UNITED STATES TAX COURT
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136 T.C. No.
10
UNITED STATES TAX COURT
GIBSON & ASSOCIATES, INC. , Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5863-08.
Filed February 24, 2011.
P is an engineering and heavy construction company
that primarily 'erects or 'rehabilitates streets,
bridges, airport runways, and other related real
property (collectively, real property) .' P' s rehabilitation services relate mainly to real property
that is substantially dilapidated lor damaged from a
~
casualty. P arlso repairs and maintains real property.
P reported on its Federal income tax return for the
taxable year ended June 30, 2006, that its receipts are
"domestic production gross receipts" (DPGR) eligible
for a deduction under sec. 199, I.R.C., and claimed a
$63, 435 deduction under that section.
R determined in
the notice of deficiency that none of P's receipts
qualified as DPGR.
Held: P's receipts are DPGR to the extent P
erected or substantially renovated real property, and
the extent to which P substantially renovated real
property turns on whether P's activities with respect
to each freestanding it.em of real property that
operated and performed a discrete function in and of;
i SERVED FEB 2 4 2011
- 2 itself:
(1) Materially increased the value of the real
property, (2) substantially prolonged the useful life
of the real property, and/or (3) adapted the real
property to a different or new use.
Held, further, P's activities materially increased
the value of the real property, substantially prolonged
the useful life of the real property, and/or adapted
the real property to a different or new use to the
extent that P's activities were not repairs (within the
meaning of sec. 263(a), I.R.C.), unrelated to P's
primary business.
Held, further, P's activities did not materially
increase the value of the real property, substantially
prolong the useful life of the real property, and/or
adapt the real property to a different or new use to
the extent that P's activities repaired or otherwise
maintained real property unrelated to P's primary
business.
Il
Charles D. Lieser, for petitioner.
George E. Gasper, for respondent.
PARIS, Judge:
Petitioner petitioned the Court to
redetermine respondent's determination of a ,$21,568 deficiency in
its Federal income tax for its taxable year ended June 30, 2006
(subject year).
The deficiency results from respondent's
determination that petitioner may not deduct $63,435 under
section 199(a)..I
Respondent disallowed that deduction after
determining that petitioner had no "domestic production gross
Unless otherwise 'indicated, section references are to the
Internal Revenue Code Nf 1986 (Code), as amended, and Rule
references are to the Tax Court Rules of Practice and Procedure.
Dollar amounts are rounded.
- 3 -
receipts".(DPGR).within the meaning of section 199(c) (4).
Petitioner reported that its DPGR totaled $26,053,570.2
Respondent now concedes that petitioner had DPGR of
$13,849,246, and petitioner concedes that it incorrectly reported
$259,156 of the $26,053,570 as DPGR.3
We- decide whether the
remaining $11,945,168 ($26,053,570 - $13,849,246 - $259,156)
(disputed amount) is DPGR.
,
We hold it is to the extent stated
herein.
FINDINGS OF FACT
Some facts were stipulated.
The stipulation of facts and
the exhibits. submitted therewith are incorporated herein by this
reference.
Petitioner is a family-owned corporation that reports
its income and expenses on the basis of a fiscal year ending on
June 30.
Its principal place of business was in Texas when its
petition was filed.
2As relevant here and discussed infra, the deduction under
sec. 199(a) equals 3 percent of the lesser of a taxpayer's
qualified production activities income (QPAI) or the taxpayer's
taxable income (as computed without the deduction under sec.
199(a)), and a taxpayer's QPAI equals the taxpayer's DPGR less
the sum of its cost of goods sold (allocable to the DPGR) plus
certain expenses and other items. Petitioner's reported
deduction of $63,435 equals 3 percent of its reported taxable
income (as computed without the deduction).
3Petitioner reported that its DPGR totaled $26,053,570 but
now asks the Court to find that its DPGR -totaled $25,794,414
(i.e., $259,156 less than reported). Petitioner concedes
explicitly that $98,455 of the $259,156 is not- DPGR, and we
consider petitioner also to concede that the-remaining $160,701
($259,156 - $98,455)
is not DPGR as well.
Petitioner is an
ngineering and heavy highway construction
company that primarily erects or rehabilitates streets, -bridges,
airport runways, and o her major components or substantial
structural parts of re 1 property'(primarily, infrastructure) in
Texas, 'Oklahoda, Arkansas, and Kansas. ' Petitioner specializes in
structural rehabilitatdon, epoxy injection,- concrete paving,
bridge jacking, lead a atement, -and protective coatings.
Petitioner also maintains and repairs infrastructure and other
||
11
real property.
11
-Petitioner works through its employees.
During the subject
year, petitioner emplo pd approximately 90 individuals.
Theset
employees werer mainly e gineers or heavy constructi-on workers,
and petitioner paid- the
over $3 million in salary and wages.
Petitioner -hired and re ained additional employees in subsequent
years.
Petitioner worked
subject year.
n 136 construction projects during the
Petitioner realized $25,892,869 of gross receipts
from these projects, in luding $16,324,032 of gross receipts from
State or Federal projects paid for with Federal funds.4
I!
Petitioner reported the $25,794,414
(and the now conceded
'A project may be -paid for with Federal funds'if the
Secretary of Transporta ion concludes that the project is a
cost-effective means of extending the useful life of a
Federal-aid highway. See 23 U.S.C. sec. 116 (2006); see also 23
U.S.C. sec. 101(a) (31)
(2006)
(defining the word "Secretary" for
purposes of tit. 23 as dhe "Secretary of Transportation").
!i
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$259,156) as DPGR and claimed a $63,435 deduction under section
199.5
Respondent determined that -petitioner could not deduct the
$63,435 because petitioner had no DPGR.
Petitioner placed its construction projects into three
categories.
The first category, "casualty" projects, involved
work that petitioner performed on infrastructure that was
significantly damaged by an act of God or by a casualty such as a
fire or an overheight or an overweight vehicle hitting or
traveling on a bridge.
The second category, "new construction"
projects, involved work that petitioner performed primarily as a
subcontractor on contractors' multimillion dollar projects
involving major rehabilitation- of real property (primarily,
infrastructure).
-The third category, "rehabilitation" projects,
involved work that peti-tioner performed as a contractor
rehabilitating dilapidated real property (primarily,
infrastructure). - Petitioner classified its projects into these
three categories after reviewing the bid sheets and the other
data in its files and after talking to individuals involved with
the projects.
Petitioner's bid sheets were papers that
petitioner prepared to calculate and place a bid on a project
offered to contractors (or subcontractors).
Each bid sheet
SPetitioner used the percentage of completion method under
sec. 460 to compute its taxable income.
- 6 contained an estimate of the amounts and types of costs that
petitioner expected to incur in performing the project.
Petitioner further characterized its projects as:
(1) Substantial renovation or (2) repair or maintenance.
Petitioner characterized a project as substantial ~renovation if
petitioner concluded that its work on the project:
(1)
Substantially prolonged the useful life of real property;
(2)
materially increased the value of real property;- or (3) adapted
real property to a new or different use.
Petitioner categorized
its construction projects as repair or maintenance if petitioner
concluded that its work on the project:
(1) Was necessary to
keep real property (or a component thereof) functioning on a
short-term basis or (2) included cosmetic or aesthetic work.
Appendixes A, B, and C list petitioner's projects (other
than 32 projects which are the subject of the parties'
concessions discussed supra p. 3) as categorized by petitioner.
The appendixes show for each of those 104 remaining projects
(disputed projects):
(1) The job number,
work that petitioner performed,
(2) the general type of
(3) the final contract amount,
(4) the revenue that petitioner earned for the subject year,
(5) whether the project was paid for with Federal funds, and
(6) petitioner's characterization of the project as repair or
maintenance, substantially prolonging the useful life of real
property, materially increasing the value of real property,
and/or adapting real property to a different or new use.
The
specific work that petitioner performed on each project is as
follows:
Casualty Projects
05-1021
Petitioner performed this project for the -Texas
Department of Transportation (TxDOT). Petitioner
strengthened a bridge at Highway 123 and McArthur
Boulevard. The bridge had been critically damaged by a
fire caused by an overturned fuel truck, and most of
the bridge was closed. Petitioner strengthened the
columns and spans of the bridge using carbon fiber
reinforced polymer and structural patching.
Petitioner
concluded that this work substantially prolonged the
useful life of the bridge and materially increased its
value.
05-1023
Petitioner performed this project for the North
Texas Tollway Authority (NTTA).
Petitioner shored up
an overhead emergency sign structure on the North Texas
Tollway after the sign was damaged.
Petitioner's work
allowed the NTTA to keep the sign in place. The sign
would have been demolished absent petitioner's work.
Petitioner concluded that this work substantially
prolonged the useful life of the sign.
05-1025
Petitioner performed this project for the TxDOT.
Petitioner worked on a bridge near Pampa, Texas, on
U.S. Highway 83.- The work rehabilitated damaged
concrete beams so that the bridge could reopen to
traffic and carry its design loads. Petitioner
concluded that this work substantially prolonged the
useful life of the bridge and materially increased its
value.
05-1029
Petitioner performed this project- for the Oklahoma
Department of Transportation (ODOT). Petitioner worked
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on a bridge in Oklahoma County, Oklahoma, on Interstate
Highway 40 over Anderson Road. The work rehabilitated
damaged concrete beams so that the bridge could reopen
to traffic and carry its design loads. Petitioner
concluded that this work substantially prolonged the
useful life of the bridge and materially increased its
value.
05-1045
Petitioner performed this project for the ODOT.
Petitioner worked on a steel bridge on U.S. Highway 64
and 129 West Avenue between Tulsa and Sand Springs,
Oklahoma. The work rehabilitated damaged concrete
beams so that the bridge could reopen to traffic and
carry its design loads. Petitioner concluded that this
work substantially prolonged the useful life of the
bridge and materi 11y increased its value.
05-1054
Petitioner performed this project for the TxDOT.
Petitioner worked on a bridge near McKinney, Texas, in
Farmersville, Texas, on U.S. Highway 380 and Main
Street. The work rehabilitated and/or replaced damaged
concrete beams so that the bridge could reopen to
traffic and carry its design loads.
Petitioner also
performed some concrete work. Petitioner concluded
that this work substantially prolonged the useful life
of the bridge and materially increased its value.
E
05-1056
Petitioner pekformed this project for the TxDOT.
Petitioner worked on a bridge on Farm-to-Market 157
over Interstate Highway 30 in Tarrant County, Texas.
The work rehabilitated damaged concrete beams so that
the bridge could reopen to traffic and carry its design
loads.
Petitioner concluded that this work
substantially prolonged the useful life of the bridge
and materially increased its value.
05-1059
Petitioner performed this project for the TxDOT.
Petitioner worked on a bridge on Interstate Highway 37
and U.S. Highway 181 in Corpus Christi, Texas. The
work rehabilitated damaged concrete beams so that the
- 9 bridge could reopen to traffic and carry its design
loads.
Petitioner concluded that this work
substantially prolonged the useful life of the bridge
and materially increased its value.
05-1060 -
Petitioner performed this project for. the NTTA.
Petitioner worked on a highway. Petitioner's work.
consisted of "PGBT fire damage". Petitioner concluded
that this work was repair or maintenance.
05-1064
Petitioner performed this project for the ODOT.
Petitioner worked on a bri'dge on Interstate Highway 40
at Choctaw Road.. The work rehabilitated damaged
concrete beams so that the bridge could reopen to
traffic and carry its design loads. Petitioner
concluded that this work'substantially prolonged the
useful life of the bridge and materially increased its
value.
05-1065
Petitioner performed this project for the TxDOT.
Petitioner worked on a bridge on -Interstate Highway 35
at Corinth Street. The work rehabilitated damaged
concrete beams so that the bridge could reopen to
as
traffic and carry its design loads. Petitioner
concluded that this work substantially prolonged the
useful life of the bridge and materially increased its
value.
05-999
Petitioner performed this project for the -ODOT.
Petitioner worked on a bridge at Randall Avenue and
Interstate Highway 40 in Oklahoma. Petitioner sealed
joints, patched the bridge deck, and retrofitted beam
ends.
Petitioner also removed existing lead paint (a
perceived hazardous material), blasted the bridge tos
remove corrosion, and applied a protective paint
coating designed to prevent future corrosion.
Petitioner concluded that this work substantially
prolonged the useful life of the bridge.
- 10 06-1072
Petitioner performed this project for the ODOT.
Petitioner worked on a bridge at County Road and
Interstate Highway 40 in Custer County, Oklahoma.
Petitioner replaced structural steel portions of the
bridge to return the bridge to its original load
carrying capacity. Petitioner concluded that this work
substantially prolonged the useful life of the bridge
and materially increased its value.
06-1073
Petitioner performed this project for the ODOT.
Petitioner workedion a bridge at Ladd Road and
Interstate Highway 35 in McClain County, Oklahoma.
Petitioner's work strengthened the bridge and returned
the bridge to its ,original load carrying capacity.
Petitioner concluded that this work substantially
prolonged the useful life of the bridge and materially
increased its value.
06-1074
Petitioner performed this project for the ODOT.
Petitioner worked, on a bridge at Interstate Highway 244
and the 23rd Street Ramp in Tulsa, Oklahoma.
Petitioner strengthened the columns of the bridge.to
resist future impact damage from derailed train cars in
a nearby railroad yard. Petitioner concluded that this
work substantially prolonged the useful life of the
bridge.
.
e
06-1078
Petitioner performed this project for the ODOT.
Petitioner worked on a bridge on State Highway 266 and
U.S. Highway 169 in Tulsa County, Oklahoma. Petitioner
rehabilitated damaged concrete beams so that the bridge
could reopen to traffic and carry its design loads.
Petitioner concluded that this work substantially
prolonged the useful life of the bridge.
06-1084
Petitioner performed this project for the TxDOT.
Petitioner worked on a bridge on Interstate Highway 37
and Sundown Bridge in Texas. Petitioner rehabilitated
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damaged concrete beams so that the bridge could reopen
to traffic and carry its design loads. Petitioner
concluded that this work substantially prolonged the
useful life of the bridge.
06-1087
Petitioner performed this project for the TxDOT.
Petitioner worked on a bridge on Interstate Highway 20
at Farm-to-Market 31 in Texas.
Petitioner
rehabilitated damaged concrete beams to restore the
bridge's load carrying capacity. Petitioner concluded
that this work.substantially prolonged the useful life
of the bridge.
06-1091
Petitioner performed this project- for the TxDOT.
Petitioner worked on a bridge at Interstate Highway 30
and Jim Miller Road in Texas. Petitioner rehabilitated
damaged concrete beams so that the bridge could reopen
to traffic and carry its design loads. Petitioner
concluded that this work substantially prolonged the
useful life of.the bridge.
New Construction Projects
03-906
Petitioner performed this project for the TxDOT.
Petitioner worked on a bridge at U.S. Highway 287 and
the Trinity River in Texas. Petitioner raised the
bridge to keep it, out of the flood plain and reduce the
chance that the bridge could close on account of high
water.or drifting debris. Petitioner concluded that
this work substantially prolonged.the useful life of
the bridge.
03-921
Petitioner performed this project for the TxDOT.
Petitioner worked on a bridge at U.S. Highways 80 and
175 in Texas.
Petitioner'-s work consisted of patching
the deck of the bridge.
Petitioner concluded that this
work substantially prolonged the useful life of the
bridge driving surface.
- 12 03-926
Petitioner performed this project for the TxDOT.
Petitioner worked on a bridge on Loop 335 in Texas.
Petitioner applied an epoxy overlay designed to protect
the bridge from the environment. Petitioner concluded
that this work substantially prolonged the useful life
of the bridge deck.
04-937
Petitioner performed this project for the City of
Dallas, Texas.
Petitioner worked on a blast fence at
two locations at Love Field Airport in Dallas . The
blast fence included catwalks and port holes and was
built on an old apron to allow for maintenance run-ups
and a staging area for hijacked aircraft.
Petitioner
concluded that this work materially increased the value
of the property and adapted the property to a new or
different use.
e
04-954
Petitioner performed this project for the TxDOT.
Petitioner worked on some bridge joints on Loop 360 in
Travis County,.Texas. Petitioner rehabilitated
pavement and joints.
Petitioner concluded that this
work substantially prolonged the useful life of the
pavement .
04-955
Petitioner performed this project for the TxDOT.
Petitioner worked on some bridge header joints in
Williamson County; Texas. Petitioner rehabilitated of
pavement and joints.
Petitioner concluded that this
work substantially prolonged the useful life of the
pavement .
04-956
Petitioner performed this project for the TxDOT.
Petitioner worked on a bridge on Interstate 35. in
Travis County, Texas. Petitioner's work involved
structural steel, head joints, and bridge deck patches.
Petitioner concluded that this work involving
structural steel and head joints substantially
prolonged the useful life of an HMAC overlay.
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Petitioner concluded that this work involving the
bridge deck patches substantially prolonged the useful
life of the bridge deck and the HMAC overlay.
O'4-959
Petitioner performed this project f-or the TxDOT.
Petitioner worked on a bridge on Interstate 35E in
Texas.
Petitioner rehabilitated concrete.pavement.so
that an asphalt overlay could be installed properly.
Petitioner also rehabilitated joints on the bridge.
Petitioner concluded that this work substantially
prolonged the useful life of the pavement on the
bridge.
04-965
Petitioner performed this project for the TxDOT.
Petitioner-worked on State Highway 205 in Texas.
Petitioner added turn lanes and driveways and patched
paving.
Petitioner concluded that the added lanes and
driveways adapted the highway to a different use.
Petitioner concluded that its pavement work
substantially prolonged the useful life of both the
concrete pavement and the new HMAC overlay.
04-967
Petitioner performed this project for the TxDOT.
Petitioner worked on Interstate Highway 35E in Dallas,
Texas.
Petitioner rehabilitated concrete pavement so
that an asphalt overlay could be installed properly.
Petitioner also rehabilitated joints on the bridge.
Petitioner concluded that this work substantially
prolonged the useful life of the pavement on the
bridge.
04-968.
Petitioner performed this project for Eastfield
College in Texas.
Petitioner rehabilitated a failed
column at a building at the college.
Petitioner
concluded that this work substantially increased the
useful life"of the building from zero to its original
design life.
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04-971
Petitioner performed this project for the
Dallas/Fort Worth Airport Authority.
Petitioner
worked on a garage ramp at_the airport. The ramp had
deteriorated, and petitioner rebuilt the ramp to allow
for traffic to exit the garage. Petitioner concluded
that - this work materially increased the value of the
garage ramp and adapted the ramp to a new or dif ferent
use.
04-981
Petitioner performed this project for the TxDOT.
Petitioner worked on U.S. Highway 67 in Texas.
Petitioner rehabilitated concrete pavement so that an
asphalt overlay could be installed properly.
Petitioner also rehabilitated joints on the bridge.
Petitioner concluded that this work substantially
prolonged the useful life of the pavement on the
bridge.
04-982
Petitioner performed this project for the TxDOT.
Petitioner worked on Interstate Highway 35E in Texas.
Petitioner rehabilitated concrete pavement so that an
asphalt overlay could be installed properly.
Petitioner also rehabilitated joints on the bridge.
Petitioner concluded that this work substantially
prolonged the useful life of the pavement on the
bridge.
05-1000
Petitioner performed this project for the Kansas
Department of Transportation.
Petitioner worked on a
bridge on Interstate Highway 35 over 127th Street in
Wichita, Kansas. Petitioner applied an epoxy overlay
designed to protect the bridge from the environment.
Petitioner concluded that this work substantially
prolonged the useful life of the bridge.
05-1002
Petitioner performed this project for the ODOT.
Petitioner worked on a bridge on State Highway 88 over
Dog Creek in Rogers County, Øklahoma. Petitioner
-715 installed a new traffic rail that upgraded the crashworthiness rating from the old rail. Petitioner
replaced the bridge deck to allow for traffic and
increase the bridge's load rating.
Petitioner
concluded that this work substantially prolonged the
useful life of the bridge, materially increased its
value, and adapted the bridge to a new or different
use.
05-1003 ,
Petitioner performed this project for the City of
Dallas, Texas.
Petitioner worked on the-Marsalis
Avenue Bridge over the Dallas Zoo.
Petitioner
repainted the.deteriorating substructure, replaced a
portion of the deck (including with a new pedestrian
walkway), replaced a number of beams and girders, and
applied corrosive painting after removing the old
paint. Petitioner concluded that this work
substantially -prolonged the useful life of the bridge.
05-1011
Petitioner performed this project for the Crescent
Hotel in Dallas, Texas. Petitioner modified a handrail
at the hotel and removed and replaced concrete to
comply with the Americans with Disabilities Act of 1990
(N2A), 42 U.S.C. secs. 12101-12213
(2006).
Petitioner
concluded that this work adapted the property to a new
or different-use.
05-1018
Petitioner performed this project for the TxDOT.
Petitioner worked on.a bridge at U.S.-Highway 287 and
Heritage Parkway in Texas.
Petitioner rotated the
bridge's bearing pads. Petitioner concluded that this
work was repair or maintenance.
s
05-1019 .
Petitioner performed this project for the TxDOT.
Petitioner worked on a bridge on U.S. Highway 79 in
Panola County, Texas.
Petitioner rehabilitated
concrete pavement so'that an asphalt overlay could- be
installed properly-. Petitioner also rehabilitated
joints on the bridge. Petitioner concluded that this
- 16 -
work substantially prolonged the useful life of the
pavement on the bridge.
05-1028
Petitioner performed this project for the ODOT.
Petitioner worked on a steel bridge over Business
Interstate Highway 40 in Beckham County, Oklahoma. The
contractor renovated the bridge, and petitioner applied
the protective coating.
Petitioner also removed
existing lead paint" (a perceived hazardous material) ,
blasted the bridge 'to remove corrosion, and applied a
protective paint coating designed to prevent future
corrosion.
Petitioner concluded that this work
substantially prolonged the useful life of the bridge
and materially increased its value.
"
05-1032
Petitioner performed this project for the TxDOT.
Petitioner worked on a bridge on U.S. Highway 287 in
Texas.
Petitioner leveled the bearing pads.
Petitioner concluded that this work was repair or
maint enance .
05-1036
Petitioner performed this project for the TxDOT.
Petitioner worked on a bridge on Interstate Highway 20
over the Brazos River in Texas.
Petitioner adjusted
the bearings of the bridge to prevent damage and
rehabilitated cracks in a structural steel diaphragm to
allow the bridge to carry the load for which is was
originally designed. Petitioner also removed existing
lead paint (a perceived.hazardous material), blasted
the bridge to remove corrosion, and applied a
protective paint coating designed to prevent future
corrosion.
Petitioner concluded that this work
substantially prolonged the useful life of the bridge
and materially increased its value.
05-1037
Petitioner performed this project for the ODOT.
Petitioner worked on a bridge on U.S. Highway 270 over
Caston Creek in Le Flore County, Oklahoma.
Petitioner
sealed joints, patched the bridge deck, and retrofitted
- 17 -
beam ends. Petitioner concluded that this work
substantially prolonged the useful life of the bridge.
05-1038
Petitioner performed.this project for the TxDOT.
Petitioner worked on the pavement on Interstate Highway
20 in.Texas. Petitioner rehabilitated concrete
pavement so that an asphalt overlay could be installed
properly. Petitioner also rehabilitated joints on the
bridge.
Petitioner concluded that this work
substantially prolonged the useful life of the pavement
on the bridge.
05-1043 -
Petitioner performed this project for the TxDOT.
Petitioner worked on the intersections at State Highway
356.
Petitioner added left and right turn lanes to the
intersections to improve traffic flow. Petitioner
concluded that this work materially increased the value
of the property and adapted it to a new or different
use.
05-1047
Petitioner performed this project for the City of
Fort Worth, Texas.
Petitioner worked on the Hulen
Street Bridge in Fort Worth.
Petitioner sealed joints,
patched the bridge deck, and retrofitted-beam ends.
Petitioner concluded that this work substantially
prolonged the useful life of the bridge.
05-1052
Petitioner performed this project for the City of
Dallas, Texas.
Petitioner worked on the aprons at two
terminals at the Love Field Airport in Dallas.
Petitioner upgraded the ramps to the aprons for heavier
aircraft, by removing approximately 12,000 square yards
of approximately 50-year-old, 13-inch pavement and
replacing it with 16-inch pavement. Petitioner also
replaced the existing trench drains with new drains
that met applicable Federal standards.
Petitioner
concluded that this work substantially prolonged the
useful life of the property, materially increased its
value, and adapted the property to- a new or different
use.
- 18 05-1057
Petitioner performed this project for the TxDOT.
Petitioner worked on a bridge on U.S. Highway 83 in
Texas.
Petitioner modified the bearings on the bridge
to prevent damage and to maintain the bridge's load
carrying capacity. , Petitioner concluded that this work
substantially prolonged the useful life of the bridge.
05-995
Petitioner performed this project for the City of
Oklahoma City, Oklahoma. Petitioner worked on a bridge
at Walnut Avenue in Oklahoma City. Petitioner removed
existing lead paint (a perceived hazardous material),
blasted the bridge to remove corrosion, and applied a
protective paint coating designed to prevent future
corrosion.
Petitioner concluded that this work
substantially prolonged the useful life of the bridge.
06-1069
Petitioner performed this project for the Lakes of
Coppell housing subdivision in Coppell, Texas.
Petitioner worked on a failing retaining wall that
spanned the length of the waterways running through the
subdivision. The wall had'cracked and was falling into
the water. Petitioner replaced the failing wall with a
new retaining wall and improved the drainage behind the
wall. .Petitioner econcluded that this work
substantially prolonged the useful life of the
subdivision and materially increased its value.
06-1071
Petitioner performed this project for the TxDOT.
Petitioner worked on a bridge on U.S. Highway 290 in
Texas.
Petitioner installed new bridge joints to
improve the life of the new overlay.
Petitioner
concluded that this work substantially prolonged the
useful life of the property.
06-1085
Petitioner performed this project for the TxDOT.
Petitioner worked on a culvert along State Highway 121
in Texas.. Petitioner's work consisted of structural
- 19 repairs and waterproofing. Petitioner concluded that
this work was repair or maintenance.
06-1089
Petitioner performed this project for the TxDOT.
Petitioner worked on a bridge on Interstate Highway 30
in Texas.
Petitioner rehabilitated concrete pavement~
so that an asphalt overlay could be installed properly.
Petitioner concluded.that this work substantially
prolonged the useful life of the pavement on the
bridge.
06-1093
Petitioner performed this project for the TxDOT.
Petitioner worked on the State Highway 356/Interstate
Highway 35E/U.S. Highway 75 bridge in Texas.
Petitioner applied an epoxy overlay to'restore the
driving surface and protect the concrete deck from
future corrosion. Petitioner concluded that this work
substantially prolonged the useful life of the bridge.
Misc. Jobs
Petitioner does not explain the jobs that it has
included in this project. We understand petitioner not
to argue that the work on this project was other than
repair or maintenance.
Rehabilitation Projects
02-861
Petitioner performed this project for the
Dallas/Forth Worth Airport Authority. Petitioner
worked on pavement at Dallas/Fort Worth.Airport.
Petitioner rehabilitated the pavement on the
runway/taxiway. Petitioner concluded that this work
substantially prolonged the useful life of the
runway/taxiway.
03-874
Petitioner performed this project for the TxDOT.
Petitioner worked on a bridge on Interstate Highway 35
and Peachtree Road in Tarrant County, Texas.
Petitioner rehabilitated pavement and joints.
- 20 -
Petitioner concluded that this work substantially
prolonged the useful life of the bridge.
03-890
Petitioner performed this project for the ODOT.
Petitioner worked on various bridges in Garvin,
Lincoln, and Johnston Counties, Oklahoma, near State
Highways 18, 19, and 99. Petitioner sealed joints,
patched bridge decks, and retrofitted beam ends.
Petitioner concluded that this work substantially
prolonged the useful lives of the bridges.
> 03-902
Petitioner performed this project for the ODOT.
Petitioner worked on various bridges in Caddo and Love
Counties, Oklahoma, near State Highways 32 and 58 and
U.S. Highways 77 and 281. Petitioner sealed joints,
patched bridge decks, and retrofitted beam ends.
Petitioner-concluded that this work substantially
prolonged the useful lives of the bridges.
03-915
Petitioner performed this project for the TxDOT.
Petitioner worked on a bridge on Interstate Highway 635
in Texas.
Petitioner rehabilitated pavement and joints
so that an asphalt overlay could be installed properly.
Petitioner concluded that this work substantially
prolonged the useful life of the bridge.
04-950
Petitioner performed this project for the ODOT.
Petitioner worked'on bridges at U.S. Highways 39 and 77
in Cleveland and McClain Counties, Oklahoma. The
bridges were rapidly deteriorating, and petitioner
replaced the concrete decks and floor beams of the
bridges.
Petitioner's work allowed the load
restrictions for truck traffic to be lifted.
Petitioner concluded that this work substantially
prolonged the-useful lives of the bridges, materially
increased their values, and adapted the bridges to new
or different uses.
- 21 04-951
Petitioner performed this project for the ODOT.
Petitioner worked on various bridges in Oklahoma at
State Highways 14, 15, and 136. Petitioner removed
existing lead paint (a perceived hazardous material),
blasted the bridges to remove corrosion, and applied
protective paint coatings designed to prevent future
corrosion. Petitioner concluded that this work
substantially prolonged the useful life of the bridges
and materially increased their values.
04-958
Petitioner performed this project for the ODOT.
Petitioner worked on a bridge at State Highway 151 and
Keystone Dam in Tulsa County, Oklahoma. Traffic had
fallen through the bridge's deck, and concrete from the
pavement had fallen down into the operating mechanisms
of the hoist. Petitioner rehabilitated the concrete
pavement of the bridge dam and rehabilitated a
guardrail.
Petitioner concluded that this work
substantially extended the useful life of the bridge
and materially increased its value.
04-960
Petitioner performed this project for the ODOT.
Petitioner worked on a bridge at State Highway 54 over
Calvary Creek in Washita County, Oklahoma. Petitioner
added structural steel to the bridge beams which
increased the weight of loads that trucks could carry
on the bridge. Petitioner concluded that this work
substantially prolonged the useful life of the bridge
and adapted it to a new or, different use.
04-961
' *
Petitioner performed this project for the ODOT.
Petitioner worked on a bridge at State Highway 54 over
Horse & Deer Creeks in Custer County, Oklahoma.
Petitioner added structural steel to the bridge beads
which increased the weight of loads that trucks could •
carry on the bridge. - Petitioner concluded that this
work substantially prolonged the useful life of the bridge and adapted it to a new or different use.
- 22 04-969
Petitioner performed.this project for the ODOT.
Petitioner worked on four bridges on county roads in
Oklahoma.
Petitioner sealed joints, patched the decks
of the bridges, and retrofitted beam ends. Petitioner
concluded that this.work substantially prolonged the
useful lives of the bridges.
04-970
Petitioner performed this project for the ODOT.
Petitioner worked on seven bridges in Oklahoma.
Petitioner sealed joints, patched the decks of the
bridges, and retrofitted beam ends. Petitioner
concluded that this work substantially prolonged the
useful lives of the bridges.
04-983
.
Petitioner performed this project for the Town of
Addison, Texas. Petitioner worked on pavement on a
bridge on Belt Line Road in Addison. Petitioner
rehabilitated pavement and joints so that an asphalt
overlay could be installed properly. Petitioner
concluded that this work substantially prolonged the
useful life of the bridge.
04-985
Petitioner performed this project for the ODOT.
Petitioner worked on a bridge at State Highway 151 and
Keystone Dam in Tulsa County, Oklahoma.
Petitioner
rehabilitated concrete pavement across the dam and
applied a sealant. Petitioner concluded that this work
substantially prolonged the useful life of the bridge
and materially increased its value.
04-986
Petitioner performed this -project for the ODOT.
Petitioner worked on a bridge at State Highway 1 and
Gaines Creek in Oklahoma. Petitioner rehabilitated the
structural steel, removed old corroded steel, and
applied a protective paint coating designed to prevent
future corrosion.
Petitioner concluded that this work
substantially prolonged the useful life of the bridge
and adapted it to a new or different use.
- 23 04-987
Petitioner performed this project for the ODOT.
Petitioner worked on a bridge at State Highway·99 over
State Highway 3 and Creek in Pontotoc'County, Oklahoma.
Petitioner sealed joints, patched the bridge deck, and
retrofitted beam ends. Petitioner concluded that this
work substantially prolonged the useful life of the
bridge.
05-1004
Petitioner performed this project for the ODOT.
Petitioner worked on various steel bridges at
Interstate Highway 44 at 12th and 19th Streets in
i
Oklahoma County, Oklahoma. Petitioner sealed joints,
patched the decks of the bridges, and retrofitted beam
ends. Petitioner also removed existing lead paint (a
perceived hazardous material), blasted the bridges to
remove corrosion, and applied protective paint coatings
designed to prevent future corrosion. Petitioner
concluded that this work substantially prolonged the
useful lives of the bridges and materially increased
their value.
05-1006
Petitioner performed this project for the NTTA.
Petitioner cleaned and sealed pavement joints to
prevent the intrusion of water. Petitioner concluded
that this work substantially prolonged the useful life
of the existing pavement.
'05-1009
Petitioner performed this project for the TxDOT.
Petitioner rehabilitated concrete traffic barrier
walls. Petitioner concluded that this work
substantially prolonged the usefuÍ life of the traffic
barrier walls.
05-1013
Petitioner performed this project for the TxDOT.
Petitioner worked on a bridge at State Highway 15 and
the Brazos River in Texas. Petitioner repositioned the
rocker bearing assemblies and installed new stiffeners
so that the bridge would not self-destruct.
(A
- 24 stiffener, sometimes called a gusset plate, is an
accessory to a steel structure that restrains a
distortion of some or all of the steel.)
Petitioner
concluded that this work substantially prolonged the
useful life of the bridge.
05-1017
Petitioner performed this project for the TxDOT.
Petitioner worked on a bridge on or at Interstate
Highway 35 in Austin (Travis County), Texas. The armor
joints on the bridge were coming loose and the steel
was sticking up in the traffic. Petitioner
rehabilitated the joints and the steel. The bridge
would have been closed without this work. Petitioner
concluded that this work substantially prolonged the
useful life of the bridge.
05-1020
Petitioner performed this project for the ODOT.
Petitioner worked on a bridge in Oklahoma. Petitioner
rehabilitated pavement and joints so that an asphalt
overlay could be ïnstalled properly. Petitioner
concluded that this work substantially 'prolonged the
useful life of the bridge.
05-1022
Petitioner performed this project for the TxDOT.
Petitioner worked on a bridge at U.S. Highway 277 and
Valley Creek in Abilene, Texas. Petitioner replaced
the bearing pads on the bridge. Petitioner concluded
that this work substantially prolonged the useful life
of the bridge.
05-1024
- Petitioner performed this project for the TxDOT.
Petitioner worked on a bridge at U.S. Highway 59 in
Lufkin, Texas. Petitioner rehabilitated the bridge
joints.
Petitioner concluded that this work
substantially prolonged the useful life of the bridge
and materially increased its value.
- 25 05-1033
Petitioner performed this project for the NTTA.
Petitioner.worked on pavement.
Petitioner routed and
sealed cracks in the pavement to prevent moisture
intrusion.
Petitioner concluded that this work
substantially prolonged the useful life of the
pavement.
05-1046
Petitioner performed this project for the TxDOT.
Petitioner worked on a bridge on U.S. Highway 75 in
Grayson County, Texas. Work was also performed on
parts of the railing and the deck. Petitioner cleaned
and sealed joints, patched the bridge deck, and
retrofitted beam ends. Petitioner concluded that this
work substantially prolonged the-useful life of the
,
bridge.
05-1048
Petitioner performed this project for the ODOT.
Petitioner worked on a bridge at Interstate Highways 40
and 44 in Oklahoma County, Oklahoma. Petitioner
removed existing lead paint (a perceived hazardous
material), blasted the bridge to remove corrosion, and
applied a protective paint coating designed to- prevent
future corrosion.
Petitioner-also rehabilitated part
of the deck of the bridge. Petitioner concluded that
this work substantially prolonged the useful life of
the bridge and materially increased its value.
05-1049
Petitioner performed this project for the ODOT.
Petitioner worked on a bridge at Interstate Highways 35
and 44 in Comanche and Garvin Counties, Oklahoma.
Petitioner sealed joints, patched the bridge deck; and
retrofitted beam ends. Petitioner also removed
existing lead paint (a perceived hazardous material),
blasted the bridge to remove corrosion, and applied a
protective paint coating designed to prevent future
corrosion.
Petitioner concluded that this works
substantially prolonged the useful life of the bridge
and materially increased its value.
.
-- 26 05-1050
Pètitione~r performed' thi's project- for -the: ODOT .
Petitionerzworked on ta bridge ingBeckham County,.
Oklahoma? Petitioner sealed 'joints, - patched thet bridge
deck, and reti-ofitted beam ends. Petitioner also
removed existing-lead paint (a perceived hazardous n .
material) , blasted the bridge to remove corrosion, - and
applied a protective paint coating designed to prevent
future corrosion. Petitioner, concluded that this work
substantially prolonged the useful life of the bridge
and materially increased its .value . 4
05-1051
Petitionersperformed thisa roject for the,City_ of
Forth Worph, Texas.
Petitioner worked on a bridge .on
Rive side' Drive ' in Fort 'Worth. - Petitioner , removed
existing lead paint (a perceived hazardous material) ,
blasted the bridge to remove corrosion, and applied,.a
protective: paigt coating designed to prevent future
corrosion;.
Petitioner concluded that this work
substantiálly prolonged the useful life of the bridge
and materially increased its value.
05-1061
Petitioner performed this project-for the ODOT.
Petitioner worked on a bridge at Interstate Highway 35
and 'the Canadian River in Oklahoma. The expansion
joints-had failed; lallowing the bridges dedk.to spall
and deteriorate andaallowing salttand/or:water to get
to the slab substructure.
(In the construction
industry, the word."spaall" as a noun refers - to a
surface defect and as a~ verb to the breaking up of a
material to create a surface defect.)- -Petitioner
rehabilitated the deck and the joints.
Petitioner
concluded that this work substantially extended the,
useful life of - the bridge .
M Petitioner performe~d thi.s project for- the TxDOT
Petitioner worked on a bridge at.Loop 1,and Gaines
,
Creek in ,Tex'as.: The bearing pads had failed,s and
petit-ioner raised the:bridge, and-sinstalled new and
updated pads to keep the brigige from destroying itself .
- 27 -
Petitioner concluded that this work substantially
prolonged the useful life of the bridge.
05-1063
Petitioner performed this project for the NTTA.
Petitioner changed the bearing pads on the Mountain
Creek Lake Bridge to prevent damage at.the beam/bearing
seat interface.
Petitioner concluded that this work
substantially prolonged the useful life of the bridge.
05-996
Petitioner performed this project for the City of
Tulsa, Oklahoma.
Petitioner worked on the Tulsa
Oklahoma Civic Center. Petitioner rehabilitated and
waterproofed the deck of the civic center. Petitioner
concluded that this work substantially prolonged the
useful life of the civic center.
05-997
Petitioner performed this project for the TxDOT.
Petitioner worked on a bridge on Interstate Highway 10.
Petitioner removed and replaced failing expansion
joints that -were allowing the bridge deck to
deteriorate and letting moisture into the substructure.
Petitioner concluded that this work substantially
prolonged the useful life of the bridge and materially
increased its value.
06-1067
Petitioner performed this project for the TxDOT.
Petitioner*worked on a bridge at U.S. Highway 69 and
Choctaw Creek in Texas.
Petitioner sealed joints,
patched the bridge deck, and retrofitted beam ends.
Petitioner also,removed existing lead paint (a
perceived hazardous material), blasted the bridge to
remove corrosion, and applied a protective paint
coating designed to prevent future corrosion.
Petitioner concluded that this work substantially
prolonged the useful life of the bridge and materially
increased its value.
- 28 4
06-1068
Petitioner performed this project for the ODOT.
Petitioner worked on a bridge at State Highway 58 over
the Washita River in Caddo County, Oklahoma.
Petitioner sealed joints, patched the bridge deck, and
retrofitted beam ends. Petitioner concluded that this
work substantially prolonged the useful life of the
bridge.
06-1070
Petitioner performed this project for the City of
Oklahoma City, Oklahoma.
Petitioner worked on the
Oklahoma City Grandstand. The expansion joints and
their supports were failing in various sections of the
grandstand, and petitioner rehabilitated those joints.
Without the rehabilitation, the grandstand would have
been unusable and continuing to self-destruct.
Petitioner concluded that this work substantially
extended the useful life of the structure.
06-1075
Petitioner performed this project for.the TxDOT.
Petitioner worked on a bridge at State Highways 82 and
87 in Texas. Petitioner strengthened and retrofitted
the structural components to help the bridge regain and
maintain its design loads carrying capacity.
Petitioner concluded that this work substantially
prolonged the useful life of the bridge.
06-1076
Petitioner performed this project for the City of
Lawton, Oklahoma. Petitioner worked on a bridge at
Gore Boulevard and Cashe Road in Oklahoma.
Petitioner
sealed joints, patched the bridge deck, and retrofitted
beam ends. Petitioner concluded. that this work
substantially prolonged the useful life of the bridge
and materially increased its value.
06-1079
Petitioner performed this project for the ODOT.
Petitioner worked on a bridge at U.S. Highways 62 and
74 in Oklahoma and Logan Counties, Oklahoma.
Petitioner sealed joints, patched the bridge deck, and
- 29 -
retrofitted beam ends. Petitioner concluded that this
work substantially prolonged the useful life of the
bridge.
06-1080
Petitioner performed this project for the City rof
Dallas, Texas. Petitioner reconfigured the
streetscapes on Field,'St. Paul, and Harwood Streets to
provide better pedestrian movement and safety.
Petitioner concluded that this.work materially
increased the value of the property and adapted the
property to a new or different use.
06-1081
Petitioner performed this project for the City of
Oklahoma City, Oklahoma., Petitioner worked on a bridge
at Cimarron Road over Interstate Highway 40 in Oklahoma
City. Petitioner sealed joints, patched the bridge
deck, and retrofitted beam ends. Petitioner concluded
that this work substantially prolonged the useful life
of the bridge.
06-1082
Petitioner performed this project for the City of
Oklahoma "City, Oklahoma. Petitioner worked on the
Rockwell Avenue Bridge in Oklahoma City. Petitioner
sealed joints, patched the bridge deck, and retrofitted
beam ends.
Petitioner concluded that this work
substantially prolonged the useful life of the bridge.
06-1088
Petitioner performed this project for the ODOT.
Petitioner worked on the Rockwell Avenue Bridge in
Oklahoma. Petitioner sealed joints, patched the bridge
deck, and retrofitted beam ends. Petitioner concluded
that this work substantially prolonged the useful life
of the bridge.
06-1090
Petitioner performed this project for the NTTA.
Petitioner worked on the entrance to a building in'
Plano, Texas." Petitioner modified the entrance to
comply with the ADA. Petitioner concluded that this
- 30 -
work substantially prolonged the useful life of the
property, materially increased its value, and adapted
the property to a new or different use.
06-1094
Petitioner performed this project for the NTTA.
Petitioner rehabilitated concrete pavement and joints'
on a bridge so that an asphalt overlay could.be
installed properly. Petitioner concluded that this
work substantially prolonged the useful life of the
bridge.
06-1095
Petitioner performed this project for CPS Energy.
Petitioner rehabilitated an old trolley bridge on
Mission Road, increasing the load carrying capacity of
the bridge to allow for trucks. Petitioner concluded
that this work substantially prolonged the useful life
of the bridge, materially increased its value, and '
adapted the bridge to a new or different use.
06-1096
Petitioner performed this project for the TxDOT.
Petitioner worked on a bridge on Interstate Highway 20
in Texas.
Petitioner sealed joints, patched the bridge
deck, and retrofitted beam ends. Petitioner concluded
that this work substantially prolonged the useful life
of the bridge.
OPINION
I.
Background
We decide whether the disputed amount is DPGR.
The parties
agree that the disputed amount is DPGR to the extent that
petitioner performed work on projects that erected or
substantially renovated real property.
In addition, the parties
agree that petitioner's work substantially renovated real
property to the extent that:
(1). The work renovated a major
- 31-component or substantial structural part of real property and
(2) the renovations materially increased the value of the real
property, substantially prolonged the usefulalife of the real
property, and/or adapted the real-property to a different or new
use.
Further, the. parties do not dispute that petitioner's work met
the'first prong of this two-part substantial renovation test.'
Our decision therefore turns.on whether petitioner's work erected
property or, to the extent it did not, met the secónd prong of
the test.?
Petitioner argues that it- "erected" or "substantially
renovated" real property and therefore the disputed amount is'
DPGR.
Respondent argues that petitioner's'work falls outside of
the meanings of those terms and therefore the disputed amount is
not DPGR.
We agree with petitioner.
6Respondent concedes in his opening brief that petitioner's
work on the bridges met the first prong but advances no argument
as to petitioner's work on the other types of property. Each of
those other types of property is "real property" within the
meaning of sec. 199 because it is either a building or other
property that is and ordinarily will remain affixed to real
property for an indefinite period. See sec. 1.199-3(m) (2)(i),
Income Tax Regs.; see also sec. 1.263A-8(c) (3), Income Tax Regs.
Furthermore, we find in the record that petitioner's work on
these other types of property renovated a major component or a
substantial structural part of that property. We conclude that
all of the properties in dispute meet the first prong of this
two-part test.
7Hereinafter, we use the term "disputed projects" to refer ,
to the 104 projects discussed supra p. 6, less the 5 of those
projects that petitioner characterizes as repair or maintenance.
- 32 -
II.
Burden of Proof
Respondent determined that none of the disputed amount is
DPGR, and respondent's determination is presumed correct.
See
Welch v: Helvering, 290 U.S. 111, 115 (1933); see also Interstate
Transit Lines v. Commissioner, 319 U.S. 590, 593
(1943)
(stating
that deductions are.a matter of legislative grace for which
taxpayers must prove their entitlement); cf. Helvering v. Bliss,
293 U.S. 144, 150-151 (1934)
(stating that tax provisions should
not be narrowly construed where, as here, they are
"liberalizations of the law in the taxpayer's favor, * * *
begotten from motives of public, policy").
A taxpayer generally
must prove the Commissioner's determination wrong in order to
prevail., See Rule 142(a).
Section 7491(a), however, sometimes
placess the burden of proof upon the Commissioner.
The record allows us to decide-this case without regard to
which party bears the burden of proof.
We proceed to do so.
We
need not 'and do not decide which party bears the burden of proof.
III.
Section 199
A.
Applicable Text
Our substantive analysis begins with the relevant text of
section 199.
(We set forth that text in appendix D.)
Section
199(a) allows a corporate taxpayer such as petitioner to deduct a
percentage (equal to 3 percent for the subject year) of the lesser of (1) its qualified production activities income or
-- 33 -
(2) its taxable income (as computed without regard to the
deduction under section 199(a)).
Section 199(b) (1) limits that
deduction to 50 percent of the wages that the taxpayer pays
during the year.
Section 199(c).(1) defines the term "qualified
production activities income" as the taxpayer's DPGR less the sum
of its cost of goods sold (allocable to the DPGR) plus certain
expenses and other items.
Section 199(c) (4) (A) (ii) provides that
DPGR includes a taxpayer's gross receipts from the construction
of real property performed in the United States if the taxpayer
is engaged in the active conduct.of a construction business and
the gross receipts are derived in the ordinary course of that
business.
Section 199 does not define the phrase "construction of real
property" as its appears in section 199(c) (4) (A) (ii), and it is
the meaning of that phrase that is the focus of our analysis.
The parties do not dispute that petitioner is entitled to a
deduction under section 199(a) to the extent that petitioner's
work on the disputed-projects falls within the meaning'of that
phrase.
Nor do the parties dispute that petitioner's work will
fall within the meaning of that phrase if the work "erected" or
"substantially renovated" real property within the meaning of
section 1.199-3-(m), Income Tax Regs.
- 34 B.
Legislative History
Section 199 was added to the Code by the American Jobs
Creation Act of 2004
(AJCA), Pub. L. 108-357, sec. 102(a), 118.
Stat. 1424, to give domestic manufacturers a tax. deduction for
certain domestic production activities.
The conferees noted that
then-present law did not reduce a corporate taxpayer's income tax
for income from domestic activities and stated that section 199
would provide such a reduction in certain cases.
Rept. 108-755, at 265-275
(2004).
See H. Conf.
The conferees stated that
"construction activities performed in the United States" was one
of those cases, that "activities that are directly related to the
erection or substantial renovation of residential and commercial
buildings and.infrastructure" were "construction activities", and
that "structural improvements, but not mere cosmetic changes,
such as painting" were "substantial renovation".
n.26.
Id. at 271 &
The name of the AJCA and the statute's wage limitation on
the amount of the deduction under section 199(a) indicate that
Congress intended that section 199 create jobs in the United
States and otherwise strengthen the U.S. economy.
IV.
Guidance From the Commissioner and From the Secretary
- A.
Notice 2005-14
On January 19, 2005, the Commissioner released Notice
2005-14, 2005-1 C.B. 498, to provide "interim guidance" on
section 199.
The notice stated that the Secretary was currently
- 35 -
developing regulations- under section 199 and that taxpayers could
rely on the interim-guidance until the regulations were issued.
Id. sec.
1,
2005-1-C.B. at- 502.
As relevant here, Notice 2005-14, sec. 4.04(11) (a) and (b),
2005-1 C.B. at 520, stated that "The term 'construction' means
the construction or erection of real property" and that
Activities constituting construction include activities
performed in connection with a project to erect or
substantially renovate real property, but do not
include tangential services such as hauling trash and
debris, and delivering materials, even if the
tangential services are essential for construction. .
However, if the taxpayer performing construction also,
in connection with the construction project, provides
tangential services such as delivering materials to the
construction site and removing its construction debris,
the gross receipts derived from the tangential services
are DPGR.
Improving land (for example, grading and,
landscaping) and painting are activities constituting
construction only if these activities are performed in
connection with other activities (whether or not by the
same taxpayer) that constitute the erection or
substantial renovation of real property. * * *
Notice 2005-14, sec. 4.04(11) (d), 2005-1 C.B. at 520, stated
that the "term 'substantial renovation' means the renovation of a
major component or substantial structural part of real property
that materially increases the value of the property,
substantially prolongs the useful life of the property, or adapts
the property to a new or different use."
Notice 2005-14, sec.
3.04(11) (d), 2005-1 C.B. at 511, explained as to that meaning:
The Service and Treasury Department believe that the
standard to be applied in determining whether there has
been a substantial renovation of real property is the
standard applied under § 263(a) to determine whether a
l
1
- 36 -
taxpayer's.activities result in permanent improvements
or betterments of property, such that the cost of the
activities must be capitalized * * * [and that the
definition of the term substantial renovation as set
forth in the notice is] consistent with the rules under
§ 263(a)
B.
* * *
2005 Proposed Regulations
On November 4, 2005, the Secretary published proposed
regulations under section 199.
See secs. 1.199-0 through
1.199-8,
Proposed Income Tax Regs.,
70 Fed. Reg.
67240
2005)..
The proposed regulations stated that the final
(Nov. 4,
regulations, when published, would apply to taxable years
beginning after December 31, 2004.
See sec. 1.199-8(g), Proposed
Income Tax Regs.,370 Fed. Reg. 67276 (Nov. 4, 2005).
The
proposed regulations stated that taxpayers could rely on the
proposed regulations and/or the interim guidance set forth in
Notice 2005-14, supra, until the final regulations were published
in the Federal Register.
See id.
The definition of the word "construction" in the proposed
regulations was similar to its definition in Notice 2005-14,
supra.
Section 1.199-3(1) (1) (i) and (2), Proposed Income Tax
Regs.,
70 Fed. Reg.
67254,
67255
(Nov. 4,
2005),
stated that "The
term construction means the construction or erection of real
property" and
Activities constituting construction include activities
performed in connection with a project to erect or
substantially renovate real property, but do not
include tangential services such as hauling trash and
debris, and del-ivering materials, even if the
- 37 -
tangential services are essential for construction.
However, if the taxpayer performing construction also,
in.connection with the construction project, provides
tangential services such as delivering materials to the
construction site and removing its construction debris,
the gross receipts derived from the tangential services
are DPGR. Improvements to land that are not
capitalized to the land (for example, landscaping) and
painting are activities constituting-construction only
if these activities are performed in connection with
other activities (whether or not by the same taxpayer)
that constitute the erection or substantial renovation
of real property * * *
The proposed regulations also followed the definition of the
term "substantial renovation" set forth in Notice 2005-14, supra.
Section 1.199-3(1) (4), Proposed Income Tax Regs., 70 Fed. Reg.
67255 (Nov. 4, 2005), stated that the "term substantial
renovation means the renovation of a major component or
substantial structural part-of,real property that materially
increases the value 'of the property, substantially prolongs the
useful life of the property, or adapts the property to a new-or
different use."
While this -definition adopted some of the
grounds for capitalization under section 263(a) and the
regulations thereunder, see sec. 1.263(a)-1(b), Income Tax Regs.
(stating that an expense is generally -a capital expenditure if
the expense adds to the value or substantially prolongs the
useful life of property owned by the taxpayer or adapts the
property to a new or different use), the proposed regulations did
not explicitly adopt all of those grounds.
The proposed-
regulations, for example, did not explicitly adopt the standard
- ,38 -
of section 1. 263 (a) -2 (a)a, Income Tax -Regs .a athat "The a cost -of
acquisition, construc tion a or eerectiontóf abuildings , machinery
and equipment, furniture and fixtures, rand similar property.
having a useful 11ife asubstantially beyond the ataxable year". is a
capital expenditure .7 -See salso INDOPCO, -Inc
503 U;S. 79,
87-89
(1992)
v . Commiss ioner ,
(holding ,that an expenditure that
produces a significant future benefit is a capitalrexpenditure
under section 263 (a) ) .
C. - '2006 Final" Regulations
a e
On.June T, 2006, the Secretary-published finalaregulations a
under section 199. ¿See secs: -1.199-0 throughe1:199-9, Income Tax
Regs., 71 Fed. Reg. 31283 (June.1, 2006)a.
The afinal regulations
are applicable to taxable years,beginning on or after June 1,
2006:
Seeesec. 'r.199-8(i) (1), Income Tax Regs. 2The final
regulations also - stated, however
•
that a taxpayer could rely on
the final regulati_onsafor taxable years beginning before May 18,
2006, provided that' the taxpayer followed all gf those :final
regulations .
See id.
- The - f~inal regulations tstated that
- y
taxpayers who do not rely. on the final regulations for taxable
years 'beginning before,r June 1, 2006, may rely ori the proposed a
regulations-and/or the interim guidance set forth in Notice 2005-
14, e supra.
See id.e 3
-
Thetfinal regulations stated that "The ,term.constructione
nieansa activities, and services rela'ting tout-he _ construction or
r 39 -
erection of real property".
Regs.
Sec. 1.199-3(m) (i) (1), Income Tax
The final regulations also stated:
Activities constituting construction are activities
performed in connection with a project to erect or
substantially renovate «r~eal property * * *
* * * Activities constituting construction do not
include tangential services such as hauling trash and
debris, and delivering materials, even if the
tangential services are essential for construction.
However, if the taxpayer performing construction also,
in connection with the construction project, provides
tangential services such as delivering materials to the
construction site and removing its construction debris,
then the gross receipts derived from the tangential
services are DPGR.
* * * Improvements to land that are not
capitalizable to the land (for example, landscaping)
and painting are activities constituting construction
only if these activities are performed in connection
with other activities (whether or not by the same
taxpayer) that constitute the erection or substantial
renovation of real property * * *
[Sec. 1.199-3 (m) (2), Income Tax Regs.]
The final regulations further stated (as did Notice 2005-14,
supra, and the proposed regulations) that "the term substantial
renovation means the renovation of a major component or
substantial structural part of real property that materially
increases the value of the property, substantially prolongs the
useful life of the property, or adapts the property to a new or
different use."
Sec. 1.199-3(m) (5), Income Tax Regs.
The final
regulations, like the proposed regulations, did not explicitly
adopt other grounds for capitalization under section 263(a) and
the regulations thereunder.
- 40 -
V.
Expert Testimony
A.
Overview
Each party relies on expert testimony to support its or his
view that petitioner's work is or is not the erection or
substantial renovation of real property.
Petitioner called two
individuals to testify as experts on engineering in the context
of petitioner's business.
Respondent called one individual to
testify as an expert on construction engineering and construction
management.
as an expert.
The Court recognized each of the three individuals
The Court also received into evidence each
individual's written report (as supplemented, in the cases of the
individuals called by petitioner).
See Rule 143(g)
(stating that
an expert witness shall.submit to the Court.a written report that
serves as his or her direct testimony).
B.
Petitioner's Experts
1.
Mr. Gibson
William E. Gibson (Mr. Gibson) was one of petitioner's
experts.
Mr. Gibson is a licensed professional engineer, and he
earned a bachelor of science degree in civil engineering in 1966
and a master of business administration degree in management in
1968.
He has worked with highway and bridge construction for
over 40 years, he has worked with structural rehabilitation for
over 20 years, and he works currently for petitioner as its chief
- 41 -
executive officer."
Mr. Gibson is an active member of many
associations/societies of engineers, and he or petitioner has
received numerous awards for his or its work in the field of
construction.
He has advised Federal and State highway
.
departments on the construction of bridges-and of other
infrastructure.
Mr. Gibson is familiar with the specific work that'
petitioner performed on each of its projects. ~ He reinforced that
familiarity by examining petitioner's documents relating to the
projects and by visiting a substantial number of the jobsites.
He classified the projects into the following groups:
(1) Those
projects which extended the useful life of real property by more
than 3 years;
(2) those projects which increased the value of
real property by more than 5 percent of the component being
worked upon;
(3) those projects that adapted the property or
component to a new or different use; and (4) those projects that
were part of new construction.
He characterized the remaining
projects which did not fall into one of these four categories as
routine maintenance or repairs.
Mr. Gibson concluded from his analysis that petitioner's
work on over 95 percent of the disputed projects was substantial
renovation within the meaning of the final regulations and their
"Mr. Gibson also has a significant financial interest in
petitioner.
- 42.predecessors.
His report, as supplemented, supported his
conclusion with vast amounts of data and with many diagrams,
charts, and pictures depicting the specific construction work
petitioner-performed.
His report, as supplemented, further
supported his conclusion with detailed bid sheets for the
projects and with articles and treatises relating to pavement
preservation, the extension of the useful life of roads and
bridges, the improvement of the condition of bridges, and bridge
management.
2.
Mr. Smith
Douglas L. Smith (Mr. Smith) was petitioner's other expert.
Mr. Smith is a licensed professional engineer, and he earned a
bachelor of science degree in civil engineering in 1983 and a
master of science degree in civil engineering in 1985.
He has
worked with building or infrastructure construction for over 18
years, and he is an active member of various societies of
engineers.
He currently works for a consulting, engineering,
architectural, and material science firm that is unrelated to
petitioner.
He and the firm specialize in investigating and
repairing infrastructure that fails to meet performance
expectations because of deterioration, collapse,, or the like.
The firm's main clients are State highway departments and the
Federal Government.
|
- 43 -
Mr. Smith reviewed all of the disputed projects, including
24 in depth (which represented most of petitioner's gross.
receipts for the subject year), and he visited 11 of the job
sites.
He scrutinized the projects'and bid sheets, and he spoke
to persons who worked on the projects.
He concluded that
petitioner's work on the disputed projects often was required by
deterioration caused by the owner's failure to properly maintain
the real property and that rehabilitation of the real property,
as opposed to repair, was essential to the survival of the real
property;
He concluded that the bridge joints that petitioner
rehabilitated had deteriorated before petitioner's work,. that -the
deteriorated joints were harming other parts of the bridges, and
that petitioner had to tailor its work to protect the structure
of the bridges prospectively.
He concluded that some of
petitioner's work, e.g.', replacement of bearing pads, was
necessitated by design defects in the originally installed parts
and was not routine maintenance.
He concluded that petitioner's
work on pavement in job No. 02-861 (and in another job not in dispute) substantially prolonged the useful life of the pavement
and increased its value.
C.
Respondent's Expert
Respondent's expert was Jeff Ronspies (Mr. Ronspies).
Mr.
Ronspies received a bachelor of science degree in civil
engineering in 1995 and a juris doctorate in 2006.
He worked as
- 44 -
an-engineer from -1995"through 2004,*eandshe-worked as an attorney
for a year and'a,half during 2006 andr2007.
FrodrAuguàt 20Ó7 to
date, he has worked eas,a gen'eral engineer for the-Internals
Revenue -Service, primarily "Gather[ï'ng] 'facts -related to fixed
asset and intangible asset audits a[and] Draft [ing] -reports".used
int administrative appeal of,audits, -and rebuttals to:taxpayer protests of, proposed tax adjustments." ··Mr.; Ronspies is not a
licensed engineer, he is ~not a current member of any engineering;
society
and he has never published a paper on engineering.e-Nor
has.M6. Ronspies ever worked as an engineer on-a construc,tion project involving b idges, roads, or other infrastructure,. other
than in his role as an overseer of a firm's basic- painting
operations.
'Mr. Ronspies'reviewed the bid calculations and the
descriptions of all of petitioner's ,projects, and he -visited 10
of the tjob sites (all within -the Dallas/Fort Worth metropolitan
a-rea). t He concluded that 29 of petitioner's 13,6 projects
-
qualified as substantial renovation of real property within the
meaningrof -the final regulations, and: these 29 projects became :
(and are) the subject of respondent's concession.
Mr. Ronspies
concluded that the remaining projects (i.e., the sdisputed .
projects splus the projects petitioner conceded) were eithér
repair or maintenance or "accounting.anomalies". - The "accounting
anoma·lies", Mr. aRonspies stated;- were ,proj.ects with no receipts,
- 45 -
or job costs for the subject year.
Mr. Ronspies explained that
he characterized projects as repair or maintenance because
petitioner worked on only part of a structure, leaving the rest
of the structure to deteriorate at the same rate as before.
Mr.
Ronspies opined that the.useful life of a structure as a whole
does not change if work is performed on only part of the
structure.
D.
:
General Rules Applicable to-Expert Testimony
Expert testimony is admissible where it assists the Court to
understand the evidence or.to determine a fact in issue.
See
Fed. R. Evid. 702; see also ASAT, Inc. v. Commissioner; 108 T.C.
147, 168 (1997).
The testimony of an expert does-not assist the
Court when the testimony merely expresses a legal conclusion.
See Alumax, Inc. v. Commissioner, 109 T.C. 133,
165 F.3d 822 (11th Cir.-1999).
171
(1997), affd.
Determining whether expert
testimony is helpful to the Court is a matter within the Court's
sound discretion.
See Laureys v. Commissioner, 92 T.C. 101, 127
(1989).
We have broad discretion to evaluate the cogency of an
expert's analysis.
case.
Sometimes, an.expert will help us decide a
See, e.g., Trans City Life Ins. Co. v. Commissioner,
106 T.C. 274, 302 (1996).
Other times, he or she will not.
See,
e.g., Estate of Scanlan v. Commissioner,,T.C. Memo. 1996-331,
affd. without published opinion 116 F.3d 1476
(5th Cir. 1997).
- 46-We weighran ~expert'setestimony in theslight of his"or her
qualifications .and-with, duerregardator all - other credible evîdence
in the record'. . We may embrace or reject an expert's opinion'in
toto, or wesmay pick and choose the 'portions of the opinion we:e
choosexto adopt.
282, 294-295
See Helverin(‡ v. Natl·.2Grocefi Co.
304 U.S.
(1938);; Silverman VD.Commissioner,- 538 F.2d 927;
933
(2d Cir. 1976), affg. T.C. Memo. 1974-285; IT&S of Iowa, Inc:- v•
Commissioner, 97 T.C. 496; 508 (1991) ; Parker-v. Commissioner, 86
T . C . 547, 562
,(198 6 ) .
We - are not bound by an expert ' s . opinion
and wiùì.reject. an exper.tis opinion .to the extent that"it is
.
contrary to thei judgment we form on the basis of our
understanding of the. record as a whole.
See Orth .v.
Commissioner, 813 -F..2d 837, 842 (7th Cir. 1987) , affg. Lio v.
Commiséioner, .85 "T.C. 56 (1985) ; Silverman v. Commissioner, supra
at 933; IT&S of Iowa, Inc. v. Commissioner, supra at 508; Chiu;v.
Commissioner, 84 'T..C. 722, 734
VI.
(1985) .
,Standards "of Substantial Renovation
A.
Applicable Guidance
Section 199 (c) (4) (A) (ii) states that DPGR is derived _from
the "aonstruction 'of real property .performed in the United
States",--but tsectiorì,199 does not define the word "construction".
Petitioner "relies in part upoñ the,final regulations to aésert
that -its -work on. the-disputed projects quali_fies as construction
because -those projects.involvedrerecting or substantially
ai
- 47 -
renovating real property. « Petitioner also relies upon the final
regulations to assert that some of its work substantially
renovated real property because petitioner renovated a major
component or substantial structural part of real property and
that workematerially increased the value of the property,
substantially prolonged the useful life of the property, or
adapted the property to a new or different use.
By their terms, the final regulations are not necessarily
applicable to this case because the subject year began before
June 1, 2006.
The final regulations, however, allow a taxpayer
such as petitioner to rely upon those regulations for taxable
years beginning before May 18, 2006.
Income Tax Regs.
See sec. 1.199-8(i) (1),
Petitioner relies on portions of the final
regulations to support its position.
Petitioner's reliance on
portions of the final regulations means those regulations are
applicable to this case in their entirety.
See id.
Petitioner's
reliance on portions of the final regulations also means that the
other above-discussed guidance from the Secretary and from the
Commissioner is not directly applicable to this case.
B.
Overview
We proceed to decide the meaning of the phrases "materially
increases the value of the property", "substantially prolongs the
useful life of the property", and "adapts the property to a new
or different use", as used in section 1.199-3 (m) (5), Income Tax
- 48 -
Regs.
These phrases had their genesis in the capitalization
rules set forth in section 263(a) and the regulations thereunder.
See Notice 2005-14,
sec. 3.04(11) (d); see also sec.
1(b), Income Tax Regs.
1.263(a)-
The increased value, prolonged useful
life, and adapted use standards contained in those phrases are
measured by reference to the "real property"
(here, primari-ly
infrastructure), inclusive of all of its components and parts.
See sec. 1.199-3(m) (3) and (4), Income Tax Regs.,9 see also sec.
1.199-3 (m) (5), Income Tax Regs.
(using the words "the property"
in reference to the words "real property").
"Sec. 1.199-3(m), Income Tax Regs"., defines the terms "real
property" and "infrastructure" as follows:
(3) Definition of real property.--The term real
property means buildings (including items that are
structural components of such buildings), inherently
permanent structures (as defined in § 1.263A-8(c) (3))
other than machinery (as defined in § 1.263A-8(c) (4))
(including items that are structural components of such
inherently permanent structures), inherently permanent
land improvements, oil and gas wells, and
infrastructure (as defined in paragraph (m) (4) of this
section). * * * For purposes of this paragraph
(m) (3), structural components of buildings and
inherently permanent structures include property such
as walls, partitions, doors, wiring, plumbing, central
air conditioning and heating systems, pipes and ducts,
elevators and escalators, and other similar property.
(4) Definition of infrastructure.--The term
infrastructure includes roads, power lines, water
systems, railroad spurs, communications facilities,
sewers, sidewalks, cable, and wiring. The term also
includes inherently permanent oil and gas platforms.
- 49 The words "real property", in turne are best understood to
refer to each freestanding item of real-property that operates
and performs a discrete function in and of ,itself.
Cf. Smith v.
Commissioner,.300 F.3d 1023, -1030 (9th Cir. 2002)
(holding that
aluminum reduction -cells were sufficiently freestanding to
constitute units of property separate and apart from the
interconnected cell lines in aluminum smelting facility, for
purposes of characterizing the expense of replacing the cell
linings as a repair), affg. Vanalco, Inc. v. Commissioner, T.C.
Memo. 1999-265; Ingram Indus., Inc. v. Commissioner, T.C. Memo.
2000-323-(holding that tugboat engines were not treated
separately from tugboats in determining whether engine repair ,
costs were capital expenditures); sec. 1.263A-10(b) (1), Income
Tax Regs.
(stating that a unit of real property includes any"
components of real-property owned by the taxpayer that are
functionally interdependent):
Thus, the relevant property that
we analyze to measure whether a standard of substantial
renovation is met is generálly each building-, bridge, or other
permanent structure on which petitioner worked.
As the expert
testimony in this case shows, each of the bridges'and the other
real property at issue normally is constructed with a number of
major interrelated components any on'e of which is critical to the
property's overall functionality, and the separate components of
the property'generally do not perform a discrete function in the
- 50 --
setting- of othe property as a whole thattwould aallow the component
to operate and be used.by fitselft.
To théicontrary, the placing -
in service of one compõneñt 3(i.e.+,- the readiness and avai'l'ability
off -that- component for .iter specif ic use). is fsgenerálly:dependent -on
the placing in serviceadf the otherecomponentsrof the bridgetor a
the othere real property. n
C.
Repairs
s «
·
M.
. .
e
The capitalization rules of sectiont 263 (a) and the
regu ations thereunder. do not treat an expense to repair property
as ra, öapital expenditure
Such an expense is not a capit al e
expenditure because¿it fails to increase the avalue or prolong the
useful life "of the property (or adapt the proþerty: to a different
or new use) .
See' Plainf ield-Union Water - Co . v. - Commissioner,
39 T .5C. 333, 338 '(1962) .
Instead; the · rep,air, gènerally keeps .
the property ïn-its ordinarily efficient- operating. condition over
the -useful life for .which it was acquired.
See Ill. -Merchs.
°In Plainfield-Uniõh Wa-ter Co. v. Commissioner, 39, T.C.
333, 338 (1962) , the taxpayer claiméd deductions for the cleaning
and lining of .cement pipe which restored the original watercarrying' aap'acity of the pipes. The'Court held thát the'expenses
were repairs because the taxpayer ,continued to use the property
in 'its riormal coürse of business 'and the useful life "of the water
main was not increased, .nor was it,s strength or capacity
enlianced.
Id.' 'The Court noted thét a repair returns property to
he state it .was before the condition necessi,tating the
expenditùré' afose and does not maké the prop~erty more valuablé,
more useful, or longer lived.
Id. . The Court noted that a
capital èxpeifditurd únder sec . 26;3 (a) generälly results in a
longer lasting.increas,e in the longevity, utility, or worth of
the proÿerty. Id.; see also Norweåt Corp. & Subá.~~v.
Commissioner,
108 T.C. 265, 279-28g (199"/) .
- 51 -
Trust Co. v. Commissioner, 4 B.T.A-. 103, 106 (1926); see also
sec. 1.162-4, Income Tax Regs.
(stating that. "incidental repairs"
do not "materially add to the value of the property" or "appreciably prolong its 1-ife, but keep it in an ordinarily
efficient operating condition" and that "Repairs in the nature.of
replacements, to the extent that they arrest deterioration and
appreciably prolong the life of the property, shall * * * be
capitalized").
Whether an expense is a repair is a factual
determination that turns on a finding that the work did or did
not prolong the life of the property, increase its value, or make
it adaptable to a ditfferent use.
Commissioner, 73 T.C. 168, 178-182
See R.R. Hensler, Inc. v.
(1979).
Sometimes, an expense that would otherwise be characterized
as a repair may be characterized as a capital expenditure if the
expense is part of the property's rehabilitation, modernization,
and improvement.
689-690
See United States v. Wehrli, 400 F.2d 686,
(10th Cir. 1968); Jones v. Commissioner, 242 F.2d 616
(5th Cir. 1957), affg. 24 T.C. 563
(1955).
Such may be so even
if the property was not completely out of service or in total
disrepair.
265, 279-280
-
See Norwest Corp. & Subs. v. Commissioner," 108 T.C.
(1997)
(holding that the costs of removing
asbestos-containing materials must be capitalized because they
were part of a general plan of rehabilitation and renovation that
improved the building); see also Bank of Houston v. Commissioner,
- 52 -
T.C. Memo. 1960-110.
In addition, the Secretary has proposed a ,
regulation under which an expense is a capital expenditure,
rather than a repair, where the property has deteriorated to a
state of disrepair and is no longer functional for its intended
use and the expense returns the property to its former ordinarily
efficient operating condition.
Proposed Income Tax Regs.,
D.
See sec. 1.263(a)-3(e) (2) (iv),
73 Fed. Reg.
12859
(Mar.
10,
2008).
Substantial Renovation Standards
1.
Materially Increases the Value
A taxpayer's receipts may be DPGR if the receipts are
attributable to renovations that materially increase the value of
real property.
See sec. 1.199-3 (m) (5), Income Tax Regs.
Respondent asserts that a material increase in the value of real
property in the context of public works projects requires that
the functional value of the property increase on account of the
project.
We agree.
See Plainfield-Union Water Co. v.
Commissioner, supra at 338.
Each of petitioner's projects may
have materially increased the value of the underlying real
property only to the extent that the. project led to a more
permanent increment in the longevity, utility, or worth of the
property.
Such a permanent increment may have occurred, for
example, if the project rehabilitated a critical component of the
property, thus making the rehabilitation tantamount to replacing
the property as a whole.
- 53 -
An increase in value following a casualty is measured by
comparing the value of the real property after the project with
the value of the real property before the casualty.
Hensler, Inc. v..Commissioner, supra at 180-182.
See R.R.
An increase in
value in other cases is measured by comparing the value of the
real property after the project with the value of the real
property before the project.
See Plainfield-Union Water Co. v.
Commissioner, supra at 337.
In all cases, any increase in value
must be "material" to qualify the receipts as DPGR.
2.
Substantially Prolongs the Useful Life
A project may-substantially prolong the useful life of
property if the project rehabilitates a critical and functional
component of the property and.gives the property a new life
expectancy.
2002).
See Smith v. Commissioner, 300 F.3d 1.023 (9th Cir.
The replacement of a component that is so integral to the
overall functioning of property effectively confers a new
lifespan on the property equivalent to the life of the component.
Id. at.1033.
The useful life of property may be substantially
prolonged where the useful life of the property as a whole was
increased or the replacement of a component effectively increased
the useful life of the property.
An increase in useful life following a casualty is measured
by comparing the useful life of the real property after the
project with the remaining useful life of the real property
- 54 -
before the casualty.
supra at 180-182.
See R.R. Hensler, Inc. v. Commissioner,
An increase in useful life in other cases is
measured by comparing the useful life of the real property after
the project with the remaining useful life of the'real property
before the project.
See Plainfield-Union Water Co. v.
Commissioner, 39 T.C. at 337; Ill. Merahs. Trust Co. v.
Commissioner, .4 B.T.A. at 106.
In all cases, any prolonging of
useful lifem must be "substantial" to qualify the receipts as
DPGR.
3.,
Adapts the Property to a New or Different Use
Property is adapted to a new or different use if the use of
the property after the project is not-consistent with the
taxpayer's intended use of the property before the project.
As
the parties acknowledge, and we agree, such an adaption often
corresponds to a material increase in value or to a substantial
prolonging of useful life.
If a project qualifies as a
substantial renovation under either one of the other two
standards, it is not necessary to determine whether the property
also is adapted for a new or different use.
Job No. 05-1011 is the only project that petitioner
characterized as adapting property to a new or different use
without substantially prolonging the useful life of the property
or materially increasing its value.
There, petitioner was paid
approximately $30,000 to modify a handrail (and to remove and to
- 55 -
replace concrete) to comply with the ADA.
Petitioner concluded
that this work adapted the property to a,new or different use.
We agree.
Petitioner's modification of the handrail allowed
access to the property by those persons to whom the ADA applied,
and the handrail could not have been so used without the
modifications.
We sustain petitioner's conclusion that this
project qualified under section 1-99 without further specific
*
discussion of this project.
VII.
Characterization of Remaining Projects
A.
Overview
We now consider whether petitioner's work on the remaining
disputed projects was the erection or substantial renovation of
real property.
We do so on a project by project basis. - We are
aided by the testimony of Messrs". Gibson and Smith, both of whom
are licensed, well-credentialéd, and knowledgeable longtime
prominent professional engineers in the fields of highway and
bridge construction and structural rehabilitation.
We heard them
and perceived them to be more knowledgeable and reliable than Mr.
Ronspies on the matter at hand, and we find the testimony of
Messrs. Gibson and Smith to be sincere and most persuasive."
"Of course, we recognize that the interests of petitioner
and Mr. Gibson overlap in that he is petitioner's chief executive
officer and has a significant financial interest in this matter.
We have taken those considerations into account in our evaluation
of his testimony and have concluded that his testimony was
sincere and credible.
- - 56 Mr. Ronspies, on thee other hand, ' lacks sany practical experiences
in roads and . bridge a construc t ion., - and we dec line' to . ac capt his
testimony ont that subjecteto the extent thatrit, conflicts with
the testimony of Messrs. ,Gibson and Smith.
-We.note .as to Mr.
Ronspies 3 that he ult imately agreed - that .7 ofepet it ioner ' s 10 m
bridge .projects that: he visited. qualified under 'section7199^ and acknowledged thatchis-opinion as to the qualification of
petitioner's remainirig projects might haveschanged hadshe:visited
them as well.
Petitioner asserts .that its work on each disputed' project
erected real property.or-substantially renovated real property.
We -agree.: Petitioner terected real.property in job Nos. 04-937 (a
blast fence) , 04-965 (additional lanes and driveways) , 04-971 (a
ramp)
05-1002 (a- traffic rail and .a bridge deck), 05-1043 ;
(additional turn lanes), and 06-1069- (a retaining wall) .9
In,
the other projects, petitioner: . (1) Renovated major components
or substantial structural parts of infrastructu,re;
(2) addressed
design errors or construction flaws by restòring infrastructure to perfqrm efficient-ly as intended;
(3) allowed infrastructure to
be put back in service after damage or severe deterioration; -(4)a
returned a major cornponent from a deteriorated state, either from
age, exposure, or casualty loss, to its former operational
Mr. Ronspies ,now agrees that job No. 04-937 -qualifies
under sec. 199.
- 57 -
efficiency;
(5) abated environmental hazards, e.g., by remóving
or encapsulating lead paint; and/or (6) brought infrastructure
into compliance with laws such as the ADA.
Petitioner'.s work on
these other projects effected the renovation of a major component
or substantial structural part of real property, and we conclude
from our description of each project (as set-forth in our
findings of fact and in appendixes A, B, and C) and our
consideration of the expert testimony of Messrs. Gibson and Smith
that the work materially increased-the value of the real property
and/or substantially prolonged the useful life of the real
property.
B.
Conclusions as to Specific Projects
1.
Casualty Projects
-
The 18 casualty projects in dispute involved petitioner's
work on damaged infrastructure (mainly bridges) that either were
completely inoperativ'e "(e.g., not.open to traffic) or not fully
operative.
Petitioner restored the integrity of the
infrastructure through substantial structural rehabilitation that
allowed the infrastructure to function as intended for many years
thereafter.
Much of the infrastructure was of little to-no use
without petitioner's:work.
Petitioner's final contract amount
for each project ranged from $11,500 to $640,994.
We conclude from the record at hand that the functionality
and dollar values of the real property underlying most of the
- 58 casualty projects increased substantially on account of
petitioner's work.
We also conclude that for those projects, and
for each of the other casualty projects for which petitioner does
not assert a material increase in value (specifically, job Nos.
05-1023, 05-999, 06-1074,
06-1078, 06-1084, 06-1087, and
06-1091), that petitioner's work substantially prolonged the
useful life of the infrastructure.
2.
New Construction-and Rehabilitation Projects
The remaining 80 projects in dispute (i.e., the 86 remaining
projects in dispute less the 6 projects that erected real
property) involved work that petitioner performed primarily as a
subcontractor, which petitioner ,calls "New Construction", and
work that petitioner performed as a contractor rehabilitating
dilapidated real property, which petitioner calls "Rehabilitation
Projects".
While petitioner places these projects into two
categories primarily on the basis of its role as a contractor or
a subcontractor,.we do not.do similarly.
Each project ultimately
involves the rehabilitation of dilapidated real property, and.we
do not think the characterization of petitioner's work is any
different just because petitioner performed its work as a
contractor versus a subcontractor.
To be sure, petitioner's work
on the "new projects" was just as new as its work on the
"rehabilitation projects".
- 59 -
Petitioner concluded that its work on each of these projects
substantially prolonged the useful life of the underlying real
property.
We agree."
That real property (typically bridges)
had deteriorated to a state of disrepair on account of a lack of
proper maintenance, and the real property was no longer
functioning as intended.
Petitioner significantly improved and
solidified the integrity of the dilapidated bridges and the other
real property through petitioner's renovation and redesign of
major structural components thereof (e.g., beams and joints), and
petitioner performed other -services such as corrosion protection,
pavement rehabilitation, and expansive joint rehabilitation.
Petitioner's work enhanced the operating condition of the real
property for many years into the future..Mr. Gibson concluded ·
that each of these projects increased the useful life of the real
property by more than 3 years, and we find that conclusion
persuasive taking into account the specialized work petitioner
did on each project and the final contract amounts (ranging from
$3,990 to $2,748,957) for these projects."
"Petitioner also concluded that its work on 16 of these
projects materially increased the value of the underlying real
property. We need not consider this conclusion given our
agreement with petitioner's primary conclusion.
"As to one of the projects in issue, job No. 03-921,
petitioner's sole work was "patching" the deck of the bridge.
While this work in and of itself would appear to be routine
maintenance, petitioner performed this work as a subcontractor on
a larger project that rehabilitated the bridge. Given the
(continued...)
- .60 --
a C., :Additional Rationalet for AlltPio†ects n
.
Respondent rargues that petitioner';s work :on -the càsualt y e
4
proj ects I"merely-brought :the -bridges back to .their, normal
operating condition" and 'that .petiti'oner' s work on the new
construction-and rehabilitation" projects was routine maintenance.
We ndisagree .
Petitione'r' s. work on many of, thesproj ec ts was .a e 2
critical and ess_ential: to the we'll-beingsand future.operation of
the s truc ture s underlyinge the proj ect s ... .Pe t it ioner , f or -example ,
removed> and replaced athe -joints on abridges because the old joints
were -failing from lack sof proper maintenance and threatening the.
structure of each og the bridges as a whole.
Similarly, -
petitioner replaced damaged or deteriorated beams -with new beams
to give the bridge its requisite support.
Likewise, -petitioner
rehabilitated a b-eam using: specialized materials and procedures
such as epoxy, heat, and mechanical force.
Mr. Gibson explained that petitioner performed six types of
specialized work on the disputed projects and that this work
either (or both) substantially prolonged the useful life. of the a
structure underlying the project or materially. increased, its
value.
Mr.4Gibson listed thiá- work as córroâion protection,
concrete structural
enovation, steel structural renovation
.
( .a continued)
additional facts that pe.titioner's final contract amount for this
job was $105, 646 and that the job was paid for with Federalz a
funds, we conclude that.petitioner's work was part of a
a
substantial renovation of the bri<‡ge and classify it as such.
- 61 -
pavement rehabi-litation, implementation of structure redesign,
and expansion joint rehabilitation.
He described each of these
types of work as follows:
Corrosion protection:
Involves the
removal of all rust- and corrosion onethe
existing structural steel components and then
the application of a three ecoat corrosion protection system to the structure. The
three coat process involves a base layer of
zinc to protect the steel from-rust, a second
epoxy layer to protect the base layer, and a
final UV layer to protect the epoxy layer.
The deteriorated steel beam ends must be
removed and replaced before the cleaning and
painting takes place.
(A beam end is the
portion of the beam beneath a joint in the ,
deck of the bridge.) This protection
generally allows the load carrying capacity
of a bridge to be increased to its original
limits and extends the useful life of the
structure.
Concrete structural renovation:
Involves a structural renovation of a
concrete bridge. Without the renovation, the
bridge does not function as originally
designed (e.g., some lanes must be closed to
traffic).
Steel structural renovation:
Involves a
structural renovation of steel on a bridge.
Without the renovation, the bridge does not
function as originally designed (e.g., some
lanes must be closed to traffic). This.work
extends the useful life of the bridge.
Pavement rehabilitation:
Involves the
joint and spall rehabilitation of the
pavement of a bridge. This process extends
the useful life of the bridge by 10 to 15
years.
Implementation of structure redesign:
Involves three different types.of projects.
The first type involves the strengthening of
- 62 -
s t ruc turals s t ee l, . the replacement lo f , spal-le'd a
concrete, the installation of new bearing
c p'ads, an'd-the painting of theobridges (The bearings on a bridge allow the bridge to
expand, contract, flex, and vibrat e without a
transfer-of the resulting,stress into
adj acent :suppor;t elements . ); eThes second type
involves othe r replacement of.' an ~cild abridge : by.
-a:new, longer,- and wider bridge. eThis is a e
done by -removing -the old bridge deck, adding
shear -connectors to the steel stringers (too
increase the l'oad carrying -capacity) p
- cleaning and painting the bridge, .moving the
new bridge 'into position, and pouring
concrete to serve as ther deck of the bridge.
(A stringer is as steel 'beam spannitig
lengthwise in a' bridge.)
The thirditype .
einvo'lvesaraising sa. bridge to increase the
clearance betw.een the bottom of the bridge
and the roadway below.
Expansion joint: rehabilitation ¯ This
involve s a rehab~ilitat ing de teriorated
expansion joints to increase the useful life
of the bridge.
'Mr. Ronspieš opined that petitioner's swork was primarily
routine maintenance, and he identified the following types of
work performed by .petitioner as routine maintenance:
(1) Joint
replacement (because, he stated, joints do not -have the expected
life of the concrete or structural steel bridge -spans, and it is
recommended that joints be greplaced regularly) ;. (2) e
rehabilitation or replacement of bridge bearings (because, he
stated, this work i
typically performed as part of ,a scheduled
maintenance pi-ogram) ;
(3) patching.of concrete -or asphalt by
removing deteriorated concrete and replacing it with new material
(because, he stated, therpat ch material does:;not increase ,the
- 63 -
life of the surrounding material);
(4) painting (because, he
stated, this work is typically performed as part of a scheduled
maintenance program); and (5) installing stiffeners and other
structural steel (because, he stated, this work does not increase
the capacity of the bridge). :We'disagree that these categories
of work, as performed by petitioner, are routine maintenance.
Mr. Gibson visited many of the job sites of the disputed
projects, and he was the individual who was most familiar:.with
the specific work that petitioner performed.
He testified
persuasively as to the type, extent, and significance of the work
that petitioner performed on each project.
He testified
persuasively that Mr. Ronspies failed to understand ther type,
extent, and significance of the work that petitioner performed on
the projects.
In addition, Mr. Gibson explained that the bridges on which
petitioner worked were dilapidated because they had not been
properly maintained and that petitioner could not simply repair
the bridges but had- to ~rehabilitate the bridges significantly.
He also explained that petitioner's addition of a protective
"For example, Mr., Ronspies viewed job No. 05-1028 as a
simple paint job, and he viewed job No. 06-1089 as isolated
asphalt repairs and some new expansion joints. Mr. Ronspies'
view was blurred as to both jobs.
In the former job, the ODOT
paid petitioner approximately $266,000 to remove a perceived
hazardous material, to blast a bridge to remove corrosion, and to
apply a protective paint coating., In the latten job, the TxDOT
paid petitioner approximately- $65,000 to rehabilitate the joint
and spall of pavement.
- 64 -
coating to a bridge is significantly different and more
sophisticated and extensive than the outdated basic type of
painting job with which Mr. Ronspies was familiar."
Bridges,
Mr. Gibson stated, used to be painted with materials that have
now been established to be hazardous to the environment and to
human health, and the trend in the last decade or two has been to
apply a protective coating to a bridge instead of simply painting
it.
He explained that the protective coating is designed to last
approximately 20 or more years without any additional maintenance
and that failing to coat can cause beams to rust, thus resulting
in the bridge not being usable anymore.
His testimony was echoed
in many regards by Mr. Smith's testimony.
As respondent would have it, the rehabilitation of one or
more components of real property would be a repair unless all of
the property's major components were replaced.
Such is so, Mr.
Ronspies stated, even if the new component was (or components
were) superior to the old component(s).
view.
We disagree with this
First, as discussed supra pp. 50-52, we do not understand
such a principle to apply to repairs in general.
Second,
petitioner concludes (and we agree) that petitioner's renovation
of major components often extended the useful life of the
"Mr. Ronspies worked for a limited time as an overseer of a
construction company's painting operations.. Those operations
were the basic type of painting that Mr. Gibson opined was
routine maintenance and was not the contemporary painting that
Mr. Gibson stated was a substantial renovation.
- 65 -
structures as a whole on account of the intricate interaction of
all of the components.
Petitioner's work on a part of a
structure resulted in a more permanent increment in the
longevity,. utility, and worth of the structure as a whole which,
in turn, increased the useful life of the overall structure.
Smith v. Commissioner, 300 F.3d'at 1033-1034.
See
Third, Messrs;
Gibson and Smith opined persuasively that a bridge usually does
not deteriorate evenly throughout its-life but that certain
sections of the bridge deteriorate faster than others on account
of their location on the bridge and their exposure to the
weather, among other reasons.
Fourth, Mr. Smith explained that a
repair of infrastructure or other similar real property is
typically an expense that the designer anticipated as part of the
property's regularly scheduled maintenance program and that such
maintenance was not done here'.
He stated that the lack of normal
or routine maintenance and the resulting deterioration of a
single component of infrastructure may make the overall
infrastructure unusable because it is unsafe.
He stated that
work such as petitioner.'s which is aimed specifically at
components of infrastructure that -have been allowed to
deteriorate to a state of disrepair therefore significantly
prolongs the useful life of the infrastructure as a whole.
Respondent argues that petitioner cannot prevail because it
has not established with any specificity that its work materially
I
66 -
increased "the value or substantially prolonged, the:useful life of
the disputed property.
-We disagree
Although-'the redord may not
allow us to pinpoint «the ekact increasesain-väluelor usefulalife
on account of petitioner's work, suffice it toisayathat
he
record -supports petitioner's conclúsionethat thesapplicable
standards were:met for reach disputed project.n 'The-bid.sheetà
show the scope of petitioner's work and the dollarramountsrof its
projects, and petitioner'is:useeof ;the-3-year and:5-percent
benchmarks is areasonable -in the rsetting at hand to eätablish that
peti idner's work -substanttially, increased thes value,'cap.acity,
efficiency,, strenggh, and/or quality of each of the items of real
property underlying the idisputed projects.
All the same, Mr. Gibson, on behalf of petitioner, analyhed
each project and-ascertained whether the work on teach project
a
- materially, increased the value of property -or substantially.
prolonged its useful-life.
(We have included in'our.description
of each project petitioner's conclusion.as to whether the project
materially increased the value.of property and/or substantially
prolonged its useful life.)
He explained that maintenance
projects are anticipated by the designer, and included ins aan
regularly .scheduled maintenance, plan fand considered when
determining the:life.of the structure.
He ,explained that
regularly.scheduled ymaintenance was lacking-as.·to many>of- the
"The same is true as to a material increase in us'eful life.
- 67 -
structures underlying the disputed projects.
He explained that
the value of a bridge declines from $400,000 to zero over 40
years if it has little or no maintenance, but with $200,000 of
rehabilitation work after 30 years, the value increases from
$100,000 to $300,000 and the life of the bridge is extended from
40 years to 60 years.
He concluded that petitioner's major
rehabilitation work on a bridge increased each bridge's value by
the cost of the rehabilitation work and prolonged the bridge's
useful life by 20 years.
We accept that rationale and understand
it to apply with equal strength to petitioner's nonbridge
properties as well.
VIII.
Conclusion
We conclude that petitioner's projects qualify under section
199 to the extent stated herein."
All arguments for a different
conclusion have been considered, and those arguments not
discussed herein have been rejected as without merit.
To take
into account the parties' concessions,
Decision will be entered
under Rule 155.
"Our conclusion is consistent with the legislative intent
for sec. 199 (e.g., petitioner hired additional employees in
years after the subject years) and with 23 U.S.C. sec. 116 (2006)
(the Secretary of Transportation presumably concluded that
petitioner's projects subject to that title were a cost-effective
means of extending the useful lives of Federal-aid highways).
- 68 APPENDIX A
Casualty Projects
Job No.
General Type of Work
Final Contract
Amount
05-1021
05-1023
05-1025
05-1029
05-1045
05-1054
Bridge rehabilitation
Highway sign shoring
Bridge rehabilitation
BEidge rehabilitation
Bridge rehabilitation
Bridge rehabilitation
$640,994
22,114
77,240
28,200
395,337
49,000
$347,837
17,114
77,240
28,200
395,337
49,000
-
*
*
*
*
*
*
*
*
*
*
*
-
05-1056
05-1059
Bridge rehabilitation
Bridge rehabilitation
31,935
43,200
-
*
*
Highway repair
398,234
05-1064
Bridge rehabilitation
141,785
05-1065
Bridge rehabilitation
73,000
05-999
06-1072
Bridge rehabilitation
Bridge rehabilitation
79,668
40,853
06 1073
06-1074
06-1078
06-1084
06-1087
06-1091
Bridge
Bridge
Bridge
Bridge
Bridge
Bridge
25,884
24,901
24,900
39,830
112,000
11,500 #
*
*
*
*
*
*
-
-
05-1060
31,935
43,200
398,234
140,850
73,000
6,000
40,053
25,784
24,910
24,025
39,830
1,950
11,500
1,775,999
#:
RM:
UL:
V:
DU:
*:
rehabilitation
rehabilitation
rehabilitation
rehabilitation
rehabilitation
rehabilitation
Revenue Earned
in Subject Year RM UL V
-
'
-
-
-
*
-
*
-
*
*
-
*
*
*
*
*
*
Project paid for with Federal funds
Repair or maintenance
Substantially prolonged useful.life of real property
Materially increased value of real property
Adapted real property to different or new use
Category or categories to which petitioner assigned project"
DU
-
-
-
- 69 APPENDIX B '
New Construction Projects
Job No.
General Type of Work
Final Contract
. Amount
03-906
03-921
03-926
04-937
04-954
04-955
04-956
04-959
04-965
04-967
04-968
04-971
04-981
04-982
05-1000
05-1002
05-1003
05-1011
05-1018
05-1019
05-1028
05-1032
05-1036
05-1037
05-1038
05-1043
05-1047
05-1052
05-1057
05-995
06-1069
06-1071
06-1085
06-1089
06-1093
Misc
Bridge work
Bridge work
Bridge work
Built blast fence
Bridge work
Bridge work
Bridge work
Bridge work
Highway work
Bridge work
Building work
Built airport ramp
Bridge work
Bridge work
Bridge work
Bridge work
Bridge work
Modified handrail
Bridge work
Bridge work Bridge work
Bridge work
Bridge 'work
Bridge work
Bridge work
Highway work
Bridge work
Airport terminal work
Bridge work
Bridge work
Built retaining wall
Bridge work
Culvert work
Bridge work
Bridge work
---
$85,014 #
105,646 #
62,050 #
2,323,112 #
77,313 #
73,868 #
178,661 #
504,241 #
357,883 #
153,863 #
112,536
406,322
250,166 #
483,936 #
41,456 #
140,094
1,391,452
29,985
41,992 #
264,204
266,800 #
11,328 #
422,372 #
178,360 #
169,012 #
747,602 #
122,000
2,261,192 #
57,100 #
86,606
154,273
64,530 #
45,823
65,592 #
908,143 #
329,273
#:
RM:
UL:
V:
DU:
*:
Revenue Earned
in Subject Year RM UL V
-0$20,000
-0(2,405)
500
-0159,340
(5,480)
(1,484)
-0-0-066,072
442,948
41,456
1
1,034,097
27,485
37,992
264,204
6,000
11,328
35,290
110,825
110,700
25,280
122,000
1,944,968
100
86,606
154,273
11,000
45,823
58,425
2,000
329,273
5,138,617
Project paid for with Federal funds
Repair or maintenance '
Substantially prolonged useful life of real property
Materially increased value of real property
Adapted real property to different or new use
Category or categories to which petitioner assigned project
*
-
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
-
DU
*
*
*
*
*
*
*
*
*
*
-
*
*
*
*
-
*
*
-
- 70 APPENDIX * Ca
Rehabilitatione Pro-jects, ;
Job No.
-General Type of Work
02 -861
03 -874
Airport . pavement work.
Bridge .work
03-890
Bridge work
03-902
Bridge work
03-915
04-950
04-951
Bridge work
Bridge work
Bridge work
04-958
04-960
Bridge work
Bridge work
04-961
Bridge wofk
04-969
04-970
04-98:3
0 4 - 985
Bridge work
Bridge work
Bridge Nork
Brei dge work
04-986
04-987
05-1004
Bridge work
Bridge work
Bridge work
05-1006
05-1009
05-1013
05-1017'
05-1420
05-1022
05-1024
05-10.33
Pavement wor
Trafficibarrier wall.
Bridge work .
Bridge work
Bridge work
Bridge work
Bridge work
Pavement work
05-1046
05-1048
05-1049
05-1050
05-1051
05-1061
Bridge work,
Bridge work
Bridge work
Bridge work
Bridge work
Bridge work
05-1062
05-1063
05-996
05-997.
Bridge work
Bridge ork
Work on Civic center
Bridge work
06-1067
06-1068
06-1070
06-1075
06-1076
06-1079
06-1080
06-1081
06-1082
06-1088
06-1090
06-1094
06-1095
06-1096
Bridge work
Bridge work
Work on grandst'and
Bridge work
Bridge work
Bridge work Streetscape work
Bridge work
Bridge work
Bridge work Modifi'ed entranãeway
Bridge work
Highway work
Bridge work
Final Contract
Amount"
$2, 011, 996 #
356,500 #
159, 722 #
291, 789 #
653 , 395 #
2 481, 935 #
179,000 #
620,622 #
47,870
173, 378
48,086 #
534,083 #
3,990
535, 148 #
161,819
19,981 #
145,174 #
719, 924
294, 863
18,600
174,716
724, 352 #
24,868
167, 198
116, 815
294,788
959,694 #
543, 670 #
537, 943 #
256,122
,370,929 #
64,649
, 1,180,258
99, 901
432, 030
37,079
51,179
23,400
950,931 #
.
89,298
434,498 #
- 2,748,957 #
131,147
123,4222
549,490 #
24,971
1,102,617
159,375
3219 910
Revenue Earned
in Subject Year RM UL V
.-
DU
-0 *
-0*
- o$21, 810 n *
. (1, 885)
** 18 , 00 0
*
- r79, 520
*
*
*
-0
*
*
-0*
*
-7-,0*
*
2, 260
* - *
297
*
140,659
* - -0*
65, 259
*
*
-0,*
*
11
*
7,713
*
*
540, 103
*
236, 185
*
18,600
s*
174,_716
*
681 101 .
*
21,368
*
167, 198
*
*
116, 815
*
294,788
*
97,531
*
*
53, 478
*
327, 661
*
*
256,122
*
*
164,449
*
6k,649
* - 784,069
*
2, 336
- *
159, 935
*
* . 37,079
*
*
500
*
23,400
*
163,395
*
89,298
- -*
*
3,,000
*
-0- - *
*
67,269
* .122, 892
*
3,000
-¯ *
24,971
*
*
*
-0-
-
-
*
*
*
1,000
5,030,552
-
*
-
-
-0-
*
-
-
!
- 71 #:
RM:
UL:
V:
DU:
*:
Project paid for with Federal funds
Repair or maintenance
Substantially prolonged useful life of real property
Materially increased value of real property
Adapted real property to different or new use
Category or categories to which petitioner assigned project
-'72 APPENDIX D
SEC.
199 .
IN~COME ATTRIÎ3UTAB E TO DOl ES IC PRODU T ON
ACTIV];TIEŠ.
(a) Allowance of Deduction.-(1) In general.--There shall be allowed
as a deduction an amount equal to 9 percent
of the lesser of-(A) the qualified production
activities income of the taxpayer
for the taxable year, or
(B) taxable income (determined
without regard to this section) for
the taxable year.
(2)
Phasein. ---In the case of any
taxable year beginning after 2004 and before
20103 paragraph (1) shall be applied by
substituting for the percentage contained
therein the transition percentage determined
under the following table:
For taxable years
beginning in:
The transition
percentage is:
2005 or 2006
2007, 2008, or 2009
3
6
(b) Deduction Limited to Wages Paid. -E
(1) In general.--The amount of the
deduction allowable under subsection (a) for
any taxable year shall not exceed 50 percent
of the W-2 wages of the taxpayer for the
taxable year.
*
*2
*
. *
*
*
*
(c) Qualified Production Activities Income.--For
purposes of this section-(1) In general.--The term "qualified
production activities income" for any taxable
•
- 73 -
year means an amount equal to the excess (if
any) of-(A) the taxpayer's domestic
production gross receipts for such
taxable year, over
(lB) the sum of-(i) the cost of
goods sold that are
allocable to such
receipts, and
(ii) other expenses,
losses, or deductions
(other than the deduction
allowed under this
section), which are
properly allocable to
such receipts.
*
*
*
*
(4) Domestic production gross receipts.-(A) In general.--The term
"domestic production gross
receipts" means the gross receipts
of the taxpayer which are derived
from--
*
*
*
*
*
*
(ii) in the case of
a taxpayer engaged in the
active conduct of a
construction trade or
business, construction of
real property performed
in the United States by
the taxpayer in the
ordinary course of such
trade or business * * *
*
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