of the bridge.

06–1087

Petitioner performed this project for the TxDOT. Petitioner

worked on a bridge on Interstate Highway 20 at Farm-to-

Market 31 in Texas. Petitioner rehabilitated damaged con-

crete beams to restore the bridge’s load carrying capacity.

Petitioner concluded that this work substantially prolonged

the useful life of the bridge.

06–1091

Petitioner performed this project for the TxDOT. Petitioner

worked on a bridge at Interstate Highway 30 and Jim Miller

Road in Texas. Petitioner rehabilitated damaged concrete

beams so that the bridge could reopen to traffic and carry its

design loads. Petitioner concluded that this work substan-

tially prolonged the useful life of the bridge.

New Construction Projects

03–906

Petitioner performed this project for the TxDOT. Petitioner

worked on a bridge at U.S. Highway 287 and the Trinity

River in Texas. Petitioner raised the bridge to keep it out of

the flood plain and reduce the chance that the bridge could

close on account of high water or drifting debris. Petitioner

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concluded that this work substantially prolonged the useful

life of the bridge.

03–921

Petitioner performed this project for the TxDOT. Petitioner

worked on a bridge at U.S. Highways 80 and 175 in Texas.

Petitioner’s work consisted of patching the deck of the bridge.

Petitioner concluded that this work substantially prolonged

the useful life of the bridge driving surface.

03–926

Petitioner performed this project for the TxDOT. Petitioner

worked on a bridge on Loop 335 in Texas. Petitioner applied

an epoxy overlay designed to protect the bridge from the

environment. Petitioner concluded that this work substan-

tially prolonged the useful life of the bridge deck.

04–937

Petitioner performed this project for the City of Dallas,

Texas. Petitioner worked on a blast fence at two locations at

Love Field Airport in Dallas. The blast fence included cat-

walks and port holes and was built on an old apron to allow

for maintenance run-ups and a staging area for hijacked air-

craft. Petitioner concluded that this work materially

increased the value of the property and adapted the property

to a new or different use.

04–954

Petitioner performed this project for the TxDOT. Petitioner

worked on some bridge joints on Loop 360 in Travis County,

Texas. Petitioner rehabilitated pavement and joints. Peti-

tioner concluded that this work substantially prolonged the

useful life of the pavement.

04–955

Petitioner performed this project for the TxDOT. Petitioner

worked on some bridge header joints in Williamson County,

Texas. Petitioner rehabilitated pavement and joints. Peti-

tioner concluded that this work substantially prolonged the

useful life of the pavement.

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204 136 UNITED STATES TAX COURT REPORTS (195)

04–956

Petitioner performed this project for the TxDOT. Petitioner

worked on a bridge on Interstate 35 in Travis County, Texas.

Petitioner’s work involved structural steel, head joints, and

bridge deck patches. Petitioner concluded that this work

involving structural steel and head joints substantially pro-

longed the useful life of an HMAC overlay. Petitioner con-

cluded that this work involving the bridge deck patches

substantially prolonged the useful life of the bridge deck and

the HMAC overlay.

04–959

Petitioner performed this project for the TxDOT. Petitioner

worked on a bridge on Interstate 35E in Texas. Petitioner

rehabilitated concrete pavement so that an asphalt overlay

could be installed properly. Petitioner also rehabilitated

joints on the bridge. Petitioner concluded that this work

substantially prolonged the useful life of the pavement on the

bridge.

04–965

Petitioner performed this project for the TxDOT. Petitioner

worked on State Highway 205 in Texas. Petitioner added

turn lanes and driveways and patched paving. Petitioner con-

cluded that the added lanes and driveways adapted the high-

way to a different use. Petitioner concluded that its pave-

ment work substantially prolonged the useful life of both the

concrete pavement and the new HMAC overlay.

04–967

Petitioner performed this project for the TxDOT. Petitioner

worked on Interstate Highway 35E in Dallas, Texas. Peti-

tioner rehabilitated concrete pavement so that an asphalt

overlay could be installed properly. Petitioner also rehabili-

tated joints on the bridge. Petitioner concluded that this

work substantially prolonged the useful life of the pavement

on the bridge.

04–968

Petitioner performed this project for Eastfield College in

Texas. Petitioner rehabilitated a failed column at a building

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at the college. Petitioner concluded that this work substan-

tially increased the useful life of the building from zero to its

original design life.

04–971

Petitioner performed this project for the Dallas/Fort Worth

Airport Authority. Petitioner worked on a garage ramp at the

airport. The ramp had deteriorated, and petitioner rebuilt

the ramp to allow for traffic to exit the garage. Petitioner

concluded that this work materially increased the value of

the garage ramp and adapted the ramp to a new or different

use.

04–981

Petitioner performed this project for the TxDOT. Petitioner

worked on U.S. Highway 67 in Texas. Petitioner rehabili-

tated concrete pavement so that an asphalt overlay could be

installed properly. Petitioner also rehabilitated joints on the

bridge. Petitioner concluded that this work substantially pro-

longed the useful life of the pavement on the bridge.

04–982

Petitioner performed this project for the TxDOT. Petitioner

worked on Interstate Highway 35E in Texas. Petitioner

rehabilitated concrete pavement so that an asphalt overlay

could be installed properly. Petitioner also rehabilitated

joints on the bridge. Petitioner concluded that this work

substantially prolonged the useful life of the pavement on the

bridge.

05–1000

Petitioner performed this project for the Kansas Depart-

ment of Transportation. Petitioner worked on a bridge on

Interstate Highway 35 over 127th Street in Wichita, Kansas.

Petitioner applied an epoxy overlay designed to protect the

bridge from the environment. Petitioner concluded that this

work substantially prolonged the useful life of the bridge.

05–1002

Petitioner performed this project for the ODOT. Petitioner

worked on a bridge on State Highway 88 over Dog Creek in

Rogers County, Oklahoma. Petitioner installed a new traffic

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206 136 UNITED STATES TAX COURT REPORTS (195)

rail that upgraded the crash-worthiness rating from the old

rail. Petitioner replaced the bridge deck to allow for traffic

and increase the bridge’s load rating. Petitioner concluded

that this work substantially prolonged the useful life of the

bridge, materially increased its value, and adapted the bridge

to a new or different use.

05–1003

Petitioner performed this project for the City of Dallas,

Texas. Petitioner worked on the Marsalis Avenue Bridge over

the Dallas Zoo. Petitioner repainted the deteriorating sub-

structure, replaced a portion of the deck (including with a

new pedestrian walkway), replaced a number of beams and

girders, and applied corrosive painting after removing the old

paint. Petitioner concluded that this work substantially pro-

longed the useful life of the bridge.

05–1011

Petitioner performed this project for the Crescent Hotel in

Dallas, Texas. Petitioner modified a handrail at the hotel and

removed and replaced concrete to comply with the Americans

with Disabilities Act of 1990 (ADA), 42 U.S.C. secs. 12101–

12213 (2006). Petitioner concluded that this work adapted

the property to a new or different use.

05–1018

Petitioner performed this project for the TxDOT. Petitioner

worked on a bridge at U.S. Highway 287 and Heritage Park-

way in Texas. Petitioner rotated the bridge’s bearing pads.

Petitioner concluded that this work was repair or mainte-

nance.

05–1019

Petitioner performed this project for the TxDOT. Petitioner

worked on a bridge on U.S. Highway 79 in Panola County,

Texas. Petitioner rehabilitated concrete pavement so that an

asphalt overlay could be installed properly. Petitioner also

rehabilitated joints on the bridge. Petitioner concluded that

this work substantially prolonged the useful life of the pave-

ment on the bridge.

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05–1028

Petitioner performed this project for the ODOT. Petitioner

worked on a steel bridge over Business Interstate Highway

40 in Beckham County, Oklahoma. The contractor renovated

the bridge, and petitioner applied the protective coating.

Petitioner also removed existing lead paint (a perceived haz-

ardous material), blasted the bridge to remove corrosion, and

applied a protective paint coating designed to prevent future

corrosion. Petitioner concluded that this work substantially

prolonged the useful life of the bridge and materially

increased its value.

05–1032

Petitioner performed this project for the TxDOT. Petitioner

worked on a bridge on U.S. Highway 287 in Texas. Petitioner

leveled the bearing pads. Petitioner concluded that this work

was repair or maintenance.

05–1036

Petitioner performed this project for the TxDOT. Petitioner

worked on a bridge on Interstate Highway 20 over the

Brazos River in Texas. Petitioner adjusted the bearings of

the bridge to prevent damage and rehabilitated cracks in a

structural steel diaphragm to allow the bridge to carry the

load for which it was originally designed. Petitioner also

removed existing lead paint (a perceived hazardous mate-

rial), blasted the bridge to remove corrosion, and applied a

protective paint coating designed to prevent future corrosion.

Petitioner concluded that this work substantially prolonged

the useful life of the bridge and materially increased its

value.

05–1037

Petitioner performed this project for the ODOT. Petitioner

worked on a bridge on U.S. Highway 270 over Caston Creek

in Le Flore County, Oklahoma. Petitioner sealed joints,

patched the bridge deck, and retrofitted beam ends. Peti-

tioner concluded that this work substantially prolonged the

useful life of the bridge.

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208 136 UNITED STATES TAX COURT REPORTS (195)

05–1038

Petitioner performed this project for the TxDOT. Petitioner

worked on the pavement on Interstate Highway 20 in Texas.

Petitioner rehabilitated concrete pavement so that an asphalt

overlay could be installed properly. Petitioner also rehabili-

tated joints on the bridge. Petitioner concluded that this

work substantially prolonged the useful life of the pavement

on the bridge.

05–1043

Petitioner performed this project for the TxDOT. Petitioner

worked on the intersections at State Highway 356. Petitioner

added left and right turn lanes to the intersections to

improve traffic flow. Petitioner concluded that this work

materially increased the value of the property and adapted

it to a new or different use.

05–1047

Petitioner performed this project for the City of Fort

Worth, Texas. Petitioner worked on the Hulen Street Bridge

in Fort Worth. Petitioner sealed joints, patched the bridge

deck, and retrofitted beam ends. Petitioner concluded that

this work substantially prolonged the useful life of the

bridge.

05–1052

Petitioner performed this project for the City of Dallas,

Texas. Petitioner worked on the aprons at two terminals at

the Love Field Airport in Dallas. Petitioner upgraded the

ramps to the aprons for heavier aircraft, by removing

approximately 12,000 square yards of approximately 50-year-

old, 13-inch pavement and replacing it with 16-inch pave-

ment. Petitioner also replaced the existing trench drains with

new drains that met applicable Federal standards. Petitioner

concluded that this work substantially prolonged the useful

life of the property, materially increased its value, and

adapted the property to a new or different use.

05–1057

Petitioner performed this project for the TxDOT. Petitioner

worked on a bridge on U.S. Highway 83 in Texas. Petitioner

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(195) GIBSON & ASSOCIATES, INC. v. COMMISSIONER 209

modified the bearings on the bridge to prevent damage and

to maintain the bridge’s load carrying capacity. Petitioner

concluded that this work substantially prolonged the useful

life of the bridge.

05–995

Petitioner performed this project for the City of Oklahoma

City, Oklahoma. Petitioner worked on a bridge at Walnut

Avenue in Oklahoma City. Petitioner removed existing lead

paint (a perceived hazardous material), blasted the bridge to

remove corrosion, and applied a protective paint coating

designed to prevent future corrosion. Petitioner concluded

that this work substantially prolonged the useful life of the

bridge.

06–1069

Petitioner performed this project for the Lakes of Coppell

housing subdivision in Coppell, Texas. Petitioner worked on

a failing retaining wall that spanned the length of the water-

ways running through the subdivision. The wall had cracked

and was falling into the water. Petitioner replaced the failing

wall with a new retaining wall and improved the drainage

behind the wall. Petitioner concluded that this work substan-

tially prolonged the useful life of the subdivision and materi-

ally increased its value.

06–1071

Petitioner performed this project for the TxDOT. Petitioner

worked on a bridge on U.S. Highway 290 in Texas. Petitioner

installed new bridge joints to improve the life of the new

overlay. Petitioner concluded that this work substantially

prolonged the useful life of the property.

06–1085

Petitioner performed this project for the TxDOT. Petitioner

worked on a culvert along State Highway 121 in Texas. Peti-

tioner’s work consisted of structural repairs and water-

proofing. Petitioner concluded that this work was repair or

maintenance.

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210 136 UNITED STATES TAX COURT REPORTS (195)

06–1089

Petitioner performed this project for the TxDOT. Petitioner

worked on a bridge on Interstate Highway 30 in Texas. Peti-

tioner rehabilitated concrete pavement so that an asphalt

overlay could be installed properly. Petitioner concluded that

this work substantially prolonged the useful life of the pave-

ment on the bridge.

06–1093

Petitioner performed this project for the TxDOT. Petitioner

worked on the State Highway 356/Interstate Highway 35E/

U.S. Highway 75 bridge in Texas. Petitioner applied an

epoxy overlay to restore the driving surface and protect the

concrete deck from future corrosion. Petitioner concluded

that this work substantially prolonged the useful life of the

bridge.

Misc. Jobs

Petitioner does not explain the jobs that it has included in

this project. We understand petitioner not to argue that the

work on this project was other than repair or maintenance.

Rehabilitation Projects

02–861

Petitioner performed this project for the Dallas/Forth

Worth Airport Authority. Petitioner worked on pavement at

Dallas/Fort Worth Airport. Petitioner rehabilitated the pave-

ment on the runway/taxiway. Petitioner concluded that this

work substantially prolonged the useful life of the runway/

taxiway.

03–874

Petitioner performed this project for the TxDOT. Petitioner

worked on a bridge on Interstate Highway 35 and Peachtree

Road in Tarrant County, Texas. Petitioner rehabilitated

pavement and joints. Petitioner concluded that this work

substantially prolonged the useful life of the bridge.

03–890

Petitioner performed this project for the ODOT. Petitioner

worked on various bridges in Garvin, Lincoln, and Johnston

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Counties, Oklahoma, near State Highways 18, 19, and 99.

Petitioner sealed joints, patched bridge decks, and retrofitted

beam ends. Petitioner concluded that this work substantially

prolonged the useful lives of the bridges.

03–902

Petitioner performed this project for the ODOT. Petitioner

worked on various bridges in Caddo and Love Counties,

Oklahoma, near State Highways 32 and 58 and U.S. High-

ways 77 and 281. Petitioner sealed joints, patched bridge

decks, and retrofitted beam ends. Petitioner concluded that

this work substantially prolonged the useful lives of the

bridges.

03–915

Petitioner performed this project for the TxDOT. Petitioner

worked on a bridge on Interstate Highway 635 in Texas.

Petitioner rehabilitated pavement and joints so that an

asphalt overlay could be installed properly. Petitioner con-

cluded that this work substantially prolonged the useful life

of the bridge.

04–950

Petitioner performed this project for the ODOT. Petitioner

worked on bridges at U.S. Highways 39 and 77 in Cleveland

and McClain Counties, Oklahoma. The bridges were rapidly

deteriorating, and petitioner replaced the concrete decks and

floor beams of the bridges. Petitioner’s work allowed the load

restrictions for truck traffic to be lifted. Petitioner concluded

that this work substantially prolonged the useful lives of the

bridges, materially increased their values, and adapted the

bridges to new or different uses.

04–951

Petitioner performed this project for the ODOT. Petitioner

worked on various bridges in Oklahoma at State Highways

14, 15, and 136. Petitioner removed existing lead paint (a

perceived hazardous material), blasted the bridges to remove

corrosion, and applied protective paint coatings designed to

prevent future corrosion. Petitioner concluded that this work

substantially prolonged the useful life of the bridges and

materially increased their values.

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212 136 UNITED STATES TAX COURT REPORTS (195)

04–958

Petitioner performed this project for the ODOT. Petitioner

worked on a bridge at State Highway 151 and Keystone Dam

in Tulsa County, Oklahoma. Traffic had fallen through the

bridge’s deck, and concrete from the pavement had fallen

down into the operating mechanisms of the hoist. Petitioner

rehabilitated the concrete pavement of the bridge dam and

rehabilitated a guardrail. Petitioner concluded that this work

substantially extended the useful life of the bridge and mate-

rially increased its value.

04–960

Petitioner performed this project for the ODOT. Petitioner

worked on a bridge at State Highway 54 over Calvary Creek

in Washita County, Oklahoma. Petitioner added structural

steel to the bridge beams which increased the weight of loads

that trucks could carry on the bridge. Petitioner concluded

that this work substantially prolonged the useful life of the

bridge and adapted it to a new or different use.

04–961

Petitioner performed this project for the ODOT. Petitioner

worked on a bridge at State Highway 54 over Horse & Deer

Creeks in Custer County, Oklahoma. Petitioner added struc-

tural steel to the bridge beams which increased the weight

of loads that trucks could carry on the bridge. Petitioner con-

cluded that this work substantially prolonged the useful life

of the bridge and adapted it to a new or different use.

04–969

Petitioner performed this project for the ODOT. Petitioner

worked on four bridges on county roads in Oklahoma. Peti-

tioner sealed joints, patched the decks of the bridges, and

retrofitted beam ends. Petitioner concluded that this work

substantially prolonged the useful lives of the bridges.

04–970

Petitioner performed this project for the ODOT. Petitioner

worked on seven bridges in Oklahoma. Petitioner sealed

joints, patched the decks of the bridges, and retrofitted beam

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ends. Petitioner concluded that this work substantially pro-

longed the useful lives of the bridges.

04–983

Petitioner performed this project for the Town of Addison,

Texas. Petitioner worked on pavement on a bridge on Belt

Line Road in Addison. Petitioner rehabilitated pavement and

joints so that an asphalt overlay could be installed properly.

Petitioner concluded that this work substantially prolonged

the useful life of the bridge.

04–985

Petitioner performed this project for the ODOT. Petitioner

worked on a bridge at State Highway 151 and Keystone Dam

in Tulsa County, Oklahoma. Petitioner rehabilitated concrete

pavement across the dam and applied a sealant. Petitioner

concluded that this work substantially prolonged the useful

life of the bridge and materially increased its value.

04–986

Petitioner performed this project for the ODOT. Petitioner

worked on a bridge at State Highway 1 and Gaines Creek in

Oklahoma. Petitioner rehabilitated the structural steel,

removed old corroded steel, and applied a protective paint

coating designed to prevent future corrosion. Petitioner con-

cluded that this work substantially prolonged the useful life

of the bridge and adapted it to a new or different use.

04–987

Petitioner performed this project for the ODOT. Petitioner

worked on a bridge at State Highway 99 over State Highway

3 and Creek in Pontotoc County, Oklahoma. Petitioner sealed

joints, patched the bridge deck, and retrofitted beam ends.

Petitioner concluded that this work substantially prolonged

the useful life of the bridge.

05–1004

Petitioner performed this project for the ODOT. Petitioner

worked on various steel bridges at Interstate Highway 44 at

12th and 19th Streets in Oklahoma County, Oklahoma. Peti-

tioner sealed joints, patched the decks of the bridges, and

retrofitted beam ends. Petitioner also removed existing lead

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214 136 UNITED STATES TAX COURT REPORTS (195)

paint (a perceived hazardous material), blasted the bridges to

remove corrosion, and applied protective paint coatings

designed to prevent future corrosion. Petitioner concluded

that this work substantially prolonged the useful lives of the

bridges and materially increased their value.

05–1006

Petitioner performed this project for the NTTA. Petitioner

cleaned and sealed pavement joints to prevent the intrusion

of water. Petitioner concluded that this work substantially

prolonged the useful life of the existing pavement.

05–1009

Petitioner performed this project for the TxDOT. Petitioner

rehabilitated concrete traffic barrier walls. Petitioner con-

cluded that this work substantially prolonged the useful life

of the traffic barrier walls.

05–1013

Petitioner performed this project for the TxDOT. Petitioner

worked on a bridge at State Highway 15 and the Brazos

River in Texas. Petitioner repositioned the rocker bearing

assemblies and installed new stiffeners so that the bridge

would not self-destruct. (A stiffener, sometimes called a

gusset plate, is an accessory to a steel structure that

restrains a distortion of some or all of the steel.) Petitioner

concluded that this work substantially prolonged the useful

life of the bridge.

05–1017

Petitioner performed this project for the TxDOT. Petitioner

worked on a bridge on or at Interstate Highway 35 in Austin

(Travis County), Texas. The armor joints on the bridge were

coming loose and the steel was sticking up in the traffic.

Petitioner rehabilitated the joints and the steel. The bridge

would have been closed without this work. Petitioner con-

cluded that this work substantially prolonged the useful life

of the bridge.

05–1020

Petitioner performed this project for the ODOT. Petitioner

worked on a bridge in Oklahoma. Petitioner rehabilitated

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pavement and joints so that an asphalt overlay could be

installed properly. Petitioner concluded that this work

substantially prolonged the useful life of the bridge.

05–1022

Petitioner performed this project for the TxDOT. Petitioner

worked on a bridge at U.S. Highway 277 and Valley Creek

in Abilene, Texas. Petitioner replaced the bearing pads on

the bridge. Petitioner concluded that this work substantially

prolonged the useful life of the bridge.

05–1024

Petitioner performed this project for the TxDOT. Petitioner

worked on a bridge at U.S. Highway 59 in Lufkin, Texas.

Petitioner rehabilitated the bridge joints. Petitioner con-

cluded that this work substantially prolonged the useful life

of the bridge and materially increased its value.

05–1033

Petitioner performed this project for the NTTA. Petitioner

worked on pavement. Petitioner routed and sealed cracks in

the pavement to prevent moisture intrusion. Petitioner con-

cluded that this work substantially prolonged the useful life

of the pavement.

05–1046

Petitioner performed this project for the TxDOT. Petitioner

worked on a bridge on U.S. Highway 75 in Grayson County,

Texas. Work was also performed on parts of the railing and

the deck. Petitioner cleaned and sealed joints, patched the

bridge deck, and retrofitted beam ends. Petitioner concluded

that this work substantially prolonged the useful life of the

bridge.

05–1048

Petitioner performed this project for the ODOT. Petitioner

worked on a bridge at Interstate Highways 40 and 44 in

Oklahoma County, Oklahoma. Petitioner removed existing

lead paint (a perceived hazardous material), blasted the

bridge to remove corrosion, and applied a protective paint

coating designed to prevent future corrosion. Petitioner also

rehabilitated part of the deck of the bridge. Petitioner con-

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216 136 UNITED STATES TAX COURT REPORTS (195)

cluded that this work substantially prolonged the useful life

of the bridge and materially increased its value.

05–1049

Petitioner performed this project for the ODOT. Petitioner

worked on a bridge at Interstate Highways 35 and 44 in

Comanche and Garvin Counties, Oklahoma. Petitioner sealed

joints, patched the bridge deck, and retrofitted beam ends.

Petitioner also removed existing lead paint (a perceived haz-

ardous material), blasted the bridge to remove corrosion, and

applied a protective paint coating designed to prevent future

corrosion. Petitioner concluded that this work substantially

prolonged the useful life of the bridge and materially

increased its value.

05–1050

Petitioner performed this project for the ODOT. Petitioner

worked on a bridge in Beckham County, Oklahoma. Peti-

tioner sealed joints, patched the bridge deck, and retrofitted

beam ends. Petitioner also removed existing lead paint (a

perceived hazardous material), blasted the bridge to remove

corrosion, and applied a protective paint coating designed to

prevent future corrosion. Petitioner concluded that this work

substantially prolonged the useful life of the bridge and

materially increased its value.

05–1051

Petitioner performed this project for the City of Forth

Worth, Texas. Petitioner worked on a bridge on Riverside

Drive in Fort Worth. Petitioner removed existing lead paint

(a perceived hazardous material), blasted the bridge to

remove corrosion, and applied a protective paint coating

designed to prevent future corrosion. Petitioner concluded

that this work substantially prolonged the useful life of the

bridge and materially increased its value.

05–1061

Petitioner performed this project for the ODOT. Petitioner

worked on a bridge at Interstate Highway 35 and the

Canadian River in Oklahoma. The expansion joints had

failed, allowing the bridge deck to spall and deteriorate and

allowing salt and/or water to get to the slab substructure. (In

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(195) GIBSON & ASSOCIATES, INC. v. COMMISSIONER 217

the construction industry, the word ‘‘spall’’ as a noun refers

to a surface defect and as a verb to the breaking up of a

material to create a surface defect.) Petitioner rehabilitated

the deck and the joints. Petitioner concluded that this work

substantially extended the useful life of the bridge.

05–1062

Petitioner performed this project for the TxDOT. Petitioner

worked on a bridge at Loop 1 and Gaines Creek in Texas.

The bearing pads had failed, and petitioner raised the bridge

and installed new and updated pads to keep the bridge from

destroying itself. Petitioner concluded that this work

substantially prolonged the useful life of the bridge.

05–1063

Petitioner performed this project for the NTTA. Petitioner

changed the bearing pads on the Mountain Creek Lake

Bridge to prevent damage at the beam/bearing seat interface.

Petitioner concluded that this work substantially prolonged

the useful life of the bridge.

05–996

Petitioner performed this project for the City of Tulsa,

Oklahoma. Petitioner worked on the Tulsa Oklahoma Civic

Center. Petitioner rehabilitated and waterproofed the deck of

the civic center. Petitioner concluded that this work substan-

tially prolonged the useful life of the civic center.

05–997

Petitioner performed this project for the TxDOT. Petitioner

worked on a bridge on Interstate Highway 10. Petitioner

removed and replaced failing expansion joints that were

allowing the bridge deck to deteriorate and letting moisture

into the substructure. Petitioner concluded that this work

substantially prolonged the useful life of the bridge and

materially increased its value.

06–1067

Petitioner performed this project for the TxDOT. Petitioner

worked on a bridge at U.S. Highway 69 and Choctaw Creek

in Texas. Petitioner sealed joints, patched the bridge deck,

and retrofitted beam ends. Petitioner also removed existing

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218 136 UNITED STATES TAX COURT REPORTS (195)

lead paint (a perceived hazardous material), blasted the

bridge to remove corrosion, and applied a protective paint

coating designed to prevent future corrosion. Petitioner con-

cluded that this work substantially prolonged the useful life

of the bridge and materially increased its value.

06–1068

Petitioner performed this project for the ODOT. Petitioner

worked on a bridge at State Highway 58 over the Washita

River in Caddo County, Oklahoma. Petitioner sealed joints,

patched the bridge deck, and retrofitted beam ends. Peti-

tioner concluded that this work substantially prolonged the

useful life of the bridge.

06–1070

Petitioner performed this project for the City of Oklahoma

City, Oklahoma. Petitioner worked on the Oklahoma City

Grandstand. The expansion joints and their supports were

failing in various sections of the grandstand, and petitioner

rehabilitated those joints. Without the rehabilitation, the

grandstand would have been unusable and continuing to self-

destruct. Petitioner concluded that this work substantially

extended the useful life of the structure.

06–1075

Petitioner performed this project for the TxDOT. Petitioner

worked on a bridge at State Highways 82 and 87 in Texas.

Petitioner strengthened and retrofitted the structural compo-

nents to help the bridge regain and maintain its design loads

carrying capacity. Petitioner concluded that this work

substantially prolonged the useful life of the bridge.

06–1076

Petitioner performed this project for the City of Lawton,

Oklahoma. Petitioner worked on a bridge at Gore Boulevard

and Cashe Road in Oklahoma. Petitioner sealed joints,

patched the bridge deck, and retrofitted beam ends. Peti-

tioner concluded that this work substantially prolonged the

useful life of the bridge and materially increased its value.

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(195) GIBSON & ASSOCIATES, INC. v. COMMISSIONER 219

06–1079

Petitioner performed this project for the ODOT. Petitioner

worked on a bridge at U.S. Highways 62 and 74 in Oklahoma

and Logan Counties, Oklahoma. Petitioner sealed joints,

patched the bridge deck, and retrofitted beam ends. Peti-

tioner concluded that this work substantially prolonged the

useful life of the bridge.

06–1080

Petitioner performed this project for the City of Dallas,

Texas. Petitioner reconfigured the streetscapes on Field, St.

Paul, and Harwood Streets to provide better pedestrian

movement and safety. Petitioner concluded that this work

materially increased the value of the property and adapted

the property to a new or different use.

06–1081

Petitioner performed this project for the City of Oklahoma

City, Oklahoma. Petitioner worked on a bridge at Cimarron

Road over Interstate Highway 40 in Oklahoma City. Peti-

tioner sealed joints, patched the bridge deck, and retrofitted

beam ends. Petitioner concluded that this work substantially

prolonged the useful life of the bridge.

06–1082

Petitioner performed this project for the City of Oklahoma

City, Oklahoma. Petitioner worked on the Rockwell Avenue

Bridge in Oklahoma City. Petitioner sealed joints, patched

the bridge deck, and retrofitted beam ends. Petitioner con-

cluded that this work substantially prolonged the useful life

of the bridge.

06–1088

Petitioner performed this project for the ODOT. Petitioner

worked on the Rockwell Avenue Bridge in Oklahoma. Peti-

tioner sealed joints, patched the bridge deck, and retrofitted

beam ends. Petitioner concluded that this work substantially

prolonged the useful life of the bridge.

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220 136 UNITED STATES TAX COURT REPORTS (195)

06–1090

Petitioner performed this project for the NTTA. Petitioner

worked on the entrance to a building in Plano, Texas. Peti-

tioner modified the entrance to comply with the ADA. Peti-

tioner concluded that this work substantially prolonged the

useful life of the property, materially increased its value, and

adapted the property to a new or different use.

06–1094

Petitioner performed this project for the NTTA. Petitioner

rehabilitated concrete pavement and joints on a bridge so

that an asphalt overlay could be installed properly. Peti-

tioner concluded that this work substantially prolonged the

useful life of the bridge.

06–1095

Petitioner performed this project for CPS Energy. Petitioner

rehabilitated an old trolley bridge on Mission Road,

increasing the load carrying capacity of the bridge to allow

for trucks. Petitioner concluded that this work substantially

prolonged the useful life of the bridge, materially increased

its value, and adapted the bridge to a new or different use.

06–1096

Petitioner performed this project for the TxDOT. Petitioner

worked on a bridge on Interstate Highway 20 in Texas. Peti-

tioner sealed joints, patched the bridge deck, and retrofitted

beam ends. Petitioner concluded that this work substantially

prolonged the useful life of the bridge.

OPINION

I. Background

We decide whether the disputed amount is DPGR. The par-

ties agree that the disputed amount is DPGR to the extent

that petitioner performed work on projects that erected or

substantially renovated real property. In addition, the par-

ties agree that petitioner’s work substantially renovated real

property to the extent that: (1) The work renovated a major

component or substantial structural part of real property and

(2) the renovations materially increased the value of the real

property, substantially prolonged the useful life of the

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(195) GIBSON & ASSOCIATES, INC. v. COMMISSIONER 221

real property, and/or adapted the real property to a different

or new use. Further, the parties do not dispute that peti-

tioner’s work met the first prong of this two-part substantial

renovation test. 6 Our decision therefore turns on whether

petitioner’s work erected property or, to the extent it did not,

met the second prong of the test. 7

Petitioner argues that it ‘‘erected’’ or ‘‘substantially ren-

ovated’’ real property and therefore the disputed amount is

DPGR. Respondent argues that petitioner’s work falls outside

of the meanings of those terms and therefore the disputed

amount is not DPGR. We agree with petitioner.

II. Burden of Proof

Respondent determined that none of the disputed amount

is DPGR, and respondent’s determination is presumed correct.

See Welch v. Helvering, 290 U.S. 111, 115 (1933); see also

Interstate Transit Lines v. Commissioner, 319 U.S. 590, 593

(1943) (stating that deductions are a matter of legislative

grace for which taxpayers must prove their entitlement); cf.

Helvering v. Bliss, 293 U.S. 144, 150–151 (1934) (stating that

tax provisions should not be narrowly construed where, as

here, they are ‘‘liberalizations of the law in the taxpayer’s

favor, * * * begotten from motives of public policy’’). A tax-

payer generally must prove the Commissioner’s determina-

tion wrong in order to prevail. See Rule 142(a). Section

7491(a), however, sometimes places the burden of proof upon

the Commissioner.

The record allows us to decide this case without regard to

which party bears the burden of proof. We proceed to do so.

We need not and do not decide which party bears the burden

of proof.

6 Respondent concedes in his opening brief that petitioner’s work on the bridges met the first

prong but advances no argument as to petitioner’s work on the other types of property. Each

of those other types of property is ‘‘real property’’ within the meaning of sec. 199 because it is

either a building or other property that is and ordinarily will remain affixed to real property

for an indefinite period. See sec. 1.199–3(m)(2)(i), Income Tax Regs.; see also sec. 1.263A–8(c)(3),

Income Tax Regs. Furthermore, we find in the record that petitioner’s work on these other types

of property renovated a major component or a substantial structural part of that property. We

conclude that all of the properties in dispute meet the first prong of this two-part test.

7 Hereinafter, we use the term ‘‘disputed projects’’ to refer to the 104 projects discussed supra

p. 198, less the 5 of those projects that petitioner characterizes as repair or maintenance.

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222 136 UNITED STATES TAX COURT REPORTS (195)

III. Section 199

A. Applicable Text

Our substantive analysis begins with the relevant text of

section 199. (We set forth that text in appendix D.) Section

199(a) allows a corporate taxpayer such as petitioner to

deduct a percentage (equal to 3 percent for the subject year)

of the lesser of (1) its qualified production activities income

or (2) its taxable income (as computed without regard to the

deduction under section 199(a)). Section 199(b)(1) limits that

deduction to 50 percent of the wages that the taxpayer pays

during the year. Section 199(c)(1) defines the term ‘‘qualified

production activities income’’ as the taxpayer’s DPGR less the

sum of its cost of goods sold (allocable to the DPGR) plus cer-

tain expenses and other items. Section 199(c)(4)(A)(ii) pro-

vides that DPGR includes a taxpayer’s gross receipts from the

construction of real property performed in the United States

if the taxpayer is engaged in the active conduct of a construc-

tion business and the gross receipts are derived in the ordi-

nary course of that business.

Section 199 does not define the phrase ‘‘construction of real

property’’ as its appears in section 199(c)(4)(A)(ii), and it is

the meaning of that phrase that is the focus of our analysis.

The parties do not dispute that petitioner is entitled to a

deduction under section 199(a) to the extent that petitioner’s

work on the disputed projects falls within the meaning of

that phrase. Nor do the parties dispute that petitioner’s work

will fall within the meaning of that phrase if the work

‘‘erected’’ or ‘‘substantially renovated’’ real property within

the meaning of section 1.199–3(m), Income Tax Regs.

B. Legislative History

Section 199 was added to the Code by the American Jobs

Creation Act of 2004 (AJCA), Pub. L. 108–357, sec. 102(a), 118

Stat. 1424, to give domestic manufacturers a tax deduction

for certain domestic production activities. The conferees

noted that then-present law did not reduce a corporate tax-

payer’s income tax for income from domestic activities and

stated that section 199 would provide such a reduction in

certain cases. See H. Conf. Rept. 108–755, at 265–275 (2004).

The conferees stated that ‘‘construction activities performed

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(195) GIBSON & ASSOCIATES, INC. v. COMMISSIONER 223

in the United States’’ was one of those cases, that ‘‘activities

that are directly related to the erection or substantial ren-

ovation of residential and commercial buildings and infra-

structure’’ were ‘‘construction activities’’, and that ‘‘structural

improvements, but not mere cosmetic changes, such as

painting’’ were ‘‘substantial renovation’’. Id. at 271 & n.26.

The name of the AJCA and the statute’s wage limitation on

the amount of the deduction under section 199(a) indicate

that Congress intended that section 199 create jobs in the

United States and otherwise strengthen the U.S. economy.

IV. Guidance From the Commissioner and From the Sec-

retary

A. Notice 2005–14

On January 19, 2005, the Commissioner released Notice

2005–14, 2005–1 C.B. 498, to provide ‘‘interim guidance’’ on

section 199. The notice stated that the Secretary was cur-

rently developing regulations under section 199 and that tax-

payers could rely on the interim guidance until the regula-

tions were issued. Id. sec. 1, 2005–1 C.B. at 502.

As relevant here, Notice 2005–14, sec. 4.04(11)(a) and (b),

2005–1 C.B. at 520, stated that ‘‘The term ‘construction’

means the construction or erection of real property’’ and that

Activities constituting construction include activities performed in connec-

tion with a project to erect or substantially renovate real property, but do

not include tangential services such as hauling trash and debris, and deliv-

ering materials, even if the tangential services are essential for construc-

tion. However, if the taxpayer performing construction also, in connection

with the construction project, provides tangential services such as deliv-

ering materials to the construction site and removing its construction

debris, the gross receipts derived from the tangential services are DPGR.

Improving land (for example, grading and landscaping) and painting are

activities constituting construction only if these activities are performed in

connection with other activities (whether or not by the same taxpayer) that

constitute the erection or substantial renovation of real property. * * *

Notice 2005–14, sec. 4.04(11)(d), 2005–1 C.B. at 520, stated

that the ‘‘term ‘substantial renovation’ means the renovation

of a major component or substantial structural part of real

property that materially increases the value of the property,

substantially prolongs the useful life of the property, or

adapts the property to a new or different use.’’ Notice 2005–

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224 136 UNITED STATES TAX COURT REPORTS (195)

14, sec. 3.04(11)(d), 2005–1 C.B. at 511, explained as to that

meaning:

The Service and Treasury Department believe that the standard to be

applied in determining whether there has been a substantial renovation of

real property is the standard applied under § 263(a) to determine whether

a taxpayer’s activities result in permanent improvements or betterments

of property, such that the cost of the activities must be capitalized * * *

[and that the definition of the term substantial renovation as set forth in

the notice is] consistent with the rules under § 263(a) * * *

B. 2005 Proposed Regulations

On November 4, 2005, the Secretary published proposed

regulations under section 199. See secs. 1.199–0 through

1.199–8, Proposed Income Tax Regs., 70 Fed. Reg. 67240

(Nov. 4, 2005). The proposed regulations stated that the final

regulations, when published, would apply to taxable years

beginning after December 31, 2004. See sec. 1.199–8(g), Pro-

posed Income Tax Regs., 70 Fed. Reg. 67276 (Nov. 4, 2005).

The proposed regulations stated that taxpayers could

rely on the proposed regulations and/or the interim guidance

set forth in Notice 2005–14, supra, until the final regulations

were published in the Federal Register. See id.

The definition of the word ‘‘construction’’ in the proposed

regulations was similar to its definition in Notice 2005–14,

supra. Section 1.199–3(l)(1)(i) and (2), Proposed Income Tax

Regs., 70 Fed. Reg. 67254, 67255 (Nov. 4, 2005), stated that

‘‘The term construction means the construction or erection of

real property’’ and