# UNITED STATES TAX COURT

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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

109 T.C. No. 2

UNITED STATES TAX COURT

HOSPITAL CORPORATION OF AMERICA AND SUBSIDIARIES, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 10663-91, 13074-91,
28588-91, 6351-92.

Filed July 24, 1997.

Ps own, operate, and manage hospitals and related
businesses. For taxable years ended 1985 through 1987
Ps claimed depreciation deductions based on 5-year
recovery periods for certain properties they placed in
service during those years, which properties Ps claim
constitute tangible personal property. R determined
that the properties constitute structural components of
the buildings to which they relate and that the
properties therefore must be depreciated over the same
recovery periods as those buildings.
Held: For purposes of assigning appropriate
recovery classes or recovery periods to the properties
to determine allowable depreciation deductions pursuant
to sec. 168, I.R.C., tests developed under prior law
for purposes of the investment tax credit are
applicable to decide whether the property constitutes
tangible personal property.

- 2 Held further: The prohibition contained in sec.
168, I.R.C., against the use of the component method of
depreciation does not preclude the use of an analysis
based on Scott Paper Co. v. Commissioner, 74 T.C. 137
(1980), and its progeny, and sec. 1.48-1(1), Income Tax
Regs., and accordingly such authorities are applied to
assign appropriate recovery classes or recovery periods
to the properties in issue.
N. Jerold Cohen, Randolph W. Thrower, J.D. Fleming, Jr.,
Walter H. Wingfield, Stephen F. Gertzman, Reginald J. Clark,
Amanda B. Scott, Walter T. Henderson, Jr., William H. Bradley,
and John W. Bonds, Jr., for petitioners in docket No. 10663-91.
N. Jerold Cohen, Randolph W. Thrower, J.D. Fleming, Jr.,
Walter H. Wingfield, Stephen F. Gertzman, Reginald J. Clark,
Amanda B. Scott, Walter T. Henderson, Jr., William H. Bradley,
John W. Bonds, Jr., and Daniel R. McKeithen, for petitioners in
docket No. 13074-91.
N. Jerold Cohen, Walter H. Wingfield, Stephen F. Gertzman,
Amanda B. Scott, Reginald J. Clark, Randolph W. Thrower, Walter
T. Henderson, Jr., and John W. Bonds, Jr., for petitioners in
docket No. 28588-91.
N. Jerold Cohen, Reginald J. Clark, Randolph W. Thrower,
Walter T. Henderson, Jr., and John W. Bonds, Jr., for petitioners
in docket No. 6351-92.
Robert J. Shilliday, Jr., Vallie C. Brooks, and William B.
McCarthy, for respondent.

- 3 WELLS, Judge:

These cases were consolidated for purposes of

trial, briefing, and opinion and will hereinafter be referred to
as the instant case.1

Respondent determined deficiencies in

petitioners' consolidated corporate Federal income tax as
follows:
TYE

Deficiency

1978
1980
1981
1982
1983
1984
1985
1986
1987
1988

$2,187,079.00
388,006.58
94,605,958.92
29,691,505.11
43,738,703.50
53,831,713.90
85,613,533.00
69,331,412.00
294,571,908.00
25,317,840.00

Unless otherwise indicated, all section references are to the
Internal Revenue Code in effect for the years in issue, and all
1

The instant case involves many issues, some of which have
been settled or decided. The issues remaining for decision
involve matters falling into two reasonably distinct categories,
which the parties have denominated the MACRS depreciation issue
and the captive insurance or Parthenon Insurance Co. issues. The
MACRS depreciation issue was presented at a special trial session
with two other distinct categories of issues that we previously
decided, and the captive insurance issues were severed for trial
purposes and were presented at a subsequent special trial
session. Separate briefs of the parties were filed for each of
the distinct categories of issues. We decided tax accounting
issues in Hospital Corp. of Am. v. Commissioner, T.C. Memo. 1996105; Hospital Corp. of Am. v. Commissioner, 107 T.C. 73 (1996);
and Hospital Corp. of Am. v. Commissioner, 107 T.C. 116 (1996).
We decided an issue related to the sale of the stock of certain
subsidiaries to HealthTrust, Inc.--The Hospital Company in
Hospital Corp. of Am. v. Commissioner, T.C. Memo. 1996-559. The
Parthenon Insurance Co. issues will be addressed in a separate
opinion subsequently to be released. The instant opinion
involves the MACRS depreciation issue.

- 4 Rule references are to the Tax Court Rules of Practice and
Procedure.
The issues to be decided concern the appropriate recovery
classes (for tax years ended 1985 and 1986) or appropriate
recovery periods (for tax years ended 1987 and 1988) for certain
tangible property that petitioners placed in service during those
years.

To decide whether petitioners utilized the proper

recovery classes or periods in calculating their claimed
depreciation deductions for those taxable years, we must decide
(1) whether the tests developed under prior law for purposes of
the investment tax credit are applicable, and, if so (2) whether
the respective properties constitute section 1245 personal
property or section 1250 real property pursuant to those tests.
FINDINGS OF FACT
Some of the facts have been stipulated for trial pursuant to
Rule 91.

The parties' stipulations of fact are incorporated

herein by reference and are found as facts in the instant case.
Petitioners were members of an affiliated group of
corporations whose common parent was Hospital Corporation of
America (HCA), which was incorporated under the laws of the State
of Tennessee.2
2

HCA maintained its principal offices in

On Feb. 10, 1994, HCA was merged with and into Galen
Healthcare, Inc., a subsidiary of Columbia Healthcare Corp. of
Louisville, Kentucky, and the subsidiary changed its name to HCAHospital Corp. of America. On that same date, the parent changed
(continued...)

- 5 Nashville, Tennessee, on the date the petitions were filed.

For

each of the taxable years involved in the instant case, HCA and
its domestic subsidiaries filed a consolidated Federal corporate
income tax return (consolidated return) on Form 1120 with the
Director of the Internal Revenue Service Center at Memphis,
Tennessee.
Petitioners' primary business is the ownership, operation,
and management of hospitals.

In Hospital Corp. of Am. v.

Commissioner, T.C. Memo. 1996-105, we set forth a detailed
description of petitioners' hospital operations, which will not
be reiterated here.

We incorporate herein our findings of fact

contained in that Memorandum Opinion.
During the taxable years in issue, petitioners constructed a
number of hospital facilities.

Those hospital facilities consist

generally of 10 different categories, which the parties
denominate as follows:

(1) Large Medical/Surgical Facilities;

(2) Small Medical/Surgical Facilities; (3) Ancillary Facilities;
(4) Radiology Facilities; (5) Small Psychiatric Facilities; (6)
Large Psychiatric Facilities; (7) Obstetrics Facilities; (8)
Ambulatory Surgery Facilities; (9) Patient Bed Facilities; and
(10) Ancillary II Facilities.
On their tax returns for taxable years ended 1985, 1986, and
1987, petitioners classified as tangible personal property

2

(...continued)
its name to Columbia/HCA Healthcare Corporation.

- 6 certain items relating to hospital facilities constructed during
those taxable years, and claimed the investment tax credit
(ITC),3 and depreciation deductions using a 5-year recovery
period.

Respondent, however, determined in the notice of

deficiency that a number of those items were structural
components of the related buildings and not personal property,
that those items were not eligible for ITC, and that they must be
depreciated over the same recovery period as the buildings to
which they related.

Prior to trial, the parties resolved the ITC

issue, leaving for trial the issue of the proper classification
of the property items for purposes of claiming the depreciation
deduction for the taxable years in issue.
On their tax returns for taxable years ended 1987 and 1988,
petitioners classified as tangible personal property certain
items relating to hospital facilities constructed during those
years and claimed depreciation deductions using a 5-year recovery
period.

Respondent, however, determined in the notice of

deficiency that a number of those items were structural
components of the related buildings and that they must be
depreciated over the same recovery period as the buildings to
which they related.

3

The investment tax credit (ITC) was repealed by the Tax
Reform Act of 1986, Pub. L. 99-514, sec. 211(a), 100 Stat. 2166,
effective (subject to transition rules) for property placed in
service after Dec. 31, 1985.

- 7 All of the property items in issue (disputed property items)
were installed in hospitals constructed for petitioners pursuant
to contracts with general construction contractors during taxable
years ended 1985, 1986, 1987, and 1988.

The parties have agreed

as to the proper categorization and the total construction cost
of each facility, the cost bases of the particular disputed
property items,4 and the dates on which each of the facilities
(and the property items located therein) were placed in service.
The parties have agreed to procedures to be followed to implement
our decision once we decide the appropriate recovery classes (or
recovery periods) for the disputed property items.
The parties have designated one facility to serve as a
"representative facility" for each of the 10 different categories
of hospital facilities.

The parties agree, however, that the

property items in petitioners' hospital facilities are identical
to each other in all material respects (i.e., manner of

4

For convenience, the parties have assigned various property
unit numbers to the disputed property items. The parties defined
and identified property units to include all functionally or
structurally related items. Property units are categorized as
either item property units or group or system property units.
From time to time we refer to the disputed property items by
their assigned property unit numbers.

- 8 attachment, function, construction, and design) regardless of the
facility in which they are contained.
Description of the Disputed Property Items5

5

On brief, petitioners group the disputed property items into
categories denominated as follows: Primary and secondary
electrical distribution systems (Property Unit 1900); branch
electrical wiring and connections and special electrical
equipment (Property Units 2200, 2244, 2320, 3026, 3075, 3195,
3280, 3292, 3298, 4040); branch electrical wiring, connections
and receptacles relating to television equipment (Property Unit
2340); conduit, floor boxes, power boxes, and outlet jacks
relating to telephone equipment (Property Unit 2330); electrical
wiring, conduit, and connections relating to internal
communications systems (Property Unit 3090); carpeting (Property
Unit 2140); vinyl wall coverings (Property Unit 2380); vinyl
floor coverings and special purpose sheet vinyl (Property Unit
2370); kitchen water piping (Property Unit 3080) and kitchen
equipment steam lines (Property Unit 3070); special plumbing
connections relating to x-ray equipment (Property Unit 2244);
kitchen hoods and exhaust systems (Property Unit 3085); patient
corridor handrails (Property Unit 3190); overbed lights and
related electrical connections (Property Unit 4050); accordion
doors/partitions (Property Unit 3240); bathroom accessories and
partitions (Property Unit 2360) and plastic mirrors (Property
Unit 2385); acoustical tile ceilings (Property Unit 2260); and
steam boilers and related accessories (Property Unit 3193). On
brief, respondent groups the disputed property in a similar
manner except that respondent separates the property items
petitioners included in Property Units 2200, 2244, 2320, 3026,
3075, 3195, 3280, 3292, 3298, 4040 (disputed property items
relating to branch electrical wiring, etc.), Property Unit 2330
(disputed property items relating to telephone equipment),
Property Unit 2340 (disputed property items relating to
television equipment), and Property Unit 3090 (disputed property
items relating to internal communications systems) into
individual categories of conduit; electrical wiring; and
electrical outlets, receptacles, and junction boxes.
Additionally, respondent combines the property items petitioners
included in Property Units 3080 and 3070 (kitchen water piping
and kitchen equipment steam lines) and Property Unit 2244
(plumbing connections relating to x-ray equipment) into one
category of plumbing. We adopt generally in the instant opinion
the denomination of categories utilized by petitioners.

- 9 1.

Primary and Secondary Electrical Distribution Systems

The primary electrical distribution systems,6 which the
parties have designated as Property Unit 1900, accept electricity
from outside electrical power sources and deliver it to the
secondary electrical distribution systems contained within the
hospital facilities.

Generally, the items comprising the primary

electrical distribution systems consist of (1) the electrical
wire and conduit extending from the outside power sources to the
main electrical distribution panels and (2) the main electrical
distribution panels themselves, also known as main switchgears.
In some instances, motor control centers or transformers also may
be included.
The secondary electrical distribution systems receive
electricity from the primary electrical distribution systems and
deliver it to the various electrical end-users located throughout
petitioners' hospital facilities (e.g., lighting fixtures, fire
protection systems, and hospital equipment).

The items

comprising those secondary electrical distribution systems
consist of the electrical wire and conduit extending from the
primary electrical distribution panels to the secondary
electrical distribution panels, the secondary electrical
6

Respondent agrees that the items comprising petitioners'
primary and secondary electrical distribution systems are similar
to those items in issue in Morrison, Inc. v. Commissioner, T.C.
Memo. 1986-129, affd. 891 F.2d 857 (11th Cir. 1990).

- 10 distribution panels themselves, and any transformers located
between the primary electrical distribution panels and the
secondary electrical distribution panels.
The main switchgears and the motor control centers are steel
cabinets which are attached to concrete pedestals using nuts that
are tightened onto bolts extending out of the pedestals.
Transformers have a construction similar to that of the
switchgears and the motor control centers and are either attached
to concrete pedestals in a manner similar to the switchgears and
the motor control centers or suspended from the overhead
structural framework of the hospital buildings using threaded rod
hangers.

Screws or bolts attach the electrical panels to the

walls of the buildings.
The main panel and the main motor control centers range in
size from 91.5 inches high by 40 inches wide by 20 inches deep up
to 91.5 inches high by 60 inches wide by 20 inches deep.

The

main panel is equal to or larger in size than the motor control
centers.

The conduit from the main transformer to the main

switchboard is 42 inches underground and encased in a concrete
envelope.
The components of the primary and secondary electrical
systems are similar in nature, although they vary in size and
complexity depending on the various electrical loads carried by
them.

Those components are installed during the construction

- 11 phase by the electrical subcontractor.

The conduit and wire in

both the primary and secondary electrical distribution systems
are custom fit for the initial place of installation.
The electrical wire constitutes the conductor used to carry
electrical power from the primary electrical distribution systems
to the secondary electrical distribution systems and from the
secondary electrical panels to various branch wiring items (e.g.,
circuit breakers, fuses).

The electrical wire carries electrical

power to the secondary electrical panels and the branch circuits
for individual electrical loads.
Electrical wire is installed in electrical conduit.
Electrical conduit is typically aluminum, plastic, or galvanized
tubing or piping which is custom fit for the particular
application.

Electrical conduit may be attached to the

structures of the hospital buildings using screws and brackets or
other appropriate fasteners.

Electrical conduit serves as a

protective shield for electrical wire contained inside the
conduit and provides a pathway for the wire to travel from one
location to another.

The conduit is integrated into a building

during the construction phase and is generally attached to
ceilings, floors, and walls, or encased in concrete.
Conduit may be inaccessible or hidden behind surfaces.

Conduit

commonly is abandoned in place and not reused when a particular
item of equipment to which it relates is moved or retired.

- 12 Although not a common occurrence, petitioners have moved and
reused some items (e.g., electrical panels, transformers, and
motor control centers) in connection with remodeling projects.
Workers started and completed the task in one evening.

The items

were not damaged by being moved from one location within the
hospital to another, and after they were moved, the items
functioned in the same manner as they had prior to being moved.
The parties have stipulated that the percentage of the
electrical load carried by the primary and secondary electrical
distribution systems to hospital equipment is as follows:
Type of facility
Large Medical/Surgical
Small Medical/Surgical
Small Psychiatric
Large Psychiatric

Percentage
30
36
23
26

The balance of the electrical load is carried to items related to
the operation or maintenance of petitioners' buildings.
2.

Branch Electrical Wiring and Connections and Special
Electrical Equipment
a.

In General

The branch wiring in the subject category is the wiring that
extends from the secondary distribution panels to either a duplex
outlet at or in a wall surface, or, in instances where a piece of
machinery is "hardwired",7 to a junction box mounted on or within
7

When equipment is "hardwired", the wiring connection of that
equipment is attached and secured directly to the electrical
(continued...)

- 13 a surface of the building.

The branch electrical wiring and

connections consist of conduit, wiring, and electrical
connections which relate to particular items of hospital
equipment.

Specifically, the items of hospital equipment to

which the branch electrical wiring and connections in the subject
category relate are:

(a) The emergency power generator controls,

battery packs, and battery chargers (Property Unit 2200); (b) the
x-ray film processing equipment (Property Unit 2244); (c) the
illuminated front entrance signs and emergency entrance signs
(Property Unit 2320); (d) the medical gas control equipment and
the medical gas alarm equipment (Property Unit 3026); (e) kitchen
equipment (e.g., braising pans, sanitizers, deep fryers,
toasters, ice makers/dispensers, and heat lamps) (Property Unit
3075); (f) equipment located in the hospital laboratories and
maintenance shop areas, such as tools and welding equipment,
specimen slicers, etc. (Property Unit 3195); (g) the
synchronously wired clock systems (Property Unit 3280); (h) the
air conditioners located in the hospital computer rooms (Property
Unit 3292); (i) the central sterilization equipment (Property
Unit 3298); and (j) special electrical equipment located in the
hospital operating rooms, recovery rooms, intensive care units,
infant nurseries, radiology areas, patient rooms, and

7

(...continued)
wiring in a junction box.

- 14 laboratories (Property Unit 4040).

Items of equipment for which

electrical connections are wired directly to the hospitals'
electrical systems include the front entrance sign, the emergency
entrance sign, the air conditioner for the computer equipment,
and the central sterilization equipment.
The branch electrical wiring and connections are required
for the operation and use of the equipment to which they relate.
The branch electrical wiring and connections are used only with
the items of equipment to which they relate.8
All of the electrical load carried by the branch electrical
wiring and connections is carried to the particular items of
equipment to which they relate.

The conduit protects and houses

the wiring.
b.

Wiring and Related Property Items Relating to
Kitchen Equipment (Property Unit 3075)

The disputed property items in Property Unit 3075 consist of
wiring, conduit, junction boxes, and outlets that provide
electricity required for the operation and use of hospital
kitchen equipment, including the kitchen hood fans and lights,
braising pans, sanitizers, deep fryers, toasters, ice
makers/dispensers, coffee urns, milk and ice cream dispensers,
and heat lamps.

8

Those items are used only with the hospital

The parties agree that the items of equipment to which the
branch electrical wiring and connections in issue relate are
properly depreciable over 5-year periods.

- 15 kitchen equipment.

If necessary, some of the items could be

adapted for another use.

In most instances, the items run from

the hospitals' secondary electrical distribution systems to a
wall near the equipment which they are intended to service.
c.

Wiring and Related Property Items in the Laboratory
and Maintenance Shop (Property Unit 3195)

The disputed property items in Property Unit 3195 consist of
wiring, conduit, above-counter receptacles, circuit boxes, and
plugmoldings which make electricity available in the laboratory
and maintenance shop areas of the hospitals and provide localized
electrical power for various electrical end-users located in
those areas.9

Some of the items described in Property Unit 3195

are located in the walls between the hospitals' secondary
electrical distribution systems and either electrical outlets or
the particular equipment they are intended to serve.

If

necessary, some of those items could be adapted for another use.
d.

Wiring and Related Property Items in Other
Areas of the Hospitals (Property Unit 4040)

The disputed property items in Property Unit 4040 consist of
wiring, conduit, outlets, circuit boxes, and related electrical
isolation panels which make electricity available for the
operation and use of equipment located in the intensive care
9

Other wiring, conduit, receptacles, and junction boxes, which
are not contained in Property Unit Number 3195 but which the
parties agree relate to the operation and maintenance of the
hospitals' buildings, also make electrical power available in the
laboratory and maintenance shop areas.

- 16 units, operating rooms, recovery rooms, infant nurseries, patient
rooms, radiology areas, laboratories, and kitchens.

The

isolation panels and grounding receptacles ensure that the
medical equipment receiving electrical power from the isolated
electrical circuits does not leak electricity, which could shock
patients undergoing surgery or other forms of treatment.

The

remote grounding receptacles are necessary for the common
grounding of equipment in those areas of the hospitals and are
necessary for the operation of the isolation panels.
3.

Wiring and Related Property Items Relating to Television
Equipment (Property Unit 2340)

Disputed property items in Property Unit 2340 consist of
branch electrical wiring, conduit, junction boxes, outlet
receptacles, and equipment that is required for the operation and
use of the television equipment located in and outside of the
hospitals.

Petitioners' use of the conduit and junction boxes is

due, in part, to local building codes.

The items are used only

and directly with the television sets located in petitioners'
hospital facilities and the master television antennae attached
to petitioners' hospitals.10
Televisions are attached to the walls of the hospitals near
the room ceilings.

10

The television outlet receptacles in issue

The television antenna and antenna wire are not in dispute.
The parties have agreed that the antenna, amplifier, and brackets
constitute 5-year property.

- 17 are recessed in the walls approximately 18 inches below the
acoustical tile ceilings.

The electrical outlet receptacles

relating to the televisions provide localized electrical power
sources for the televisions at standardized voltages and
standardized amperes.

Most of the televisions are located in the

patient rooms of petitioners' hospitals.
The antenna conduit protects the television antenna cables
which extend between the master television antenna systems (or
cable television hook-ups) and the antenna/cable television
outlets located adjacent to the television outlet receptacles.
The conduit protects the antenna wiring contained within it and
is installed for the specific purpose of housing the television
antenna wiring.
4.

Conduit, Floor Boxes, Power Boxes, and Outlet Jacks
Relating to Telephone Equipment (Property Unit 2330)

The telephone conduit, floor boxes, power boxes, and outlet
jacks in Property Unit 2330 are required for the use and
operation of the telephone equipment11 located in petitioners'
hospitals, due in part at least to local building codes.

Those

items are used only and directly with that telephone equipment
and were installed specifically for use with the telephone
equipment.

11

The parties agree that the telephone equipment to which the
items in Property Unit 2330 relate is properly depreciable over
5-year periods.

- 18 5.

Electrical Wiring, Conduit, and Connections Relating to
Internal Communications Systems (Property Unit 3090)

The conduit, wiring, and electrical connections in Property
Unit 3090 are required for the use and operation of the
hospitals' internal communications systems (i.e., the nurse call
systems, the intercommunications systems, the dictation systems,
and the music and paging systems).12

Petitioners' use of the

conduit, floor boxes, and outlet jacks is due in part to local
building codes.

Those items are used only and directly with the

equipment comprising those systems.

The items in issue are

attached to the walls, floors, and ceilings of petitioners'
hospitals and are located between the secondary electrical
distribution systems and the particular items of equipment to
which they relate.

The items are specifically for use with the

hospitals' internal communication systems.
6.

Carpeting (Property Unit 2140)

The carpeting in Property Unit 2140 is the carpeting that
was originally placed in petitioners' hospital facilities during
construction.

The carpeting is custom fit to the area in which

it is laid, and is installed over the sealed concrete floor using
adhesives.

The adhesives prevent the carpeting from slipping or

skidding while it covers the floors of the hospitals.

12

The parties agree that the machinery and equipment to which
the items in Property Unit 3090 relate are properly depreciable
over 5-year periods.

- 19 Petitioners typically replace carpeting after approximately
2-1/2 to 7 years of use due to heavy wear, soiling, and changes
in the decor of petitioners' hospitals.13

Workers remove the

carpeting by using a linoleum knife to lift up one corner of the
carpeting and then by pulling the carpeting by hand from the
concrete floors.

Removal of the carpeting is not a difficult or

time-consuming process and does not damage the underlying
concrete floors.
carpeting.

Petitioners typically discard the removed

Petitioners do not allow the removed carpeting to be

reused because of potential health risks.
7.

Vinyl Wall Coverings (Property Unit 2380)

The vinyl wall coverings originally placed in the various
hospital facilities are also in issue.

The wall coverings

consist of 3-foot or 4-foot wide strips of vinyl fabric.

The

strips of vinyl fabric are secured to the walls with an adhesive.
The walls are treated with glue sizing prior to placing the vinyl
wall coverings on the sheetrock walls of the hospital facilities.
The glue sizing protects the sheetrock walls from being damaged
upon a subsequent removal of the wall coverings.
The vinyl wall covering is used as an alternative to
painting the sheet rock walls.
13

Due to heavy wear and to changes

In one of the representative facilities, after approximately
8 years of use, more than 95 percent of the carpeting in issue
had been removed and replaced. Petitioners intend to replace the
remaining 5 percent of that carpeting, which is badly soiled and
worn, when scheduling permits.

- 20 in the decor of petitioners' hospital facilities, petitioners
remove and replace vinyl wall coverings after approximately 5 to
10 years of use.14
Removal of the wall coverings is accomplished by removing
the base molding covering the bottom edge of the wall covering,
grasping a corner of the wall covering, and pulling it off the
walls.

Removal of the vinyl wall coverings does not damage

either the vinyl fabric or the sheetrock walls of the hospitals,
and any residual adhesives that remain on the walls can be
removed with very light sanding.
8.

Vinyl Floor Coverings (Property Unit 2370)

The items in Property Unit 2370 consist of the vinyl tile
and sheet vinyl floor coverings originally placed in petitioners'
hospital facilities during construction.
of three general types:

The floor coverings are

(1) 12-inch by 12-inch vinyl tiles, (2)

8-foot wide sheet vinyl, and (3) seamless vinyl floor covering.
Petitioners utilize all three types of vinyl floor coverings
in a similar manner.

The vinyl tiles are unpackaged, trimmed as

necessary, and attached to the hospital floors using adhesive.
The sheet vinyl is first cut to fit the area on which it is
placed and also is attached to the concrete floors of the
hospitals using adhesive.
14

The seamless vinyl floor covering is

In one of petitioners' representative facilities, after
approximately 8 years of use, approximately 60 to 65 percent of
the vinyl wall coverings in issue had been replaced.

- 21 installed similarly to the sheet vinyl but with its seams joined
together using heat.
Petitioners replace vinyl floor coverings after about 3 to 5
years due to wear and changes in the decor of petitioners'
facilities.15

The sheet vinyl and seamless vinyl floor covering

are composed of a softer material than vinyl composition tile.
Workers remove sheet vinyl by lifting one corner of the
vinyl and peeling it off the concrete floors.

Workers remove

vinyl tile by using a mechanical scraper, which lifts the tiles
off the concrete floors without damaging the floors.

The

underlying adhesives are typically dry and powdery after the
floor coverings are removed.

Removal of the vinyl tile floor

coverings requires more effort than is necessary for removing
carpeting; nonetheless, with the proper tools and skill, removal
of the vinyl floor coverings goes relatively fast.

Petitioners

discard the floor covering upon removal.
9.

Kitchen Water Piping (Property Unit 3080) and Kitchen
Equipment Steam Lines (Property Unit 3070)

Petitioners maintain kitchens which are used to prepare
meals for most inpatients on a daily basis as a part of providing
health care services to those patients.

15

Petitioners also operate

In one of petitioners' representative facilities, after
approximately 8 years of use, two-thirds of the original vinyl
floor coverings had been replaced.

- 22 hospital cafeterias where food is sold to hospital employees,
visitors, and the public for cash.
The kitchen water piping in Property Unit 3080 consists of
the following distinct categories of items:

(1) items relating

to the operation of the kitchen grease trap systems,16 the trench
drains, the grease waste piping, the grease waste excavation, the
grease waste fill, and the grease trap itself, and (2) plumbing
connections (including the hose reel connections) for particular
items of kitchen equipment.

The piping is contained in the walls

of petitioners' hospital facilities and fastened to the building
structures.
The kitchen grease trap systems consist of underground tanks
and the related plumbing connections.

The grease traps have

inlet chambers connected to kitchen waste pipes and outlet
chambers connected to the domestic sanitary sewers, and they
serve as buffers between the kitchen waste pipes and the sanitary
sewer systems.

Their function is to remove grease and solid

matter from waste water leaving the kitchen areas while allowing
the remaining waste water to pass into the sanitary sewers.
The kitchen plumbing connections in issue supply water to
specific items of kitchen equipment, such as the dishwashers,
coffee urns, steam kettles, braising pans, and ice makers, and
16

Respondent agrees that the kitchen grease trap systems in
issue are similar to those in issue in Morrison, Inc. v.
Commissioner, T.C. Memo. 1986-129.

- 23 remove the liquid wastes generated by that equipment.

The

plumbing connections branch off of a hospital's main water lines
to the walls near the specific pieces of equipment the plumbing
connections are intended to serve.

The plumbing connections are

necessary for the operation of the items of equipment to which
they relate and are used only with the items of equipment to
which they relate.

If necessary, the connections could be

adapted for other uses.

The hose reel connections are located

behind the walls and are used to connect the hose reel to hot and
cold potable water.
The kitchen equipment steam lines in Property Unit 3070 are
in all material respects identical to the kitchen plumbing
connections (Property Unit 3080) described above.
10.

Special Plumbing Connections Relating to X-Ray
Equipment (Property Unit 2244)

The plumbing connections relating to the x-ray equipment are
required for the operation and use of the x-ray film processing
equipment located in petitioners' hospitals.
are used only with that equipment.

Those connections

The plumbing connections are

located in the walls and floors between the hospitals' main
plumbing lines and the x-ray film processing equipment they are
intended to serve.

Removal of those plumbing connections would

not affect the hospitals' main water piping and sanitary
drainage.

- 24 11.

Kitchen Hoods and Exhaust Systems (Property Unit 3085)

The kitchen hoods and exhaust systems consist of the cooking
area exhaust hoods and fans, the kitchen supply air intake fans,
the dishwasher exhaust fans, and related duct work.

Dishwasher

condensate return units are also included.
The exhaust hoods and fans are placed directly over the
kitchen cooking equipment, where they collect and guide cooking
vapors, grease, smoke, humidity, and other fumes moving from the
kitchen cooking equipment into the exhaust duct work to be
expelled outside of the hospital buildings.

The kitchen hoods

are installed on frames bolted to the overhead structure, and the
frames are attached to a reinforced concrete floor structure.
The sheet metal duct work is installed in a continuous run from
the kitchen hood through the floors overhead to a curbed roof
opening in a covered discharge unit.

The kitchen exhaust hoods

contain their own chemical fire protection and lighting system.
The kitchen exhaust fans are attached with steel screws.
They do not serve to ventilate the hospital buildings generally,
and they are not part of the hospital buildings' heating,
ventilation, or air conditioning systems.
The kitchen supply air intake fans (or the "air make-up
units")17 replace the air removed from the kitchens by the

17

Respondent agrees that, with the exception of the condensate
return unit, although smaller, the kitchen supply air intake fans
(continued...)

- 25 kitchen exhaust fans to insure proper negative balance in the air
pressure.

The kitchen supply air intake fans ensure that a

hospital kitchen maintains negative pressure with relation to the
remainder of the hospital building by replacing air that is
exhausted by the kitchen exhaust fans.

The kitchen supply air

intake fans are attached to the roofs of petitioners' hospitals
using bolts and are connected to metal duct work used only with
that equipment.
The dishwasher exhaust fans remove moisture and humidity
generated by the dishwasher and are vented to both ends of the
dishwasher.

The fans serve to ventilate only the dishwashing

area of the kitchens and ensure that the dishwashers operate
efficiently.

The fans are attached to the roofs of the

facilities using bolts and are connected to duct work
specifically designed for and used only with those fans.
The dishwasher condensate return units consist of water
piping which provides an emergency source of hot water for the
dishwashers.

The piping is attached to the building and runs

from a dishwasher to a boiler and back to the dishwasher.

It is

separate and apart from the building plumbing and is used
exclusively to connect the dishwashers with the boilers.

17

(...continued)
in petitioners' hospitals are similar to those in issue in
Morrison, Inc. v. Commissioner, supra.

Removal

- 26 of the condensate return unit piping would not affect the
hospital's main water piping and sanitary drainage.
The kitchen duct work is placed in the walls and ceilings
during construction.

The duct work is fastened to the building

structure with steel hangers.
of building walls and ceilings.

It is not movable without removal
Portions may be removable but

that partial removal would render the remaining sections
unusable.

The sheet metal duct work, exhaust hoods, exhaust and

supply fans, and condensate return units are fixed to the
building with screws and bolts.
welded.

The frames are bolted and

Much of the installation is through walls, ceilings, and

roofs, and specific openings are made in the structure for those
items.
12.

Patient Corridor Handrails (Property Unit 3190)

Patient corridor handrails18 are strips of hard plastic,
about 1-3/4-inches at the top and 6-inches wide, which are
attached to the walls in certain areas of petitioners' hospitals
using bolts and clip brackets.

The patient corridor handrails

are placed approximately 32-inches above the hospital floors and
extend 3-1/2-inches from the wall surface.

18

They are installed in

The patient corridor handrails in issue do not include
handrails located in hospital stairwells or those required by
elevation changes, nor do they include bumper guards, which are
located in all hallways and corridors and used to protect the
walls of petitioners' buildings.

- 27 patient corridors of the hospitals to assist in the
rehabilitation of petitioners' patients.
Patient corridor handrails can be removed from the walls of
the hospitals.

After removal, the handrails can be replaced or

relocated within the hospital.
Local fire or building codes do not require patient corridor
handrails.
13.

Overbed Lights and Related Electrical Connections
(Property Unit 4050)

The overbed lights are 4-tube, 4-foot fluorescent lighting
fixtures installed in a standard opening in the acoustical
ceiling grid and are positioned directly over the patient beds in
each patient room.

They are similar in appearance to general

lighting fixtures.

The lights are controlled by switches located

on the headwall units above the patient bed headboards.

The

placement of the switches allows the overbed lights to be
activated by someone standing at the patient's bedside and makes
it difficult for a patient to activate the overbed light while
lying in bed.
The overbed lights are designed to be used and are used to
provide a light source during the examination of patients by
medical staff or physicians.

The overbed lights are referred to

as "exam lights" on the hospital blueprints.
The patient rooms are approximately 100 square feet in size.
Other lighting devices in the patient rooms also provide room

- 28 illumination.19

For example, each patient room contains a 2-tube

fluorescent light fixture which is attached to the wall just
above each patient bed headboard and which is activated by a pull
cord placed within the patient's reach.

Additionally, each

patient room contains a fluorescent light fixture placed over the
vanity cabinet located in the patient room area and a night light
that provides exit lighting during the night.

Furthermore, each

patient room contains one large double-pane window which
illuminates the patient rooms during the daylight hours.

Use of

the overbed lights may be uncomfortable for some patients because
of the brightness of the lights and of the placement of the
lights directly over a patient's bed.
The electrical conduit, wiring, and junction boxes relating
to the overbed lights are used only with those lights, but, if
necessary, they could be adapted for other uses.

The electrical

connections relating to the overbed lights are necessary for the
operation of the overbed lights.
14.

Accordion Doors/Partitions (Property Unit 3240)

The accordion doors/partitions (partitions) in the subject
category consist of two different types of accordion-style room
dividers.

Both types are approximately 8- to 10-foot high and,

when expanded, are used to subdivide the hospital cafeterias and
conference rooms into smaller rooms.

19

They are attached to the

Those lighting devices are not in issue.

- 29 hospital walls and are expanded and contracted by manually
pulling them along tracks attached to the ceilings.
partitions are suspended from those tracks.

The

The tracks are

mounted on 2-inch by 4-inch or 2-inch by 6-inch blocking, which
is attached to the ceilings of the hospital buildings and
supported from above by angled steel arms.
bear any structural loads.

The partitions do not

The partition located in the

cafeteria contains a door which allows passage through the
subdivided rooms when the accordion is fully extended.
The partitions located in the hospital conference rooms
represent 44 percent of the total cost bases of the partitions in
issue.

The partitions located in the hospital cafeterias

represent the remaining 56 percent of the total cost bases of the
partitions in issue.
The partition originally placed in a West Houston Medical
Center conference room has been removed and is currently in
storage.

Removal of the partition has not affected the essential

structure of the West Houston Medical Center.

The supporting

steel and wood for that partition still is attached to the
structural frame at the site of the original installation,
covered by the acoustical ceiling.
15.

Bathroom Accessories and Partitions (Property Unit
2360) and Plastic Mirrors (Property Unit 2385)

Petitioners' hospital facilities contain a large number of
bathrooms in addition to employee bathrooms and public

- 30 bathrooms.20

The bathroom accessories in issue consist of the

following items located in patient bathrooms of petitioners'
hospitals:

Paper towel dispensers, soap dispensers, mirrors,

towel racks, grab bars, toilet paper holders, bathrobe hooks,
shower curtain rods, and toiletry shelves.

Petitioners' staff

and employees do not use the patient bathrooms, except as
necessary to provide health care services to the patients.
Toilet accessories such as grab bars require support by
double studding behind the walls.

The bathroom accessories are

attached to either the walls or the doors of the patient
bathrooms using screws.

They can be removed from the walls of

the bathrooms by removing the screws and backplates attaching
them to the walls.

Removal of those items does not damage either

the items or the walls.

Removal of the items is not a time-

consuming or difficult process, and one of the items typically
could be removed from a wall within 1 minute.

If removed, the

items could be reused elsewhere if the necessary blocking is in
place.

The plastic mirrors included in Property Unit 2385 are

in all material respects identical to the mirrors located in the
patient rooms which are included in Property Unit 2360.

20

Petitioners concede that the bathroom accessories in
Property Unit 2360 located in non-patient bathrooms (i.e., the
employee and public bathrooms) relate to the operation or
maintenance of a building and thus constitute structural
components of the buildings. Seventy-five percent of the total
cost of the bathroom accessories included in Property Unit 2360
is attributable to the bathroom accessories located in patient
bathrooms.

- 31 16.

Acoustical Tile Ceilings (Property Unit 2260)

The acoustical tile ceilings (acoustical ceilings) consist
of metal grid systems, typically with a 2-foot by 2-foot or 2foot by 4-foot opening, and squares of acoustical tile that are
laid into the openings of the grids.

The grids are installed in

select areas of petitioners' hospital facilities and are hung by
wires parallel to the structural frames of the hospital
buildings, approximately 8- to 12-feet above the concrete floors.
The wires are attached to the structural frames of the hospital
buildings using eye bolts.

The grids are attached to the

hospital walls using nails or screws.

Light fixtures, speakers,

air conditioning vents, and sprinkler heads are placed in
openings of the grids or through openings cut in the tiles.
The acoustical ceilings are movable and have been moved,
reconfigured, and reused by petitioners in at least one of
petitioners' representative facilities.

Acoustical ceilings hide

unsightly plumbing and piping, conduit, wiring, and air
conditioning ducts which are installed between the structural
frame above and the ceiling.

The acoustical ceilings also

enhance the cleanliness of petitioners' hospitals by preventing
dirt and dust from falling from the pipes and duct work located
between the acoustical ceilings and the structural ceilings of
the hospitals into the areas below.

Acoustical tiles

additionally provide a sound deadening material, which reduces
noise.

They also serve a decorative function.

- 32 The acoustical ceilings utilized by petitioners are typical
of the ceilings used in many commercial buildings.

Painted

gypsum board is used for ceilings in the critical areas of the
hospitals, such as the operating, trauma, and medical areas.
Hospital accreditation commissions require hospitals to have
ceilings in order to operate as hospitals.
17.

Steam Boilers and Related Accessories (Property Unit
3193)

The steam boiler systems in Property Unit 3193 are shopassembled, high-pressure, steam-operated boilers and related
accessories.

The steam boilers produce steam that is used to

provide heat for petitioners' hospitals and that is distributed
to specific items of hospital equipment, such as the air make-up
units, hot water heaters, kitchen equipment, operating room
humidifiers, and central sterilization equipment.
The boilers and related accessories are bolted to structural
steel frames, which are encased in a concrete slab, raised floor.
Bolts, embedded into the concrete, are used both to level the
boilers and to secure the installation.

The boiler stacks are

attached to the structural roof and extend through the roof to an
elevation which facilitates the dispersion of fumes.
The boilers and related accessories are placed in the
mechanical room and are interconnected with the piping used to
transmit the high temperature water and steam.

The entire system

is integrated into the building mechanical system.

- 33 Boilers are not easily removed.

The installation and/or

removal of a boiler would require a skilled mechanical
subcontractor.
OPINION
During taxable years ended 1985 through 1988, petitioners
constructed a number of hospital facilities, which they used in
their trade or business.

For purposes of our decision as to

petitioners' entitlement to depreciation deductions relating to
those facilities for those taxable years, the parties do not
agree on the appropriate recovery classes or recovery periods for
the disputed property items21 contained in the facilities.
Resolution of that issue entails our decision as to whether the
disputed property items constitute section 1245 class property or
section 1250 class property.

The parties have stipulated that if

a disputed property item constitutes section 1245 class property,
it is depreciable over a 5-year recovery period, but if the
disputed property item constitutes section 1250 class property,
it is depreciable over an 18-, 19-, or 31.5-year recovery period
(depending on when the item was placed in service).22

21

The parties have agreed on the classification of a number of
property items relating to the constructed facilities, but they
are unable to agree as to the disputed property items described
supra.
22

The recovery period for real property placed in service
after March 15, 1984, but before May 9, 1985, generally is 18
years. Deficit Reduction Act of 1984 (DRA-1984), Pub. L. 98-369,
sec. 111, 98 Stat. 634; Simplification of Imputed Interest Rules
(continued...)

- 34 Accordingly, we must decide whether the tests developed under
prior law for purposes of the investment tax credit must be used
in deciding the appropriate recovery classes (for tax years ended
1985 and 1986) or appropriate recovery periods (for tax years
ended 1987 and 1988) for the disputed property items that
petitioners placed in service during those years and, if so,
whether the respective properties constitute section 1245 class
property or section 1250 class property pursuant to those tests.
Petitioners contend that the disputed property items
constitute section 1245 class property and that those items are
depreciable over 5-year periods.

Respondent contends that the

disputed property items are section 1250 class property because
they are structural components of the buildings to which they
relate, and, thus, they are depreciable over the same recovery
period as the buildings.

22

(...continued)
(SIIR), Pub. L. 99-121, secs. 103, 105(a), 99 Stat. 509-511
(1985). The recovery for real property placed in service after
May 8, 1985, but before Dec. 31, 1986, generally is 19 years.
SIIR, secs. 103, 105(a); Tax Reform Act of 1986 (TRA-1986), Pub.
L. 99-514, secs. 201, 203, 100 Stat. 2122-2123, 2143. The
recovery period for nonresidential real property placed in
service after Dec. 31, 1986, but before May 12, 1993, generally
is 31.5 years. TRA-86, secs. 201, 203; Omnibus Budget
Reconciliation Act of 1993 (OBRA-1993), Pub. L. 103-66, sec.
13151, 107 Stat. 448. For convenience, we refer to property
placed in service between Jan. 1, 1985, and Dec. 31, 1986,
generally as 19-year property.

- 35 In General
Section 167 prescribes general rules governing the
depreciation deduction, which provides a reasonable allowance for
the exhaustion, wear and tear of property used in a trade or
business or held for the production of income.

Section 168,

added to the Internal Revenue Code (Code) by the Economic
Recovery Tax Act of 1981 (ERTA), Pub. L. 97-34, 95 Stat. 172,
describes a specific depreciation system, entitled "Accelerated
Cost Recovery System" (ACRS), applicable generally for tangible,
depreciable property placed in service after December 31, 1980.
ERTA, secs. 201(a), 209(a), 95 Stat. 226.

During 1986, Congress

replaced ACRS with a modified accelerated cost recovery system
(MACRS), effective generally for tangible, depreciable property
placed in service after December 31, 1986.

Tax Reform Act of

1986 (TRA-86), Pub. L. 99-514, secs. 201, 203, 100 Stat. 21222123, 2143.

Accordingly, the disputed property items placed in

service during 1985 and 1986 are subject to the ACRS rules, and
the disputed property items placed in service after 1986 are
subject to the MACRS rules.
ACRS
Congress enacted ACRS to stimulate the economy by allowing
greater depreciation deductions over shorter depreciation periods
and to simplify the depreciation rules.

Sprint Corp. v.

Commissioner, 108 T.C. 383 (1997); Simon v. Commissioner, 103
T.C. 247, 255 (1994), affd. 68 F.3d 41 (2d Cir. 1995); Liddle v.

- 36 Commissioner, 103 T.C. 285, 289, 290 (1994), affd. 65 F.3d 329
(3d Cir. 1995); see also Collins Music Co. v. United States, 21
F.3d 1330, 1332 (4th Cir. 1994); S. Rept. 97-144, at 47 (1981),
1981-2 C.B. 412, 425.

ACRS permits a depreciation deduction for

recovery property over a predetermined recovery period by
applying a statutory percentage to its cost.

Sec. 168(b); Schrum

v. Commissioner, T.C. Memo. 1993-124, affd. in part and vacated
and remanded in part on another issue 33 F.3d 426 (4th Cir.
1994).
Recovery property is defined generally as "tangible property
of a character subject to the allowance for depreciation--(A)
used in a trade or business, or (B) held for the production of
income."

Sec. 168(c)(1).

Recovery property is assigned to one

of the following classes of property:

3-year property, 5-year

property, 10-year property, 19-year real property, 15-year public
utility property, or low-income housing.
special rule applies for theme parks.

Sec. 168(c)(2).

A

Sec. 168(c)(2)(G).

Five-year property includes section 1245 class property
which is not 3-year property, 10-year property, or 15-year public
utility property.

Sec. 168(c)(2)(B).

Five-year property, thus,

includes section 1245 class property with no assigned class life.
Sec. 168(c)(2)(B); Collins Music Co. v. United States, supra at
1333.

Nineteen-year real property "means section 1250 class

property which--(i) does not have a present class life of 12.5

- 37 years or less, and (ii) is not low-income housing."

Sec.

168(c)(2)(D).
The present class life of a property item is "the class life
(if any) which would be applicable with respect to any property
as of January 1, 1981, under subsection (m) of section 167
(determined without regard to paragraph (4) thereof and as if the
taxpayer had made an election under such subsection)."23
168(g)(2).

Sec.

Additionally, respondent may prescribe a present

class life that reasonably reflects the anticipated useful life
of the property for any property that did not have a present
class life as of January 1, 1981.

Sec. 168(g)(2).

Class life

refers to the class life of property assigned by respondent that
reasonably reflects the anticipated useful life of that class of
property to a particular industry or other group.

Sec. 167(m);

23

Sec. 167(m) was repealed as an obsolete provision by the
Omnibus Budget Reconciliation Act of 1990, Pub. L. 101-508, sec.
11812, 104 Stat. 1389-534. Prior to its repeal, sec. 167(m)
provided as follows:
SEC. 167(m) Class Lives.-(1) In General.--In the case of a taxpayer who has
made an election under this subsection for the taxable year,
the term "reasonable allowance" as used in subsection (a)
means (with respect to property which is placed in service
during the taxable year and which is included in any class
for which a class life has been prescribed) only an
allowance based on the class life prescribed by the
Secretary which reasonably reflects the anticipated useful
life of that class of property to the industry or other
group. The allowance so prescribed may (under regulations
prescribed by the Secretary) permit a variance from any
class life by not more than 20 percent (rounded to the
nearest half year) of such life.

- 38 see sec. 1.167(a)-11, Income Tax Regs.

Accordingly, ACRS

incorporates by reference the Asset Depreciation Range (ADR)24
classifications.

Sec. 168(g)(2); Walgreen Co. v. Commissioner,

68 F.3d 1006, 1008 (7th Cir. 1995), revg. and remanding on
another issue 103 T.C. 582 (1994).

ACRS reduces the number of

property classes from around 125 under the ADR system to six
(five as originally enacted).

Sec. 168(c)(2); Sprint Corp. v.

Commissioner, supra.
In several revenue procedures, respondent had prescribed
asset guideline classes, asset guideline periods (class lives)
and ranges, and annual asset guideline repair allowance
percentages for assets used in business, manufacturing, and other
activities.

24

E.g., Rev. Proc. 87-56, 1987-2 C.B. 674; Rev. Proc.

Prior to ERTA, the principal method used to assign useful
lives for personal property was the ADR and class life system,
which was effective generally for assets placed in service after
1970 and before 1981. Walgreen Co. v. Commissioner, 103 T.C.
582, 586-588 (1994), revd. and remanded on another issue 68 F.3d
1006 (7th Cir. 1995); Simon v. Commissioner, 103 T.C. 247, 254255 (1994), affd. 68 F.3d 41 (2d Cir. 1995); Clinger v.
Commissioner, T.C. Memo. 1990-459; see also sec. 1.167(a)-(11),
Income Tax Regs. Pursuant to that system, assets were grouped
into approximately 125 different asset guideline classes and a
guideline life was assigned to each class. A range of years,
i.e., the ADR, was then provided for each class of personal
property. The taxpayer could use a useful life of up to 20
percent longer or 20 percent shorter than the guideline life
prescribed by respondent for particular classes of depreciable
property. For each asset account in the class, the taxpayer
selected either a class life or an ADR that was used as the
useful life for computing depreciation. Sprint Corp. v.
Commissioner, 108 T.C. 384 (1997); Walgreen Co. v. Commissioner,
supra; Simon v. Commissioner, supra; Clinger v. Commissioner,
supra.

- 39 83-35, 1983-1 C.B. 745.

The revenue procedures provide ADR

classes for specified depreciable assets generally used in all
business activities, except as noted, as well as for depreciable
assets used in certain businesses.

Rev. Proc. 83-35, supra, is

applicable for assets placed in service during years ended 1985
and 1986.

The present class life is the asset guideline period

(i.e., the midpoint class life) established for the particular
class.

Rev. Proc. 83-35, sec. 101, 1983-1 C.B. at 745.

The component method of depreciation is not permitted under
ACRS.

25

Sec. 168(f)(1).25

The component method of depreciation is

Sec. 168(f) provides in pertinent part as follows:
SEC. 168(f) Special rules for application of this section.
--For purposes of this section-(1)

Components of section 1250 class property.--

(A) In general.--Except as otherwise provided in
this paragraph-(i) the deduction allowable under subsection
(a) with respect to any component (which is
section 1250 class property) of a building shall
be computed in the same manner as the deduction
allowable with respect to such building, and
(ii) the recovery period for such component
shall begin on the later of-(I) the date such component is placed in
service, or
(II) the date on which the building is
placed in service.
(B) Transitional rules.
(continued...)

- 40 a method of depreciation that "fragments an item of property,
often a building, into its elements (e.g., shell, plumbing, and
wiring) and applies individual useful lives and salvage values to
each such component."

Westin, Lexicon of Tax Terminology 127

(1984); see also Shainberg v. Commissioner, 33 T.C. 241 (1959);
sec. 1.167-7, Income Tax Regs.
Accordingly, the parties agree that the disputed property
items placed in service during 1985 and 1986 constitute 5-year
property, as petitioners contend, only if the items constitute
section 1245 class property, and do not constitute structural
components of section 1250 class property, as respondent contends
they do.
MACRS
MACRS provides that the "depreciation deduction provided by
section 167(a) for any tangible property shall be determined by
using--(1) the applicable depreciation method, (2) the applicable
recovery period, and (3) the applicable convention."
168(a).

Sec.

For purposes of the general depreciation system, which

is involved in the instant case, MACRS generally classifies

25

(...continued)
*
*
(C)

*

*

*

*

*

Exception for substantial improvements.-(i) In general. For purposes of this
paragraph, a substantial improvement shall be
treated as a separate building.

- 41 eligible personal property and certain real property as 3-year
property, 5-year property, 7-year property, 10-year property, 15year property, or 20-year property, and assigns that property to
a corresponding recovery period on the basis of the property's
class life.

Sec. 168(c), (e)(1), (e)(3).

MACRS generally

classifies section 1250 real property as residential rental
property (which is not involved in the instant case) or
nonresidential real property,26 which are assigned to a 27.5-year
recovery period or a 31.5-year recovery period,27 respectively.
Sec. 168(c), (e)(2).
Section 168(i)(1) provides that the term "class life" means
"the class life (if any) which would be applicable with respect
to any property as of January 1, 1986, under subsection (m) of
section 167".

That class life generally is the midpoint class

life for the asset guideline class to which the property was
assigned as of January 1, 1986, pursuant to Rev. Proc. 83-35,

26

Sec. 168(e)(2)(B) defines nonresidential real property as
follows:
(B) Nonresidential real property.--The term "nonresidential
real property" means section 1250 property which is not-(i) residential rental property, or
(ii) property with a class life of less than 27.5
years.
27

OBRA-1993, sec. 13151, 107 Stat. 448, extended to 39 years
the recovery period for nonresidential real property placed in
service after May 12, 1993.

- 42 1983-1 C.B. 745.28
674.

Rev. Proc. 87-56, sec. 2.20, 1987-2 C.B. at

Section 168(i)(1)(B) provides that, except in the case of

residential rental property or nonresidential real property,
respondent may designate a class life for any property which does
not have a prescribed class life as of January 1, 1986, or,
within restrictions, may modify the class life of property.29
See sec. 168(i)(1)(D).

Additionally, section 168(e) assigns

recovery periods to certain tangible, depreciable property
regardless of its class life.

Sec. 168(e)(3).

Rev. Proc. 87-56,

section 5, 1987-2 C.B. 674, as clarified and modified by Rev.
Proc. 88-22, 1988-1 C.B. 785, prescribes class lives and recovery
periods applicable for years ended 1987 and 1988.
MACRS repealed ACRS section 168(f)(1), which related
specifically to components of section 1250 class property.
Section 168(i)(6),30 however, provides that improvements made to

28

With the exception of telephone central office equipment for
which a class life was delineated in Rev. Proc. 82-67, 1982-2
C.B. 853, the class lives for property as of Jan. 1, 1986, for
property that had assigned class lives, remained the same as
their class lives as of Jan. 1, 1981. See Collins Music Co. v.
United States, 21 F.3d 1330, 1333-1334 (4th Cir. 1994); Rev.
Proc. 83-35, sec. 1.01, 1983-1 C.B. 745, 745.
29

Congress repealed respondent's authority to prescribe or
modify class lives in sec. 6253 of the Technical and
Miscellaneous Revenue Act of 1988, Pub. L. 100-647, 102 Stat.
3753.
30

Sec. 168(i)(6) provides as follows:
(6) Treatments of additions or improvements to
property.--In the case of any addition to (or improvement
(continued...)

- 43 real property are depreciated using the same recovery period
applicable to the underlying property as if the underlying
property were placed in service at the time the improvements were
made.

Accordingly, MACRS continues the prohibition against the

use of the component method of depreciation.

S. Rept. 99-313, at

105 (1986), 1986-3 C.B. (Vol. 3) 105.
Congress did not assign a specific class life to the
disputed property items placed in service during 1986 and 1987.
See sec. 168(e)(3).

Accordingly, the parties agree that the

disputed property items constitute 5-year property, as
petitioners contend, only if the items have a class life of more
than 4 years but less than 10 years pursuant to Rev. Proc. 87-56,
as clarified and modified by Rev. Proc. 88-22, sec. 168(c),
(e)(1), and the disputed property items do not constitute

30

(...continued)
of) any property-(A) any deduction under subsection (a) for such
addition or improvement shall be computed in the same
manner as the deduction of such property would be
computed if such property had been placed in service at
the same time as such addition or improvement, and
(B) the applicable recovery period for such
addition or improvement shall begin on the later of-(i) the date on which such addition (or
improvement) is placed in service, or
(ii) the date on which the property with
respect to which such addition (or improvement)
was made is placed in service.

- 44 structural components of nonresidential real property, as
respondent contends they do.
The Meaning of Section 1245 Class Property Under ACRS and MACRS.
Respondent does not dispute for purposes of the instant case
that petitioners' business is described in Asset Guideline Class
57.0 (Class 57.0).

Rev. Proc. 83-35, 1983-1 C.B. at 762, and

Rev. Proc. 87-56, 1987-2 C.B. at 686, describe Class 57.0 as
follows: "Distributive Trades and Services:

Includes assets used

in wholesale and retail trade, and personal and professional
services.

Includes section 1245 assets used in marketing

petroleum and petroleum products".

Both revenue procedures

prescribe a 9-year class life for assets in Class 57.0.
Proc. 83-85, supra; Rev. Proc. 87-56, supra.

Rev.

ACRS and MACRS both

provide that property with a 9-year class life is depreciable
over a 5-year period.

Sec. 168(c)(2)(B) (1985 and 1986); sec.

168(c), (e)(1) (1986 and 1987).

Consequently, unless the

disputed property items constitute section 1250 class property,
they are depreciable over 5-year periods because petitioners'
businesses fall within the category "personal and professional
services".
Petitioners contend that the disputed property items
constitute section 1245 class property pursuant to the Code,
relevant legislative history, relevant income tax regulations,
respondent's long-standing rulings, and prior decisions of this
Court and, therefore, are properly depreciable over 5-year

- 45 periods.

Petitioners maintain that the question of whether

property constitutes section 1245 or section 1250 property
frequently was presented to respondent and to the courts in the
context of whether property constituted tangible personal
property for purposes of qualifying for ITC and that a similar
analysis is appropriate for purposes of ACRS and MACRS.
Respondent has raised a number of arguments in support of
the position that the disputed property items constitute section
1250 class property.

Respondent's principal argument is that

using a different recovery period for the disputed property items
than for the buildings to which they relate in effect results in
component depreciation, which method is no longer permitted under
ACRS and MACRS.

Respondent argues that the cases on which

petitioners primarily rely are not applicable to the instant case
because those cases involve tax years prior to 1981, when
component depreciation was permissible, and they deal with ITC.
Respondent asserts that the judicially developed ITC tests have
limited application in determining what constitutes a structural
component for purposes of applying ACRS and MACRS in light of the
elimination of the component method of accounting.

Respondent

maintains that the disputed property items must be depreciated
over the same recovery period as the structure to which they
relate.

Respondent's position raises an issue of first

impression.

- 46 To resolve that issue, we look to the language of the
statute.

Because the relevant ACRS and MACRS provisions differ,

we discuss separately our conclusion that, in prohibiting
component depreciation, Congress did not intend to eliminate from
5-year property those disputed property items which would satisfy
the definition of tangible personal property pursuant to section
1245(a)(3)(A) prior to the enactment of ACRS or MACRS.
ACRS
As we discussed supra, to be classified as 5-year property
the disputed property items must constitute section 1245 class
property.

Sec. 168(c)(2)(B).31

Section 1245 class property

consists of "tangible property described in section 1245(a)(3)
other than subparagraphs (C) and (D)."32

Sec. 168(g)(3).33

On

31

For taxable years ended 1984 and 1985, sec. 168(c)(2)(B)
provides as follows:
(B) 5-year property.--The term "5-year property" means
recovery property which is section 1245 class property and
which is not 3-year property, 10-year property, or 15-year
public utility property.
32

Sec. 1245(a)(3) provides as follows:
(3) Section 1245 Property.--For purposes of this
section, the term "section 1245 property" means any
property which is or has been property of a character
subject to the allowance for depreciation provided in
section 167 (or subject to the allowance of amortization
provided in section 185) and is either-(A) personal property,
(B) other property (not including a building or
its structural components) but only if such other
(continued...)

- 47 the other hand, to constitute 19-year real property, the property
must be section 1250 class property.

32

Section 1250 class property

(...continued)
property is tangible and has an adjusted basis in which
there are reflected adjustments described in paragraph (2)
for a period in which such property (or other property)-(i) was used as an integral part of
manufacturing, production, or extraction or of
furnishing transportation, communications,
electrical energy, gas, water, or sewage disposal
services, or
(ii) constituted a research facility used in
connection with any of the activities referred to
in clause (i), or
(iii) constituted a facility used in
connection with any of the activities referred to
in clause (i) for the bulk storage of fungible
commodities (including commodities in a liquid or
gaseous state),
(C) an elevator or an escalator,
(D) so much of any real property (other than any
property described in subparagraph (B)) which has an
adjusted basis in which there are reflected adjustments
for amortization under section 169, 179, 185, 188, 190,
193, or 194,
(E) a single purpose agricultural or horticultural
structure (as defined in section 48(p)), or
(F) a storage facility (not including a building
or its structural components) used in connection with
the distribution of petroleum or any primary product of
petroleum.

33

For taxable years ended 1984 and 1985, sec. 168(g)(3)
provides as follows:
The term "section 1245 class property" means tangible
property described in section 1245(a)(3) other than
subparagraphs (C) and (D).

- 48 embodies "property described in section 1250(c)34 and * * * in
section 1245(a)(3)(C)."

Sec. 168(g)(4).35

Petitioners are not engaged in an activity described in
section 1245(a)(3)(B).

Additionally, the disputed property items

are not described in section 1245(a)(3)(E) or (F).

Accordingly,

the disputed property items constitute section 1245 class
property only if they are personal property as defined in section
1245(a)(3)(A).

See also sec. 1.1245-3(a), Income Tax Regs.

Section 1.1245-3(b)(1), Income Tax Regs., defines personal
property as "(1) Tangible personal property (as defined in
paragraph (c) of § 1.48-1, relating to the definition of 'section
38 property' for purposes of the investment credit)".
Accordingly, ACRS incorporates within the meaning of section 1245
class property tangible personal property defined in section
1.48-1(c), Income Tax Regs.36

34

Sec. 1250(c) provides as follows:
(c) Section 1250 Property. For purposes of this section,
the term "section 1250 property" means any real property
(other than section 1245 property, as defined in section
1245(a)(3)) which is or has been property of a character
subject to the allowance for depreciation provided in
section 167.

35

For taxable years ended 1984 and 1985, sec. 168(g)(4)
provides as follows:
(4) Section 1250 class property. The term "section 1250
class property" means property described in section 1250(c)
and property described in section 1245(a)(3)(C).
36

Sec. 1.48-1(c), Income Tax Regs., provides as follows:
(continued...)

- 49 Nineteen-year real property consists of section 1250 class
property with a present class life of more than 12.5 years,
except for low-income housing as defined in section 168(c)(2)(F).
Sec. 168(c)(2)(D).

Section 1250 class property is property

described in section 1250(c) and in section 1245(a)(3)(C).

36

Sec.

(...continued)
(c) Definition of tangible personal property. If property
is tangible personal property it may qualify as section 38
property irrespective of whether it is used as an integral
part of an activity (or constitutes a research or storage
facility used in connection with such activity) specified in
paragraph (a) of this section. Local law shall not be
controlling for purposes of determining whether property is
or is not "tangible" or "personal". Thus, the fact that
under local law property is held to be personal property or
tangible property shall not be controlling. Conversely,
property may be personal property for purposes of the
investment credit even though under local law the property
is considered to be a fixture and therefore real property.
For purposes of this section, the term "tangible personal
property" means any tangible property except land and
improvements thereto, such as buildings or other inherently
permanent structures (including items which are structural
components of such buildings or structures). Thus,
buildings, swimming pools, paved parking areas, wharves and
docks, bridges, and fences are not tangible personal
property. Tangible personal property includes all property
(other than structural components) which is contained in or
attached to a building. Thus, such property as production
machinery, printing presses, transportation and office
equipment, refrigerators, grocery counters, testing
equipment, display racks and shelves, and neon and other
signs, which is contained in or attached to a building
constitutes tangible personal property for purposes of the
credit allowed by section 38. Further, all property which
is in the nature of machinery (other than structural
components of a building or other inherently permanent
structure) shall be considered tangible personal property
even though located outside a building. Thus, for example,
a gasoline pump, hydraulic car lift, or automatic vending
machine, although annexed to the ground, shall be considered
tangible personal property.

- 50 168(g)(4).

Section 1250(c) defines section 1250 property to mean

"any real property (other than section 1245 property, as defined
in section 1245(a)(3))".

Section 1245(a)(3)(C) includes

elevators and escalators within the definition of section 1245
property.
Section 1.1250-1(e)(3)(i), Income Tax Regs., defines real
property to include the structural components of a building
within the meaning of section 1.1245-3(c), Income Tax Regs.,
which provides in pertinent part that "the terms 'building' and
'structural components' shall have the meanings assigned to those
terms in paragraph (e) of § 1.48-1."37

37

Sec. 1.48-1(e)(2) provides in pertinent part as follows:
(2) The term "structural components" includes such parts of
a building as walls, partitions, floors, and ceilings, as
well as any permanent coverings therefor such as paneling or
tiling; windows and doors; all components (whether in, on,
or adjacent to the building) of a central air conditioning
or heating system, including motors, compressors, pipes and
ducts; plumbing and plumbing fixtures, such as sinks and
bathtubs; electric wiring and lighting fixtures; chimneys;
stairs, escalators, and elevators, including all components
thereof; sprinkler systems; fire escapes; and other
components relating to the operation or maintenance of a
building. However, the term "structural components" does
not include machinery the sole justification for the
installation of which is the fact that such machinery is
required to meet temperature or humidity requirements which
are essential for the operation of other machinery or the
processing of materials or foodstuffs. Machinery may meet
the "sole justification" test provided by the preceding
sentence even though it incidentally provides for the
comfort of employees, or serves, to an insubstantial degree,
areas where such temperature or humidity requirements are
not essential. * * *

- 51 The foregoing statutory and regulatory provisions support a
conclusion that Congress intended that the same tests be used to
ascertain whether property constitutes section 1245 class
property or section 1250 class property for purposes of ACRS as
are applied for purposes of determining whether property
qualifies for ITC.

See also Schrum v. Commissioner, 33 F.3d 426,

437 (4th Cir. 1994), affg. in part and vacating and remanding in
part on another issue T.C. Memo. 1993-124, where the Court of
Appeals observed:

"That the classes of section 38 property and

section 1245 property are, for present purposes, coextensive, is
confirmed by Treasury Regulation § 1.1245-3(b)(1), which, in
defining section 1245 property, makes several references to
Treasury Regulation § 1.48-1(c)."

(Fn ref. omitted.)

Respondent, however, contends that section 168(f)(1),38
which prohibits component depreciation, effectively operates to
change the definition of tangible personal property for purposes
of ACRS to eliminate from section 1245 class property, and to
include in section 1250 class property, any item which is
attached to a building and that has utility beyond its relation
to a particular piece of property, even if under long-standing
precedent the property constitutes personal property for purposes
of section 38 and section 1245.

38

See supra note 25.

We, however, do not agree.

- 52 Section 168(f)(1) only could apply to property that
constitutes section 1250 class property as that term was
understood at the time Congress enacted ACRS.

Neither the

statute nor its legislative history reveals an intent by Congress
to redefine section 1250(c) to include property, which at that
time, was considered under long-standing precedent to constitute
section 1245 property.

Had Congress intended that outcome, we

believe Congress would have clearly set forth that intent in the
statute or in its legislative history.

To the contrary, the

statutory language supports petitioners' position.

Section

168(f)(1)(A)(i) provides that "the deduction allowable under
subsection (a) with respect to any component (which is section
1250 class property) of a building shall be computed in the same
manner as the deduction allowable with respect to such building".
(Emphasis added.)

Thus, the statutory provision plainly and only

speaks to section 1250 class property, which section 168(g)(4)
defines as property described in section 1250(c).

As discussed

supra, the regulations under section 1250(c) incorporate by
reference section 1.1245-3(c), Income Tax Regs., which
incorporates by reference section 1.48-1(e), Income Tax Regs.
Accordingly, we conclude that the statutory language manifests a
congressional intent to retain the prior law

distinction between

components that constitute section 1250 class property and
property items that constitute section 1245 class property.

- 53 The legislative history does not reveal a contrary
intention.

The legislative history relating to section

168(f)(1)(A) does not focus on the definition of section 1250
class property or on the definition of structural components
contained in section 1.48-1(e), Income Tax Regs.

See H. Rept.

97-201, at 67-68, 84 (1981); S. Rept. 97-144 (1981), 1981-2 C.B.
412, 428.

Moreover, the General Explanation of ERTA prepared by

the staff of the Joint Committee on Taxation states as follows:
The recovery period and method the taxpayer selects
must be used for the building as a whole, including all
structural components that are real property (e.g., wiring,
plumbing, etc.). Component depreciation no longer may be
used. The distinction between a structural component of a
building, which is section 1250 property, and an item of
property that is section 1245 property remains the same as
under prior law.
* * * [Staff of the Joint Comm. on
Taxation, General Explanation of the Economic Recovery Tax
Act of 1981, at 85 (J. Comm. Print 1981). Emphasis added.]
Additionally, see Staff of the Joint Comm. on Taxation,
General Explanation of the Tax Reform Act of 1986, at 90 (J.
Comm. Print 1987), summarizing the prohibition against the
component method of depreciation under ACRS as follows:
"Component cost recovery was not permitted under ACRS.

Thus, the

same recovery period and method had to be used for a building as
a whole, including all structural components."; see also H. Rept.
99-426, at 138 (1985), 1986-3 C.B. (Vol. 2) 138; S. Rept. 99-313,
99th Cong., 2d Sess. 88 (1986), 1986-3 C.B. (Vol. 3) 88.
We note further that our understanding of the statutory
provision comports with the construction given that provision in

- 54 the report relating to the Small Business Job Protection Act of
1996, Pub. L. 104-188, 110 Stat. 1755,39 wherein the Senate
Finance Committee, in explaining present law relating to
depreciation of leasehold improvements, states as follows:
If the improvement is characterized as tangible
personal property, ACRS depreciation is calculated using the
shorter recovery periods and accelerated methods applicable
to such property. The determination of whether certain
improvements are characterized as tangible personal property
or as nonresidential real property often depends on whether
or not the improvements constitute a "structural component"
of a building (as defined by Treas. Reg. sec. 1.48-1(e)(1)).
See, for example, Metro Natl. Corp. [v. Commissioner], 52
TCM 1440 (1987) [T.C. Memo. 1987-38]; King Radio Corp. [v.
United States], 486 F.2d 1091 (10th Cir. 1973);
Mallinckrodt, Inc. [v. Commissioner], 778 F.2d 402 (8th Cir.
1985) [affg. per curiam T.C. Memo. 1984-532] (with respect
various leasehold improvements). [S. Rept. 104-281, at 16
n.5 (1996).]
We additionally note that for purposes of ascertaining ACRS
recovery periods section 1245 class property has the same
definition as personal property described in section 1.48-1(c),
Income Tax Regs., which comports with respondent's own
interpretation of section 168(f) promulgated in proposed
regulations under section 168 issued during 1984.40

See 49 Fed.

39

We recognize that it is well settled that the view of a
later Congress as to the construction of a statute or a
regulation adopted is not entitled to great weight. E.g., CSI
Hydrostatic Testers, Inc. v. Commissioner, 103 T.C. 398, 415
(1994), affd. 62 F.3d 136 (5th Cir. 1995); Mars, Inc. v.
Commissioner, 88 T.C. 428, 435 (1987).
40

The proposed regulations have not been amended to reflect
changes to sec. 168 made by the TRA-1986 and subsequent
legislation. No final or temporary regulations under sec. 168
relating to the issues in the instant opinion have been issued.
(continued...)

- 55 Reg. 5940-5971 (Feb. 16, 1984).

Section 1.168-2(e), Proposed

Income Tax Regs., 49 Fed. Reg. 5946 (Feb. 16, 1984), provides in
pertinent part as follows "((e) Components and improvements--(1)
Component cost recovery not permitted.

In general, the

unadjusted basis of structural components (as defined in § 1.481(e)(2)) of a building must be recovered as a whole.

Thus, the

same recovery period and method must be used for all structural
components, and such components must be recovered as constituent
parts of the building of which they are a part.

* * *"

[Emphasis added.])
Accordingly, we conclude that the precedent that has been
developed to ascertain whether property constitutes eligible
section 38 property for purposes of ITC is equally applicable to
ascertain whether property constitutes section 1245 class
property for purposes of ACRS.

See also Schrum v. Commissioner,

T.C. Memo. 1993-124 (to the extent that property does not qualify
as eligible section 38 property under section 48, the property
cannot constitute section 1245 class property.)

40

(...continued)
We recognize that the proposed regulations "carry no more weight
than a position advanced on brief by the respondent". Zinniel v.
Commissioner, 89 T.C. 357, 369 (1987), quoting F.W. Woolworth Co.
v. Commissioner, 54 T.C. 1233, 1265-1266 (1970).

- 56 MACRS
MACRS does not utilize the terms "section 1245 class
property" or "section 1250 class property".41

Rather, MACRS

assigns property to recovery periods on the basis of class lives.
To constitute 5-year property, the disputed property items must
have a class life of more than 4 years but less than 10 years.
Sec. 168(e)(1).

To constitute nonresidential real property, the

disputed property items must be section 1250 property with a
class life of more than 27.5 years.

Sec. 168(e)(2).

Section 168(i)(12) provides that "The terms 'section 1245
property' and 'section 1250 property' have the meanings given
such terms by sections 1245(a)(3) and 1250(c), respectively."

As

we discussed supra, section 1250(c) excludes from the term
"section 1250 property", "section 1245 property, as defined in
section 1245(a)(3)".
From that statutory provision, we conclude that, as with
ACRS, the MACRS statutory language manifests a congressional
intent to retain the prior law distinction between components

41

Although the terms "section 1245 class property" and
"section 1250 class property" are not utilized in MACRS, as will
be discussed in more detail infra, the disputed property items
involved in the instant case for taxable years ended 1986 and
1987 would have constituted either section 1245 class property or
section 1250 class property, as applicable, had ACRS continued to
be in effect for those taxable years. Consequently, for
convenience, we continue to use the terms "section 1245 class
property" and "section 1250 class property", where appropriate,
to refer to property items for which MACRS applies as well as to
the property items for which ACRS applies.

- 57 that constitute section 1250 class property and property items
that constitute section 1245 class property.

The legislative

history of MACRS does not reveal a contrary intention.
In support of the position that an analysis based on ITC is
inappropriate for cost recovery purposes, respondent relies on
language contained in Grinalds v. Commissioner, T.C. Memo. 199366, that "the 'sole justification' test relates to the investment
tax credit, which has provisions and policies of its own, and it
provides only limited guidance, if any, in interpreting section
168(i)(6), the statute directly involved here."

The "sole

justification" test refers to the provision in section 1.48-2(e),
Income Tax Regs., which specifically excludes from the definition
of a structural component "machinery the sole justification for
the installation of which is the fact that such machinery is
required to meet temperature or humidity requirements which are
essential for the operation of other machinery."
Income Tax Regs.

Sec. 1.48-2(e),

In Grinalds, we did not focus on the definition

of section 1245 class property and section 1250 class property.
Therefore that case is distinguishable and inapplicable to the
issue of whether tangible property constitutes section 1245 class
property or section 1250 class property for purposes of ACRS and
MACRS.
Based on the foregoing, we conclude that the tests developed
to ascertain whether property constituted tangible personal

- 58 property for purposes of ITC equally are applicable to decide
whether the property constitutes tangible personal property for
purposes of MACRS.

Accordingly, we conclude that, to the extent

a disputed property item would have qualified as tangible
personal property for ITC, that property also will qualify as
tangible personal property for purposes of ACRS and MACRS.
Additional Arguments
Respondent further contends that the tests developed to
decide whether property qualified for ITC are inapplicable to
ascertain ACRS recovery classes or MACRS recovery periods because
ITC and ACRS and MACRS accomplish their capital cost incentives
in a different manner and focus on different factors.
Respondent's arguments in support of that contention are premised
on the position that the ACRS and MACRS depreciation deductions
should be tied to the useful life of the property involved.

We

rejected a similar position in Simon v. Commissioner, 103 T.C.
247 (1994), affd. 68 F.3d 41 (2d Cir. 1995), and Liddle v.
Commissioner, 103 T.C. 285 (1994), affd. 65 F.3d 329 (3d Cir.
1995), and we reject it here.
Other arguments raised by respondent in support of the
position that the tests used to ascertain whether property
qualifies as tangible personal property for ITC purposes are not
applicable for purposes of ACRS and MACRS also are without merit,
and we do not address them here.

- 59 Respondent contends alternatively that all of the disputed
property items are structural components under an ITC analysis
and, consequently, constitute section 1250 class property.

We

now address that alternative position.
Classification of the Disputed Property Items as Section 1245
Class Property or Section 1250 Class Property.
In General
As discussed supra, the classification of disputed property
items as section 1245 class property, depreciable over a 5-year
recovery period, or section 1250 class property, depreciable over
the life of the related structure, depends upon a decision as to
whether the respective items constitute tangible personal
property within the meaning of section 1.48-1(c), Income Tax
Regs., which would be section 1245 class property, or structural
components of the buildings to which they relate within the
meaning of section 1.48-1(e)(2), Income Tax Regs., which would be
section 1250 class property.

See also secs. 1.1245-3(b)(1), (c),

1.1250-1(e)(3), Income Tax Regs.
Tangible Personal Property
The regulations define tangible personal property to include
"any tangible property except land and improvements thereto, such
as buildings or other inherently permanent structures (including
items which are structural components of such buildings or
structures)".

Sec. 1.48-1(c), Income Tax Regs.

Local law does

not control for purposes of determining whether property is or is

- 60 not "tangible" or "personal".

Id.

The term "tangible personal

property" is not intended to be defined narrowly and includes
assets accessory to the operation of a business.

Illinois Cereal

Mills, Inc. v. Commissioner, 789 F.2d 1234, 1237 (7th Cir. 1986),
affg. T.C. Memo. 1983-469; Metro Natl. Corp. v. Commissioner,
T.C. Memo. 1987-38; see also S. Rept. 1881, 87th Cong., 2d Sess.
(1962), 1962-3 C.B. 707, 858; Morrison, Inc. v. Commissioner,
T.C. Memo. 1986-129, affd. 891 F.2d 857 (11th Cir. 1990).42
In Whiteco Indus., Inc. v. Commissioner, 65 T.C. 664, 672673 (1975), we listed the following factors to consider in
resolving whether property is inherently permanent and, thus, not
tangible personal property within the meaning of section 1.481(c), Income Tax Regs.:

(1) Is the property capable of being

42

S. Rept. 1881, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 707,
722, in defining "section 38 property" for purposes of the
investment tax credit, stated in pertinent part as follows:
Except for the exclusions noted below, all tangible
personal property qualifies as section 38 property.
* * * Tangible personal property is not intended to be
defined narrowly here, nor to necessarily follow the
rules of State law. It is intended that assets
accessory to a business such as grocery store counters,
printing presses, individual air-conditioning units,
etc., even though fixtures under local law, are to
qualify for the credit. Similarly, assets of a
mechanical nature, even though located outside a
building, such as gasoline pumps, are to qualify for
the credit. Real property (other than buildings and
structural components) which qualifies as integral
parts of categories referred to above includes such
assets as blast furnaces, oil and gas pipelines,
railroad track and signals, and fences used in
connection with raising cattle.

- 61 moved, and has it in fact been moved? (2) Is the property
designed or constructed to remain permanently in place? (3) Are
there circumstances which tend to show the expected or intended
length of affixation, i.e., are there circumstances which show
that the property may or will have to be moved? (4) How
substantial a job is removal of the property and how timeconsuming is it?

Is it "readily removable"? (5) How much damage

will the property sustain upon its removal? and (6) What is the
manner of affixation of the property to the land?
Movability itself is not the controlling factor in deciding
whether the property lacks permanence.

Kramertown Co. v.

Commissioner, 488 F.2d 728, 731 (5th Cir. 1974), affg. T.C. Memo.
1972-239; see also Consolidated Freightways v. Commissioner, 708
F.2d 1385, 1390 (9th Cir. 1983) (a variety of factors are
considered, including, where possible, the function and design of
the component in issue, the intent of the taxpayer in installing
the component, and the effect of removal of the component on the
building), affg. in part and revg. in part 74 T.C. 768 (1980);
Everhart v. Commissioner, 61 T.C. 328, 331 (1973) (moveability
per se does not determine whether or not property is personal
property); Dixie Manor, Inc. v. United States, 44 AFTR 2d 795442, 79-2 USTC par. 9469 (W.D. Ky. 1979) (fact that walls often
are removed because of a change in design by itself is not
sufficient), affd. without published opinion 652 F.2d 57 (6th

- 62 Cir. 1981).

The fact that an item is not readily reusable in

another location is evidence supporting the conclusion that it is
to be treated as permanent in its present location.
Mallinckrodt, Inc. v. Commissioner, 778 F.2d 402, 403 (8th Cir.
1985), affg. per curiam

T.C. Memo. 1984-532.

Structural Components
Section 1.48-1(e)(2), Income Tax Regs., explains the meaning
of "structural components" by way of example rather than by
definition as follows:
(2) The term "structural components" includes such
parts of a building as walls, partitions, floors, and
ceilings, as well as any permanent coverings therefor such
as panelling or tiling; windows and doors; all components
(whether in, on, or adjacent to the building) of a central
air conditioning or heating system, including motors,
compressors, pipes and ducts; plumbing and plumbing
fixtures, such as sinks and bathtubs; electric wiring and
lighting fixtures; chimneys; stairs, escalators, and
elevators, including all components thereof; sprinkler
systems; fire escapes; and other components relating to the
operation or maintenance of a building. However, the term
"structural components" does not include machinery the sole
justification for the installation of which is the fact that
such machinery is required to meet temperature or humidity
requirements which are essential for the operation of other
machinery or the processing of materials or foodstuffs.
Accordingly, an item constitutes a structural component of a
building if the item relates to the operation and maintenance of
the building.

Sec. 1.48-1(e)(2), Income Tax Regs.

The "sole

justification" test set forth in section 1.48-1(e)(1), Income Tax
Regs., excludes from the term "structural component" only
machinery that is required to meet the temperature and humidity

- 63 requirements of other machinery.

See Piggly Wiggly S., Inc. v.

Commissioner, 84 T.C. 739, 750-753 (1985), affd. 803 F.2d 1572
(11th Cir. 1986); Texas Instruments, Inc. v. Commissioner, T.C.
Memo. 1992-306; Morrison, Inc. v. Commissioner, supra.
Applying the foregoing general principles, we next consider
the appropriate individual categories for the disputed property
items.

Before we address the substantive issues, however, we

must decide an evidentiary matter which was raised at trial.
At trial, petitioners objected to the admission of portions
of the report prepared by respondent's expert, Steve Wilgus (Mr.
Wilgus), which petitioners contend contains legal conclusions.
Respondent contends that the contested materials do not
constitute legal conclusions.

We took petitioners' objections

under advisement.
Testimony of a witness qualified by knowledge, skill,
experience, training, or education is admissible whenever that
scientific, technical or other specialized knowledge will assist
the trier of fact to understand the evidence or to decide a fact
in issue.

Fed. R. Evid. 702.

Testimony that expresses a legal

conclusion and does not assist the trier of fact is not
admissible.

See Heflin v. Stewart County, Tenn., 958 F.2d 709,

715-716 (6th Cir. 1992); Davis v. Combustion Engg., Inc., 742
F.2d 916, 919 (6th Cir. 1984); Laureys v. Commissioner, 92 T.C.
101, 126-129 (1989); Weinstein's Federal Evidence, sec.

- 64 704.04[2][a], at 704-10-704-11 (2d ed. 1997); see also Fed. R.
Evid. 701, 702; Snap-Drape, Inc. v. Commissioner, 98 F.3d 194,
197-198 (5th Cir. 1996), affg. 105 T.C. 16 (1995); Berry v. City
of Detroit, 25 F.3d 1342, 1353-1354 (6th Cir. 1994); Molecular
Tech. Corp. v. Valentine, 925 F.2d 910, 919 (6th Cir. 1991);
Adalman v. Baker, Watts & Co., 807 F.2d 359, 365-368 (4th Cir.
1986).43
We conclude that Mr. Wilgus' report states legal conclusions
applying law to facts and that those legal conclusion are not
helpful to the Court.

Consequently, we disregard them.44

Additionally, in support of their respective positions, the
parties presented expert testimony at trial and in reports
concerning the nature of the disputed property items.

Expert

testimony may be in the form of an opinion or in the expression
of a dissertation or exposition of scientific or other principles
relevant to the case, which the finder of fact may apply to the
facts.

Fed. R. Evid. 702, advisory comm. note, 28 U.S.C. App. at

8871 (1994).

Opinion testimony of an expert not supported by an

adequate foundation of relevant facts, data, or opinions,
however, is inadmissible conjecture or speculation.

See Randolph

43

See also Estate of Carpenter v. Commissioner, T.C. Memo.
1993-97.
44

See also Shoney's S., Inc. v. Commissioner, T.C. Memo. 1984413 n.2, wherein we also disregarded legal conclusions contained
in a report prepared by Mr. Wilgus.

- 65 v. Laeisz, 896 F.2d 964, 967-968 (5th Cir. 1990); Twin City
Plaza, Inc. v. Central Sur. & Ins. Corp., 409 F.2d 1195, 1200
(8th Cir. 1969); Graham, Federal Practice and Procedure, sec.
6641, at 251-252 (Interim ed. 1992).

An expert may base an

opinion or inference on facts that the expert knows from first
hand observation, that are in the record and made known to the
expert, or that, although not in the record, are "of a type
reasonably relied upon by experts in the particular field in
forming opinions or inferences upon the subject."

Fed. R. Evid.

703; see also Ramsey v. Culpepper, 738 F.2d 1092, 1101 (10th Cir.
1984); In re Aircrash in Bali, Indonesia on April 22, 1974, 684
F.2d 1301, 1314 (9th Cir. 1982); Baumholser v. Amax Coal Co., 630
F.2d 550, 552-553 (7th Cir. 1980).
Although otherwise inadmissible data underlying an expert's
opinion may be admitted at trial, the use of that data is limited
to explaining the expert's reasoning, and is not admitted as
substantive evidence.

Fed. R. Evid. 703, 705; Engebretsen v.

Fairchild Aircraft Corp., 21 F.3d 721, 728-729 (6th Cir. 1994);
United States v. Wright, 783 F.2d 1091, 1100 (D.C. Cir. 1986);
Paddack v. Dave Christensen, Inc., 745 F.2d 1254, 1261-1262 (9th
Cir. 1984).

Factual allegations that are not otherwise in the

record that are relied upon by an expert witness may be admitted
as substantive evidence only if proper foundational requirements
are satisfied; i.e., where the expert testifies from personal

- 66 knowledge of the facts relayed.

See Fed. R. Evid. 602.

Accordingly, to the extent that the testimony of an expert states
factual allegations that are not otherwise properly in the
record, i.e., no foundation was laid establishing that the
witness had an opportunity to observe and actually did observe
the fact to which the witness testified, we disregard such
testimony.
Although we have considered and given due weight to the
conclusions of the experts, we do not set forth infra those
conclusions except where we believe it will help explain our
rationale for finding that a specific disputed property item
constitutes personal property or a structural component.

We turn

next to consideration of the appropriate categories for the
disputed items.
1.45

Primary and Secondary Electrical Distribution Systems

The primary and secondary electrical distribution systems
(Property Unit 1900) include the main panels, main motor control
centers, transformers, the secondary distribution panels, and
related wiring and conduit.

See supra pp. 9-12.

The parties

have stipulated to the portion of the electrical load conveyed by
the primary and secondary electrical distribution systems to
hospital equipment and to the portion conveyed to items related

45

Our numbering of the groups of disputed property items
considered in this Opinion corresponds to the numbering utilized
by petitioners in their briefs.

- 67 to the operation and maintenance of petitioners' buildings.

See

supra p. 12.
Petitioners contend that the portion of the primary and
secondary electrical distribution systems which carry electrical
loads to particular items of business equipment constitutes
section 1245 class property within the meaning of sections 1.481(c) and 1.1245-3(b), Income Tax Regs., because that portion of
the electrical distribution systems does not relate to the
operation or maintenance of a building.

Respondent counters that

those disputed property items are structural components of the
buildings to which they relate because they are inherently
permanent and are not readily removable.
Respondent agrees that our decision in Morrison, Inc. v.
Commissioner, supra, as affirmed by the Court of Appeals for the
Eleventh Circuit, provides authority for petitioners' position
that the primary and secondary electrical distribution systems
are not structural components to the extent of the load
percentages that the parties stipulated are carried to equipment.
Our holding in Morrison follows our holding in Scott Paper Co. v.
Commissioner, 74 T.C. 137, 186-187 (1980), that the portion of
the taxpayer's primary electrical distribution system which did
not relate to the overall operation or maintenance of buildings
constituted tangible personal property under section 48(a)(1)(A)
and therefore was eligible for ITC.

Respondent, however, urges

- 68 the Court to disavow Scott Paper Co. v. Commissioner, supra, and
its progeny, and instead to follow the reasoning of A.C. Monk &
Co. v. United States, 686 F.2d 1058, 1065-1066 (4th Cir. 1982)
(no justification for allocating portions of a single electrical
system; components of electrical system are structural components
if they can be reasonably adapted to general uses), or of
Illinois Cereal Mills, Inc. v. Commissioner, 789 F.2d at 1244
(electrical distribution system was "other tangible property"
under section 48(a)(1)(B)).46

46

Absent a stipulation to the contrary, the instant case is
appealable to the Court of Appeals for the Sixth Circuit and
therefore is not controlled by the decisions of the Courts of
Appeals for the Fourth Circuit (A.C. Monk & Co. v. United States,
686 F.2d 1058 (4th Cir. 1982)) or Seventh Circuit (Illinois
Cereal Mills, Inc. v. Commissioner, 789 F.2d 1234 (7th Cir.
1986), affg. T.C. Memo. 1983-469). See Golsen v. Commissioner,
54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir. 1971). The
Court of Appeals for the Sixth Circuit has not decided the issue;
accordingly, we decide the instant case as we think proper.
Lardas v. Commissioner, 99 T.C. 490, 498 (1992).
We note, however, that in Morrison, Inc. v. Commissioner,
891 F.2d 857, 863 n.* (11th Cir. 1990), the Court of Appeals for
the Eleventh Circuit stated as follows:
*We note that only Scott Paper is directly on point. In
Scott Paper, the Tax Court analyzed a primary electrical
system to determine whether it partially qualified as
tangible personal property under section 48(a)(1)(A). The
Illinois Cereal and the Monk courts, however, discussed
whether portions of primary electrical systems constituted
other tangible personal property under section 48(a)(1)(B).
Although the Illinois Cereal court stated at the end of its
opinion that the taxpayer's primary electrical system did
not constitute tangible personal property, the court did not
squarely face the issue. See Illinois Cereal, 789 F.2d at
1239 ("[Taxpayer] does not contend that its electrical
distribution system is 'tangible personal property' under
(continued...)

- 69 Respondent contends further that the disputed property items
in the subject category are distinguishable from the primary and
secondary electrical distribution property items involved in
Scott Paper Co. v. Commissioner, supra, because in that case the
electrical components were readily removable, they were not
inherently permanent, they were inextricably linked to and
installed in conjunction with the addition of particular pieces
of machinery, and most of the electricity carried by the
electrical components was conveyed to the new equipment.
In Morrison, Inc. v. Commissioner, T.C. Memo. 1986-129, we
explained our rationale for finding a portion of the primary and
secondary electrical system in Scott Paper Co. eligible property
for ITC as follows:
In Scott Paper Co., we concluded that the components of the
taxpayer's primary electric system which supplied the
electric needs of process machinery rather than contributing
to the overall operation or maintenance of buildings, was
not an inherently permanent structure and the taxpayers were
entitled to the investment tax credit on these components.
In reaching this conclusion we placed great emphasis on the
language in section 1.48-1(e)(2), Income Tax Regs., which
defines "structural components" by listing examples and
including as the last line of the regulation "and other
components relating to the operation or maintenance of a
building." In Scott Paper Co., supra at 183, we
characterized that phrase as follows:

46

(...continued)
section 48."

(Emphasis added)).

Thus, it is not clear whether Illinois Cereal actually supports
respondent's position.

- 70 a descriptive phrase intended to present the basic
test used for identifying structural components.
The preceding elements are examples of items which
meet the test as a general rule. Items which
occur in an unusual circumstance and do not relate
to the operation or maintenance of a building
should not be structural components despite being
listed in section 1.48-1(e)(2), Income Tax Regs.
* * *
We also quoted the Technical Explanations of the Revenue Act
of 1962 which explained the language which was incorporated
in the regulation as follows:
The term "structural components" of a building
includes such parts of the building as central
air-conditioning and heating systems, plumbing,
and electric wiring and lighting fixtures,
relating to the operation [or] maintenance of the
building. [H. Rept. 1447, 87th Cong., 2d Sess.
(1962), 1962-3 C.B. 503, 516; S. Rept. 1881, 87th
Cong., 2d Sess. (1962), 1962-3 C.B. 843, 859.]
In accordance, we concluded that property fails to qualify
for the credit if it relates to the overall operation or
maintenance of a building rather than being used to aid in
the employment of a particular function or particular piece
of property. See Central Citrus Co. v. Commissioner, 58
T.C. 365, 374 (1972).
We focused on the ultimate uses of power at the
taxpayer's facility in Scott Paper Co. and distinguished the
power used in the overall operation or maintenance such as
lighting, heating, ventilation and air-conditioning of the
building and the power used to operate the taxpayer's
machinery. Scott Paper Co. v. Commissioner, supra at 183184. We thus concluded in Scott Paper Co. that:
To the extent that the primary electric carried
electrical loads to be used for pulp and paper
production processes or other such qualifying
uses, the investment credit will be allowed for
the primary electric improvements.
To the extent that the primary electric
improvements relate to the overall operation [or]
maintenance of buildings, they are structural
components of such buildings, and they do not qualify
as tangible personal property.

- 71 We find no material differences between the facts in the
instant case and those facts present in Scott Paper Co. v.
Commissioner, supra, and Morrison, Inc. v. Commissioner, supra,
relating to the primary and electrical distribution systems.

For

the reasons previous articulated in both of those case, we
conclude that the portion of the cost of the primary and
secondary electrical distribution systems in petitioners'
hospitals which is equal to the percentage of the electrical load
carried to those systems allocable to the hospitals' equipment,
as stipulated by the parties, constitutes section 1245 class
property, depreciable over a 5-year recovery period.
2.

Branch Electrical Wiring and Connections and Special
Electrical Equipment

The branch electrical wiring and connections (hereinafter
branch wiring) relate to several items of hospital equipment and
are contained in many different property units including
controls, battery packs, and battery chargers for the emergency
power generation systems (Property Unit 2200); x-ray film
processing equipment (Property Unit 2244); illuminated emergency
entrance signs and illuminated hospital front entrance signs
(Property Unit 2320); medical gas control equipment and medical
gas alarm equipment (Property Unit 3026); hospital kitchen
equipment (Property Unit 3075); equipment located in the hospital
laboratory and maintenance shop areas (Property Unit 3195);
synchronously wired clock systems (Property Unit 3280); air

- 72 conditioners located in the hospital computer rooms (Property
Unit 3292); hospital central sterilization equipment (Property
Unit 3298); items of hospital equipment located in the operating
rooms, recovery rooms, intensive care units, infant nurseries,
radiology areas, patient rooms, laboratories, and kitchens
(Property Unit 4040).

See supra pp. 12-16.

The parties have stipulated that 100 percent of the
electrical load carried by the branch wiring relating to the
controls, battery packs, and battery chargers for the emergency
power generation systems, the x-ray film processing equipment,
the illuminated emergency entrance signs and the illuminated
hospital front entrance signs, the medical gas control equipment
and medical gas alarm equipment, the synchronously wired clock
systems, the air conditioners located in the hospital computer
rooms, and the hospital central sterilization equipment, is
conveyed to the particular items of equipment to which they
relate.

The parties agree further that the branch wiring is

necessary and required for the operation and use of the items to
which they relate and, during the years in issue, was used only
with those items.

The parties additionally have stipulated that

all of the electrical receptacles in dispute are used to provide
localized electrical service for specific items of equipment
located in the kitchens, patient rooms, laboratories, and
maintenance shop areas of petitioners' hospitals, which equipment

- 73 respondent agrees is 5-year personal property.

We refer to the

branch wiring and special electrical equipment in issue in the
subject category collectively as the branch electrical systems.
Petitioners contend that the branch electrical systems are
section 1245 class property pursuant to the reasoning of Scott
Paper Co. v. Commissioner, 74 T.C. 137 (1980), and its progeny,
as well as Rev. Rul. 66-299, 1966-2 C.B. 14.47

Petitioners

contend that the parties agree that virtually every item to which
the branch wiring relates was appropriately classified as section
1245 class property.
Respondent, however, contends that the disputed property
items in the subject category are inherently permanent and are
identified as a structural component (electric wiring) in section
1.48-1(e)(2), Income Tax Regs.

On brief, respondent segregates

the disputed property items into individual segments of conduit,
electrical wiring, junction boxes, outlets, and receptacles.

47

A revenue ruling reflects respondent's position on an issue
and is not binding precedent upon the Court. See Halliburton Co.
v. Commissioner, 100 T.C. 216, 232 (1993), affd. without
published opinion 25 F.3d 1043 (5th Cir. 1994); Stark v
Commissioner, 86 T.C. 243, 250-251 (1986); Neuhoff v.
Commissioner, 75 T.C. 36, 46 (1980), affd. 669 F.2d 291 (5th Cir.
1982). We disregard a revenue ruling, if it conflicts with the
statute it supposedly interprets, with the statute's legislative
history, or if it is otherwise unreasonable. E.g., Threlkeld v.
Commissioner, 848 F.2d 81, 84 (6th Cir. 1988), affg. 87 T.C. 1294
(1986). However, we may adopt its reasoning if we agree that the
ruling correctly applies the law. Estate of Lang v.
Commissioner, 64 T.C. 404, 406-407 (1975), affd. in part and
revd. in part 613 F.2d 770, 776 (9th Cir. 1980); Keating v.
Commissioner, T.C. Memo. 1995-101.

- 74 Respondent contends that the conduit is designed to remain in
place throughout its expected useful life, is identical to other
conduit which petitioners have agreed is a structural component,
and is typical of electrical conduit used at other commercial
establishments.

Respondent contends that the electrical wiring

is not designed or installed with a particular piece of
equipment, is not easily removable, and is not economically
practicable to reuse.

Respondent contends that none of the

electrical outlets, receptacles, and junction boxes are
inextricably linked to specific items of machinery, they are not
moved, they are typical of outlets, receptacles, and junction
boxes used in commercial facilities, and they relate to the
operation of the buildings in that they provide points for the
provision of power for many property items including employee
radios in the laboratories and power tools in the shop areas.
As we understand respondent's position, respondent agrees
that the disputed property items in the subject category are
necessary for, and used exclusively with, the operation of
various items of equipment.

Nevertheless, respondent contends

that the branch electrical systems are structural components
because they were not designed for or installed with the specific
equipment to which they relate, they are adaptable for other
purposes, are composed of standard electrical supplies, have
useful lives not inextricably linked to the specific equipment

- 75 with which they are used, and are not readily removable.
Additionally, with regard to the electrical outlets, receptacles,
and junction boxes located in laboratory and shop areas,
respondent asserts that those disputed property items may be used
to power nonhospital equipment or equipment relating to the
operation or maintenance of the buildings.

To decide whether the

disputed property items in the subject category constitute
personal property or structural components of the buildings to
which they relate, we apply the reasoning in Scott Paper Co. v.
Commissioner, supra, and cases following its rationale.
In Scott Paper Co. v. Commissioner, 74 T.C. at 182-183, we
noted that even though section 1.48-1(e)(2), Income Tax Regs.,
lists items such as "wiring and lighting fixtures" in describing
structural components, to constitute a structural component of a
building, the item nonetheless must relate to the operation or
maintenance of the building.

Subsequently, in Morrison, Inc. v.

Commissioner, T.C. Memo. 1986-129, we found that much of the
electrical distribution systems constituted personal property.
We stated:
Respondent points out that the reasonable adaptability of
the electrical distribution system with minimal effort to
accommodate another cafeteria, a restaurant or a retail
sales establishment such as a furniture store, indicates
that the system relates to the overall operation or
maintenance of the building rather than relating to the
function of specific pieces of kitchen machinery or
equipment. Respondent recognizes that his argument is
contrary to our holding in Scott Paper Co., supra.
Following our holding in Scott Paper Co. v. Commissioner, 74

- 76 T.C. 137, 184 (1980), we focus on the ultimate use of the
electrical power in petitioners' cafeterias in order to
determine whether the electrical distribution system
constitutes a structural component. An allocation should
then be made based on the qualifying and nonqualifying uses
of the power.
Similarly, in Duaine v. Commissioner, T.C. Memo. 1985-39, we
analyzed various items of property contained in a fast food
restaurant to determine whether they qualified for ITC.

We

followed the reasoning of Scott Paper Co. v. Commissioner, supra,
in finding that electrical outlets and conduits that provided
localized power sources for the lessee's specialized restaurant
equipment constituted personal property.
In Rev. Rul. 66-299, 1966-2 C.B. at 16, respondent concluded
that:
special electrical or plumbing connections which are
necessary to and are used directly with a specific item of
machinery or equipment, or between specific items of
individual, machinery or equipment, are not structural
components of the building, but are essentially items of
machinery or equipment, and qualify as section 38 property
for investment credit purposes.
We analyzed that language in Central Citrus Co. v. Commissioner,
58 T.C. at 374, and stated:
Such language creates a clear distinction between property
used in the general overall operation of a building * * *
and that property which is utilized to aid in the employment
of a particular function or particular piece of property.
We find this particular dichotomy to be both reasonable and
sound and in agreement with congressional intent. * * *
[Citations omitted.]
Accordingly, we held in Central Citrus Co. that distribution
system adapters, contractors, fuses, starters, switches, and

- 77 relays served specialized functions or specific equipment used in
the taxpayer's citrus fruit processing business and therefore
qualified for ITC.
Respondent argues that the disputed property items
comprising the branch electrical systems are not identical to the
primary and secondary electrical systems involved in Scott Paper
Co. v. Commissioner, supra, and Morrison, Inc. v. Commissioner,
supra, or to the electrical connections involved in Duaine v.
Commissioner, supra, or to the "special electrical or plumbing
connections" described in Central Citrus Co. v. Commissioner,
supra, and Rev. Rul. 66-299, supra.

We, however, conclude that

there are no material differences among those items and the
disputed property items in the subject category.
Respondent argues further that the wiring and conduit
located in the walls or floors of the hospitals are inherently
permanent because they are not movable.

Movability, however, is

not the sole determinant as to what constitutes section 1245
personal property.

Kramertown Co. v. Commissioner, 488 F.2d at

731; Consolidated Freightways v. Commissioner, 708 F.2d at 1390;
Everhart v. Commissioner, 61 T.C. at 331; Dixie Manor, Inc. v.
United States, 44 AFTR 2d at 79-5444 to 79-5446, 79-2 USTC par.
9469.

The fact that some of the wiring and conduit is contained

in the walls and floors of the hospitals is not relevant in
determining whether those items are personal property.

We look

- 78 to the ultimate use of the electrical power conveyed by the
branch electrical systems to decide whether the disputed property
items constitute structural components or personal property.
Scott Paper Co. v. Commissioner, supra; Morrison, Inc. v.
Commissioner, supra.
From the foregoing, we learn that a disputed property item
constitutes a structural component to the extent that it
furnishes electrical power for a function

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3A5b8db017b33a6f35. Public record. Not legal advice.