Petition for Writ of Certiorari — L & B Corp. v. Commissioner

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oupreme Court, U.S.

FILED

APR 4 1969

No.

In The

JOSEPH F. SPANIOL, JR;

Supreme Court of the United §_ CLERK

October Term, 1988 a ee

L & B CORPORATION, a Nebraska Corporation

Petitioner,

vs.

COMMiUSSIONER OF INTERNAL REVENUE,

Respondent.

LARRY A. LARSEN and BETTY J. LARSEN,

Petitioners,

VS.

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

ESTATE OF HOWARD C. LARSEN, DECEASED, MAXINE

J. LARSEN, EXECUTRIX and MAXINE J. LARSEN,

Petitioners,

vs.

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

Pau. A. RAUTH

Marks & CLARE

American Charter Center

1623 Farnam Street, Suite 900

Omaha, Nebraska 68102

(402) 422-0900

COCKLE LAW BRIEF PRINTING CO., (800) 225-6964 9

OR CALL COLLECT (402) 342-2831 x \

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QUESTIONS PRESENTED FOR REVIEW

1. Do the Petitioners’ refrigerated structures qualify

as “section 38 property,” as defined in the Internal Reve-

nue Code of 1954, as amended, because:

(a) they are “other tangible property” used as an

integral part of production, and

(b) they are not buildings?

2. Did the Court of Appeals err in setting aside the

Tax Court’s finding that the Petitioners’ refrigerated

structures “do not function as buildings” (and, therefore,

are not buildings) without having determined that such

finding was clearly erroneous, as required by Federal

Rule of Civil Procedure 52(a)?

TABLE OF CONTENTS

Questions Presented

Opinions Below

Jurisdiction

Statutes and Regulations Involved

Statement of the Case.

Reasons for Granting the Writ

Conclusion

Appendix

A p p

ill

TABLE OF AUTHORITIES

Page

Cases:

Anderson v. City of Bessemer City, North Carolina,

IE pa a 16, 17

Colony, Inc. v. Commissioner, 357 U.S. 28............. 18

Giannini Packing Corp. v. Commissioner, 83 T.C. 526

ene ES IS 22, 34,133, 17

Loda Poultry, Inc. v. Commissioner, 88 T.C. 816... 12, 14, 17

Munford, Inc. v. Commissioner, 849 F.2d 1398

Ss ie AS Se I RS is Vals ee

STATUTES AND REGULATIONS:

I foo ck eet e essen sans 2

eee CRE CI9OU) ... 2. ee eee ees 5, 6, &, it

6) rr 4,19

GS 4, 19

meee Se SOM e) (1988)...........-........ by 19

eee 5

Treas. Reg. § 1.48-1(e)(1) (1980) ............... 5, 10, 14

RuLEs:

egy sec se sects a es $05 8e, ho hy 17

I ee ee 15

—-

In The

Supreme Court of the United States

October Term, 1988

—_—

L & B CORPORATION, et al.,

Petitioners,

Vs.

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

y %

The Petitioners, L & B Corporation,” Larry A. Larsen

and Betty J. Larsen, Estate of Howard C. Larsen,

Deceased, Maxine J. Larsen, Executrix, and Maxine J.

Larsen, respectfully pray that a writ of certiorari issue to

review the judgment and opinion of the United States

Court of Appeals for the Eighth Circuit in this case.

(1) Entities affiliated with L & B Corporation (now known as

Millard Refrigerated Services, Inc.) include these corpora-

tions: Millard Warehouse, Inc; Lac Seul Sporting Club,

Inc.; Freezer Services, Inc. (Iowa); Millard Warehouse Avi-

ation, Inc.; Millard Warehouse, Batavia, Inc.;,M.P.S., Inc.;

(Continued on following page)

OPINIONS IN THE COURTS BELOW

_ The opinion of the Court of Appeals (App. A, infra,

1-21) is reported at 862 F.2d 667. The opinion of the

United States Tax Court (App. D, infra, 25-59) is reported

at 88 T.C. 744.

JURISDICTION

Judgment of the Court of Appeals was entered on

November 25, 1988. (App. B, infra, 22, 23) The order of

the Court of Appeals denying the Petition for Rehearing

was entered on January 6, 1989 (App. C, infra, 24), and

this petition for certiorari was filed within 90 days of that

date. This Court has jurisdiction under 28 U.S.C. §1254(1).

(Continued from previous page)

lowa-Nebraska By-Products, Inc.; Millard Warehouse Enter-

prises, Inc.; Millard Refrigerated Services-S.O., Inc.; L.A.L.,

Inc.; Larsen Realty, Inc.; Millard Refrigerated Services-Des

Moines, Inc.; Millard Refrigerated Services-Omaha, Inc.; Mill-

ard Refrigerated Services-Denison, Inc.; Millard Refrigerated

Services-Grand Island, Inc.; Millard Refrigerated Services-lowa

City, Inc.; Millard Refrigerated Services-Dodge City, Inc.; Mill-

ard Refrigerated Services-Friona, Inc.; Millard Refrigerated

Services-Greeley, Inc.; Millard Refrigerated Services-M.A.., Inc.,

and these partnerships: Larsen Realty; Millard Warehouse, Des

Moines; Millard Warehouse, Denison; Millard Warehouse, lowa

City; Millard Warehouse, Omaha; Millard Warehouse, Grand

Island; Millard Warehouse, Friona; Millard Warehouse, Dodge

City

STATUTES AND REGULATIONS INVOLVED

Statutes:

26 U.S.C. §38 (1980):

§38. Investment in certain depreciable property

(a) General rule. - There shall be allowed,

as a credit against the tax imposed by this chapter,

the amount determined under subpart B of this

part.

(b) Regulations. - The Secretary shall pre-

scribe such regulations as may be necessary to

carry out the purposes of this section and subpart

26 U.S.C. §48(a)(1) (1980):

§48. Definitions; special rules

(a) Section 38 property. -

(1) In general. - Except as provided in

this subsection, the term “section 38 property”

means -

(A) tangible personal property (other

than an air conditioning or heating unit), or

(B) other tangible property (not includ-

ing a building and its structural components) but

only if such property -

(i) is used as an integral part of manu-

facturing, production, or extraction or of furnish-

ing transportation, communications, electrical

energy, gas, water, or sewage disposal services, or

(ii) constitutes a research facility used

in connection with any of the activities referred to

in clause (i), or

(iii) constitutes a facility used in con-

nection with any of the activities referred to in

clause (i) for the bulk storage of fungible commodi-

ties (including commodities in a liquid or gaseous

state), or

(i) the construction, reconstruction, or

erection of the elevator or escalator is completed by

the taxpayer after June 30, 1963, or

(ii) the elevator or escalator is acquired

after June 30, 1963, and the original use of such

elevator or escalator commences with the taxpayer

and commences after such date, or

(D) single purpose agricultural or hor-

ticultural structures; or

(E) in the case of a qualified rehabilitated

building, that portion of the basis which is attribu-

table to qualified rehabilitation expenditures

(within the meaning of subsection (g)).

Such term includes only property with respect to

which depreciation (or amortization in lieu of

depreciation) is allowable and having a useful life

(determined as of the time such property is placed

in service) of 3 years or more.

26 U.S.C. §168(b)(3)(A) (1988):

§168. Accelerated cost recovery system

(b) Applicable depreciation method. - for

purposes of this section -

(1) * + *

(2) + + *

(3) Property to which straight line

method applies - The applicable depreciation

method shall be the straight line method in the case

of the following property:

(A) Non-residental real property.

26 U.S.C. §168(c) (1988):

§168. Accelerated cost recovery system

poses of this section, the applicable recovery

period shall be determined in accordance with the

following table:

The applicable

In the case of: recovery period is

* + * + + +

Non-residental 31.5 years

real property

———EEeEeoeE—eO

26 U.S.C. §168(e)(2)(B) (1988):

§168. Accelerated cost recovery system

(e) Classification of property. For purposes

of this section -

(2) residential rental or non-residential

real property. -

(A) + + *

(B) Non-residental real property. - The

term “non-residental real property” means section

1250 property which is not -

(i) Residential real property, or

(ii) Property with a class life of less

than 7.5 years.

Regulations:

Treas. Reg. §1.48-1(e)(1) (1980)

(The text of the regulation cited above, for the year

indicated, is set forth at App. F, infra, 65, 66)

STATEMENT OF THE CASE

The jurisdiction of the United States Tax Court (here-

inafter “Tax Court”) was invoked by the Petitioners

under 26 U.S.C. §6213(a), by the filing of three cases in

the Tax Court requesting redetermination of income tax

deficiencies for the calendar years 1979 and 1980. These

cases were consolidated for trial and were tried to the Tax

Court without a jury.

During 1979 and 1980 the Petitioners, operating

through various partnerships, constructed and placed in

service, at several locations in Iowa and Nebraska, facili-

ties consisting of refrigerated structures and additions

thereto, together with loading docks, paved truck turn-

arounds and, in some instances, railroad trackage. The

refrigerated structures were designed, constructed and

used to rapidly freeze freshly slaughtered meat to an

extremely low temperature, and also to provide for fro-

zen and cold storage of meat and other products.

On their tax returns for 1979 and 1980, the Petitioners

claimed, as a credit against their income taxes, the invest-

ment tax credit which was allowed under 26 U.S.C. §§38

and 48, as then in effect, (hereinafter “ITC”) with respect

to the entire cost of their refrigerated structures, which

included the cost of the refrigeration equipment incorpo-

rated into these structures. On those tax returns, the

Petitioners used the 200% declining balance method of

depreciation with a seven year useful life, in computing

depreciation on those structures.

During audit of those returns, the Commissioner of

Internal Revenue (hereinafter “Commissioner”) allocated

a part of the total cost of these refrigerated structures to

the refrigeration equipment and the remainder of the cost

to the structures themselves. The Commissioner then

treated the refrigeration equipment as “tangible personal

property” and allowed ITC on the same as “section 38

property” under 26 U.S.C. 48(a)(1)(A). However, the Com-

missioner disallowed ITC on the costs he had allocated to

the structures themselves, stating that these structures

were “buildings” which were not “section 38 property”

and therefore not subject to ITC. For the same reason, the

Commissioner also disallowed the 200% declining bal-

ance method of depreciation on these refrigerated struc-

tures and extended their useful life.

Following trial, the Tax Court determined that these

refrigerated structures were “not buildings” but that their

useful life should be 15 years. (App. 59) The Tax Court

did not allow the 200% declining balance method of

depreciation. (App. 57)

The trial record shows that a “refrigerated structure”

is made up of two interdependent and indispensable

components, the first of which is a sealed, heavily insu-

lated air chamber, with the second being the refrigeration

equipment. The refrigeration equipment includes evap-

orators and high velocity electric fans located within the

air chamber, plus compressors electric motors, and

related equipment, located outside the air chamber. These

items of equipment inside and outside of the air chamber

are connected by piping containing the refrigerant

(ammonia). While in operation, the refrigeration equip-

ment causes the ammonia to be first compressed, outside

the air chamber, and then expanded within the air cham-

ber, resulting in the extraction of heat from the meat

within the chamber.

The trial record further establishes that the principal

function of these refrigerated structures — the freezing of

meat — is accomplished by removing substantially all of

the heat from the meat, and finally transferring this heat

to the air outside of the air chamber. Stating it sequen-

tially, the heat first transfers from the meat to the

extremely cold air within the air chamber, as it is blown

over and around the meat, and then from the air to the

refrigerant contained within the refrigeration equipment.

The refrigerant, having absorbed the heat, is then circu-

lated to the outside of the chamber, where the heat is

dissipated from the refrigerant into the outside air. This

process of transferring heat from the meat to the outside

air continues so long as the refrigeration equipment is

operating and the air chamber remains closed.

The trial record also shows that the air chamber alone

cannot cause the meat to freeze, nor can the refrigeration

equipment, without the air chamber, cause the meat to

freeze. The testimony at trial established that these

“refrigerated structures” are essentially very large deep

freezers which function very much like a home deep

freezer. They are operated on a continuous basis, twenty

four hours a day.

In order to determine whether the refrigerated struc-

tures were “section 38 property,” as defined in 26 U.S.C.

§48(a)(1)(B)(i), the Tax Court had to determine both:

(1) that the refrigerated structures are not buildings,

and

(2) that the refrigerated structures are used as an

integral part of production.

The Tax Court determined that these refrigerated struc-

tures were “not buildings,” but also determined that they

were not used as an integral part of production.

The Court of Appeals found that the structures were

“buildings,” and reversed the Tax Court on that point.

Having determined that the structures were “buildings,”

the Court of Appeals had no need to determine whether

or not the structures were used as an integral part of

production. It nevertheless made such a determination

when it found, de novo, that the “structures” do not

perform the function of freezing the meat. (App. A, infra,

15)

The Tax Court, in determining how these refrigerated

structures function, found that the facilities served two

functions, first, meat that was “hot,” i.e., freshly cut, was

frozen, and second, meat and other products were stored

at cold to extremely cold temperatures. (App. 37 and 47)

Having found these to be their functions, the Tax Court

held that these refrigerated structures are not buildings.

(App. 48)

In its opinion, the United States Court oi Appeals for

the Eighth Circuit (hereinafter “Court of Appeals”) stated

that it and other courts have used a two-part test to

determine whether or not a particular structure is a build-

ing. This test requires the Court to determine (1) whether

the structure resembles a building, and (2) whether the

structure functions as a building. (App. 8) Both the Tax

Court and the Court of Appeals concurred in finding,

under the first part of the above-mentioned test, that the

structures look like buildings. Petitioners do not chal-

lenge that finding in this Court.

With respect to “function,” the second part of the

above-mentioned test, the Court of Appeals disagreed

with the Tax Court’s conclusion, believing instead that

the refrigerated structures do function as buildings.

(App. 9) The Court of Appeals stated that the Tax Court

applied an unduly restrictive version of the function test

in this case. (App. 9) The Tax Court had determined that

the refrigerated structures do not function as buildings

because:

“the evidence does not indicate that significant

human activity, of quantity or quality, took place in

the refrigerated structures. The structures did not.

function as working space for employees and equip-

ment * * *.” (App. 47)

The Court of Appeals adopted a somewhat different

function test stating that:

“Thus, a structure functions as a ‘building’ if it pro-

vides shelter for significant machine or animal activ-

ity or if it provides working space for humans. Under

this broader concept of ‘function,’ the refrigerated

structures constitute ‘buildings. * * * The refrigerated

structures provide shelter for the refrigeration equip-

ment and provide working space for the employees

* * *. Applying the test above, we find that these

structures function as ‘buildings.’ ” (App. 12)

In its opinion, the Court of Appeals recognized that

several courts have applied a narrower function test in

determining whether refrigerated structures constitute

“buildings.” (App. 13) It further acknowledged that it

had departed from the narrow definition of “buildings”

used by the Tax Court and several other circuits. (App.

12, n.8)

In further discussion as to whether or not these struc-

tures were essentially an item of machinery or equip-

ment, and therefore not buildings, under the definition of

“building” established by Section 1.48-1(e)(1) of the Treas-

ury Regulations, the Court of Appeals stated:

“After reviewing the record, we find that the struc-

tures in this case do not perform the function of

freezing the meat. Rather, they were designed to

withstand the cold temperatures produced by the

compressor engines, the refrigeration coils, and the

blowers. The insulation helped to maintain the condi-

tions in the structure; the structure itself did not create

those conditions. Based on these facts, it appears that

the structures are sufficiently separate from the equip-

ment that it cannot fairly be said that the structures

performed the function.” (App. 14, 15) (emphasis

added)

Here the Court of Appeals was viewing the “structure”

separately from the equipment, rather than viewing the

entire functioning unit as a “refrigerated structure” con-

sisting of the air chamber and the refrigeration equip-

ment, all of which, as an operating unit, performs the

function of freezing the meat.

In Part II B of its opinion, the Court of Appeals

recognized the “clearly erroneous” test under F.R.C.P.

52(a) when it addressed the issue of whether the blast

freezing of meat constitutes manufacturing or produc-

tion, pursuant to 26 U.S.C. § 48(a)(1)(B)(i). (App. 17-21)

Since the Treasury Regulations define “production,” and

state that property used as an integral part of the “pro-

cessing of meat” will be “section 38 property,” the Court

of Appeals had to address the question of whether or not

the “freezing of meat” constituted the “processing of

meat.” (App. 17, 18) In footnote 12 to its opinion the

Court of Appeals stated that this issue involves an anal-

ysis of fact and law, and that in mixed law-fact questions

involving interpretations of the Internal Revenue Code,

the Court will only reverse if the lower Court’s finding is

clearly erroneous. (App. 18, n.12) The Court of Appeals,

without specifically mentioning F.R.C.P. 52(a), correctly

applied that rule and determined that the Tax Court

“clearly erred” in finding that the subject property was

not used as an integral part of processing meat. (App. 18)

After referring to the testimony of three experts, all of

whom essentially said that the freezing of meat is the

processing of meat, the Court of Appeals concluded:

“Thus, blast freezing constitutes the processing of meat

and the Tax Court clearly erred in determining other-

wise.” (App. 18-20)

Nevertheless, in reversing the Tax Court’s determina-

tion on the issue of the “function” of Petitioners’ refriger-

ated structures and its determination that they “are not

buildings,” the Court of Appeals has made no determina-

tion that the findings of the Tax Court are “clearly erro-

neous.” This omission is unexplained, for nowhere in its

opinion does the Court of Appeals state that the “clearly

erroneous” test of F.R.C.P. 52(a) is inapplicable to its

reversal of the Tax Court’s findings on the fact question

of whether or not these refrigerated structures “function”

as “buildings,” and on the ultimate question of whether

or not they are buildings.

Ly.

REASONS FOR GRANTING THE WRIT

1. THE DECISION OF THE COURT OF APPEALS

AS TO THE “FUNCTION” OF THE PETITIONERS’

REFRIGERATED STRUCTURES IS DIRECTLY IN

CONFLICT WITH THE DECISION OF THE UNITED

STATES COURT OF APPEALS FOR THE ELEVENTH

CIRCUIT IN MUNFORD, INC. V. COMMISSIONER OF

INTERNAL REVENUE, 849 F.2d 1398 (1988) AND IS

ALSO DIRECTLY IN CONFLICT WITH DECISIONS

OF THE TAX COURT, INCLUDING LODA POULTRY

CO. V. COMMISSIONER, 88 T.C. 816 (1987) AND WITH

A POSITION TAKEN BY THE COMMISSIONER IN

GIANNINI PACKING CORP. V. COMMISSIONER, 83

T.C. 526 (1983).

The Court of Appeals admitted that its decision is in

conflict with a decision of the United States Court of

Appeals for the Eleventh Circuit when it stated that it

declined to follow that Court’s decision in Munford, supra.

(App. 10) In Munford, supra, on similar facts, the Court of

Appeals for the Eieventh Circuit affirmed the Tax Court

in its finding that the refrigerated structure involved was

not a building under the functional test, stating that the

principal purpose or function of the refrigerated area is

not to furnish working space for employees, but to pro-

vide an area in which frozen foods may be stored at low

temperature, and that the employees’ activities are

merely supportive of and ancillary to that principal pur-

pose or ‘function. (849 F.2d 1398, 1403) The Court of

Appeals in Munford, supra, determined that the Tax

Court’s finding of fact in this regard was not clearly

erroneous and therefore not reversible. (849 F.2d 1398,

1404)

In this case, the Tax Court determined that the struc-

tures in question did not function as working space for

employees and equipment, but instead functioned to

freeze meat and to provide low temperature storage for

meat and other food products, and that the refrigerated

structures performed the function, not the employees.

(App. 37 and 47) The foregoing Tax Court finding as to

the function of the refrigerated structures is substantially

identical to that found by the Tax Court in Munford, supra,

except that in this case, in addition to frozen storage,

meat is actually frozen, while in Munford, supra, there was

only frozen storage. The procedural treatment, on appeal,

of these similar Tax Court findings is to be distinguished,

however. In Munford, the Court of Appeals found the Tax

Court was not clearly in error in determining the function

of the refrigerated structure. In this case the Court of

Appeals reversed the Tax Court without determining that

the Tax Court was clearly in error, merely determining

that it disagreed with the Tax Court, and making its own

de novo determination of the “function” of the subject

refrigerated structures.

The Court of Appeals below wrongly made findings

in reference to the “structure,” looking at the “structure”

or air chamber alone and not as an integrated complete

unit, ie., a “refrigerated structure.” Properly it should

have considered the complete “refrigerated structure,”

i.e., the air chamber and the refrigeration equipment com-

bined as one functioning unit. One can no more have a

“refrigerated structure” without the operating refrigera-

tion equipment than one can have a “motor vehicle”

without a motor, or a brick kiln? without a burner to

provide heat.

The decision of the Court of Appeals below is also in

conflict with the Tax Court’s decision in Loda Poultry,

supra, a case in which three compartments of the tax-

payer’s refrigerated structure were used to store products

at low temperatures, or as frozen products. These com-

partments were maintained at temperatures varying from

32° F. to 0° F. These compartments were found to be “not

a building.” (88 T.C. 816, 827) Except for the fact that

these three compartments were not used to actually

freeze meat, they functioned in a manner comparable to

the Petitioners’ refrigerated structures.

The decision of the Court of Appeals below is also in

conflict with a position taken by the Commissioner in

Giannini Packing Corp., supra, which the Court of Appeals

stated had “no relevant distinguishing factors” from this

2 See Treas. Reg. § 1.48-1(e)(1) as to this final example, the

brick kiln, which is an approved structure classified as not

being within the meaning of the term “building.” Brick kilns

generate and enclose heat, rather than cold, in the course of the

production of bricks.

ieiiieateeinitineanmainemounidiemamimm iaeaaiiiial

case, as to the “processing” issue. (App. 20) That case

involved a structure which used the same refrigeration

principle and performed substantially identical functions

as those of the Petitioners herein, with fresh fruit, not

meat, as the foodstuff being processed, and with the

internal operating temperature being near 32° F. instead

of well below freezing. However, in Giannini, supra, the

parties had agreed that the structure in question was not

a building. It can thus be seen that the Commissioner

agreed to a position in Giannini, supra, on the factual

question as to whether or not the structure was a “build-

ing,” which is exactly opposite from the position of the

Commissioner in this case.

To resolve these conflicts, this Court should grant

certiorari to review the judgment below. ~

2. IN FAILING TO APPLY THE “CLEARLY ERRO-

NEOUS” TEST REQUIRED BY E.R.C.P. 52(a), THE

COURT OF APPEALS, IN REVERSING THE TAX

COURT ON THE “FUNCTION” ISSUE, HAS SO FAR

DEPARTED FROM THE ACCEPTED AND USUAL

COURSE OF JUDICIAL PROCEEDINGS AS TO CALL

FOR AN EXERCISE OF THIS COURT’S POWER OF

SUPERVISION.

Should this Court determine that the Court of

Appeals has improperly failed to use the “clearly erro-

neous” test under F.R.C.P. 52(a), in reversing the Tax

Court’s finding of fact on the question of how the Peti-

tioners’ refrigerated structures “function,” then this

Court may, under its Rule 23.1, grant this Petition for Writ

of Certiorari and also summarily dispose of this case on

its merits, partially reversing the Court of Appeals as to

its finding, and holding, that the Petitioners’ structures

function as buildings. This would leave standing the Tax

Court's finding that these refrigerated structures function

to freeze meat (and to provide for frozen storage), that

they therefore do not function as buildings, and that they

are not buildings. It would also leave standing the deter-

mination by the Court of Appeals that the “freezing of

meat” is the “processing of meat,” therefore “produc-

tion.” It would then follow that these refrigerated struc-

tures are “other tangible property (other than a building

and its structural components)” which are “used as an

integral part of production,” and are therefore “section 38

property.”

In reviewing decisions appealed from the Tax Court,

Courts of Appeal are bound by the following:

(a) Findings of fact shall not be set aside unless

clearly erroneous. F.R.C.P. 52(a)

(b) Where there are two permissible views of the

evidence, the fact finder’s choice between them cannot be

clearly erroneous. Anderson v. City of Bessemer City, North

Carolina, 470 U.S. 564, 574 (1985).

Using the same evidence, the Tax Court and the

Court of Appeals have arrived at exactly opposite find-

ings of fact on the question of the “function” of Peti-

tioners’ refrigerated structures, resulting in exactly

opposite findings on the issue of whether or not these

structures are or are not buildings.

The Tax Court’s view of the evidence on the question

of “function” is clearly permissible, even if another court

might find differently when presented with the same

evidence, including testimony from a number of expert

and lay witnesses and dozens of documents. The Court of

Appeals for the Eleventh Circuit, agreeing with the Tax

Court below, reached a similar conclusion as to the “func-

tion” of a similar facility in Munford, supra. The Tax Court

did likewise in Loda Poultry, supra. Also, the Commis-

sioner and the taxpayer in Giannini, supra, agreed on the

“function” and “nonbuilding” issue with respect to the

structures involved in that case.

It appears, then, that in this case there are two per-

missible views of the evidence, the view of the Tax Court

that these refrigerated structures are not buildings, because

they do not function as buildings and the view of the Court

of Appeals that these same structures are buildings,

because they do function as buildings.

Because there are two permissible views of the evi-

dence, the choice between them, made by the Tax Court

as fact finder, cannot be clearly erroneous under the rule

established by this Court in Anderson, supra. (470 U.S. 564,

574)

Therefore, the Tax Court’s finding of fact as to the

“function” of these refrigerated structures, and its ulti-

mate finding that they “are not buildings,” cannot be

clearly erroneous, and cannot be set aside. Any action by

the Court of Appeals doing so is in violation of F.R.C.P.

52(a), is contrary to the rule of Anderson, supra, and is

such a distant departure from the accepted and usual

course of judicial proceedings as to call for the exercise of

this Court’s power of supervision.

Accordingly, this Court should grant certiorari to

review the judgment below.

3. FOR UNIFORM INTERPRETATION AND

APPLICATION OF FEDERAL TAX LAWS AS THEY

PERTAIN TO THE INVESTMENT TAX CREDIT AND

TO THE DEPRECIATION OF REFRIGERATED STRUC-

TURES SUCH AS THOSE HERE INVOLVED, THE

QUESTION OF WHETHER SUCH STRUCTURES ARE,

OR ARE NOT, BUILDINGS MUST BE RESOLVED.

Only the Commissioner can enlighten this Court as to

how many taxpayers are currently involved in tax dis-

putes similar to those in this case, which are not yet

determined by a court. This Court may take judicial

notice, however, of the existence of the commercial refrig-

eration and storage industry in the United States, consist-

ing of a substantial number of taxpayers who are owners

and operators of refrigerated structures similar to those

here involved, which are used either for the freezing of

meat, or for frozen storage of meat and other products, or

for both purposes. The record below demonstrates that

these structures are built at great cost. For the commercial

refrigeration and storage industry, it seems apparent that

there are tax years still open which involve both the

investment tax credit issue and the depreciation issue.

This Court has previously granted certiorari to address

questions under repealed tax laws where the questions

presented were “of substantial importance in the admin-

istration of the income tax laws for earlier taxable years.”

Colony, Inc. v. Commissioner, 357 U.S. 28, 32 (1958).

In addition, for years both before and after repeal of

the investment tax credit provisions of the Internal Reve-

nue Code, the depreciation issue, as to both useful life

(recovery period) and method of depreciation, is still of

great importance to Petitioners and others.

The record below shows that subsequent to the tax

years here involved, due to expansion of older facilities,

as well as development of new locations, the Petitioners

have continued to construct, and are still constructing,

refrigerated structures of the type here involved. The

question of whether such structures are, or are not,

“buildings” is material in determining not only the

investment tax credit, but also in determining, both for

now and for the future, the proper method of deprecia-

tion and the useful life of such structures.

Under current law if such structures are “buildings”

then they would seem to be “non-residential real prop-

erty”. See 26 U.S.C. § 168(e)(2)(B). As such they must be

depreciated by the straight line method under 26 U.S.C.

§ 168(b)(3)(A) and their useful life (recovery period) must

be 31.5 years under 26 U.S.C. § 168(c).

However, if they are “not buildings,” then under the

decision in Munford, supra, a taxpayer within the jurisdic-

tion of the 11th Circuit, having constructed a refrigerated

structure substantially identical to those involved in this

case, would presumably depreciate his facility using

either the 200% or 150% declining balance method with a

useful life (recovery period) possibly as short as 7 years.

Unless this Court settles the question of whether

such refrigerated structures are, or are not, “buildings”

under the Internal Revenue Code, taxpayers within juris-

dictions other than the 8th Circuit and the 11th Circuit

will remain in a quandary as to how they should depreci-

ate similar refrigerated structures. Presumably, such tax-

payers would logically prefer to follow Munford, supra, so

as to accelerate the depreciation of their structures for

income tax purposes. However, because of the differences

between the decision in Munford, supra, and the decision

of the Court of Appeals below on the “building” issue,

taxpayers such as the Petitioners herein, with refrigerated

structures of this type, who are within the jurisdiction of

the Eighth Circuit Court of Appeals, will be at great

economic disadvantage as compared to taxpayers outside

of that jurisdiction. The latter taxpayers, treating their

structures “not as buildings,” will be able to reduce their

taxable incomes by depreciation expenses determined on

their structures through the use of the 200% or 150%

declining balance method of depreciation with possibly

as short as a 7 year useful life, as opposed to the use of

the straight line method of depreciation with a 31.5 year

useful life.

This non-uniform application of the federal tax law,

granting a competitive advantage to some in the refrig-

eration industry while denying it to others, justifies grant

of certiorari.

CONCLUSION

For the foregoing reasons, a Writ of Certiorari should

be granted.

Respectfully submitted,

L & B CORPORATION, et al.

Petitioners

PauL A. RAUTH

Marks & CLARE

American Charter Center

1623 Farnam Street, Suite 900

Omaha, Nebraska 68102

(402) 422-0900

Attorney for Petitioners

App. 1

APPENDIX A

L & B CORPORATION, a Nebraska

corporation, Appellant,

Vv.

COMMISSIONER OF INTERNAL

REVENUE, Appellee.

Larry A. LARSEN and Betty J.

Larsen, Appellants,

COMMISSIONER OF INTERNAL REVENUE, Appellee.

ESTATE OF Howard C. LARSEN,

Deceased, Maxine J. Larsen, Executrix

and Maxine J. Larsen, Appellants,

COMMISSIONER OF INTERNAL

REVENUE, Appellee.

No. 87-2387.

United States Court of Appeals,

Eighth Circuit.

Submitted June 16, 1988.

Decided Nov. 25, 1988.

Partnership which sought an investment tax credit

for refrigerated structures and associated paved truck

turnaround areas and railroad tracks appealed a decision

of the United States Tax Court, Mary Ann Cohen, J., 88

T.C. 744, which denied any tax credit. The Court of

App. 2

Appeals, Heaney, Circuit Judge, held that: (1) the refriger-

ated structures were “buildings,” within the meaning of

the Internal Revenue Code, and thus owner was not

entitled to credit for the structures, but (2) the blast

freezing of meat constitutes processing of meat and the

turnarounds and railroad tracks constituted property

“used directly in the activity” of blast freezing meat, so as

to be entitled to credit.

Reversed.

Paul A. Rauth, Omaha, Neb., for appellant.

Thomas R. Lamons, Dept. of Justice, Washington,

D.C., for appellee.

Before HEANEY and MAGILL, Circuit Judges, and

LARSON,” Senior District Judge.

HEANEY, Circuit Judge.

L & B Corporation, Larry A. Larsen, Betty Larsen, the

estate of Howard Larsen, Maxine J. Larsen, Lance Sterling

Larsen and Ashley Larsen, partners in the partnerships of

Larsen Realty, Millard Warehouse — Des Moines (Millard-

DM), and Millard Warehouse - Denison (Millard-D),

appeal a decision of the tax court denying investment tax

credits for refrigerated structures and associated paved

truck turnaround areas and railroad tracks.

*The HONORABLE EARL R. LARSON, United States Senior

District Judge for the District of Minnesota, sitting by

designation.

App. 3

The individual partners claimed investment tax

credits in 1979 and 1980 pursuant to U.S. Internal Reve-

nue Code, 26 U.S.C. § 38, for the cost of constructing

these facilities. The Commissioner of Internal Revenue

originally allowed a credit for the refrigeration equip-

ment used in the structures and the railroad trackage but

disallowed a credit for the cost of constructing the struc-

tures themselves.! The Commissioner also disallowed a

credit for the truck turnaround areas which had subse-

_quently been added to the facilities. On appeal, the Tax

Court held that the refrigerated structures, the truck turn-

arounds, or the railroad tracks were not “buildings”

within the meaning of the Internal Revenue Code. The

Tax Court denied any tax credit, however, as it found that

none of the property was used in manufacturing, produc-

tion or extraction, as required under the Code.?

The partners argue on appeal that an investment tax

credit should be given for the cost of the refrigerated

structures, truck turnarounds and railroad tracks because

they are all used in the process of rapidly freezing meat,

an act which constitutes the processing of meat within the

meaning of the Internal Revenue Code. The Commis-

sioner argues that freezing does not constitute the “pro-

cessing of meat” because it improves neither the quality

1 The investment tax credit given for the cost of the refrig-

eration equipment is not an issue on appeal. See Tax Court

Opinion, at 16; Appellee’s Brief, at 12.

2 The Tax Court’s opinion, which includes a detailed state-

ment of the facts of this case, is reported at 88 T.C. 744 (1987)

[available on WESTLAW, 1987 WL49298].

seiner

App. 4

nor the marketability of the product. Furthermore, the

Commissioner challenges the Tax Court’s determination

that the structures are not “buildings” within the mean-

ing of the Code and Treasury Regulations.

We reverse the Tax Court’s holding that the refrige-

rated structures are not buildings within the meaning of

the Internal Revenue Code. We also reverse the Tax

Court’s holding that the rapid freezing of meat is not the

“processing of meat.” We hold that the partners may not

claim a tax credit for the structures but may claim a credit

for the truck turnaround areas and those railroad tracks

used to transport meat to the structures.

I. FACTUAL BACKGROUND

The partners claimed investment tax credits for the

cost of constructing or improving several refrigerated

structures located in Omaha, Nebraska; Lincoln,

Nebraska; Des Moines, Iowa; and Denison, Iowa. The

refrigerated structures are all constructed in a similar

manner. They rest on a foundation of poured concrete

and concrete block footings. The floors of the structures

are 6-inch poured concrete slabs. Beneath the concrete

floor is a 6-inch layer of polystyrene insulation, which

serves to maintain cold temperatures inside the struc-

tures. Beneath the insulation and extending under the

loading dock is a layer of gravel. Clay pipes within the

gravel layer serve to remove waste heat from com-

pressors inside the structures, preventing the ground

below the floor from freezing, buckling or heaving.

The walls are made of steel and concrete blocks. The

roof is made of corrugated steel and is covered with nine

App. 5

inches of insulation. A single-ply membrane roof covers

the insulation.

The partners installed storage racks, refrigeration

coils and blowers inside the refrigerated structures. The

racks are bolted to the concrete floor, and the coils and

blowers are attached to the ceiling above the racks. The

storage racks are designed to facilitate the circulation of

air over and around the meat stored on the racks. The

racks are removable, but holes where the bolts entered

the concrete floor would have to be plugged. The lighting

systems in these facilities are especially adaptable to

extremely low temperatures. An elaborate sprinkler sys-

tem has been designed to prevent water from freezing in

the pipes. The refrigeration equipment, including the

coils and blowers, could be removed without structural

damage.

Local meat packers, such as Swift, lowa Beef Packers,

and Farmland Foods, ship large quantities of fresh meat

to these refrigerated structures. The meat, usually boxed

or packaged with labels or brand names, is unloaded at

the rail and truck docks adjacent to the structures, placed

on pallets, and taken into special compartments inside

the structures, called blast freezers, to be rapidly frozen.

When this process is finished, the meat is stored in the

other refrigerated compartments until shipped back to

the packers or to third party purchasers by truck or rail.

The rail facilities at Millard-D and Millard-DM accommo-

dated the partnership’s export business. The railroad

tracks at Millard-DM were used for both in-shipments

and out-shipments. Those tracks at Millard-D were used

almost exclusively for out-shipments.

During 1979 and 1980, the facilities handled as much

as 20 million pounds of meat per week. Although the

App. 6

facilities received some pre-frozen meat, an estimated

99% of all meat received went through the blast freezing

process.

Il. LEGAL DISCUSSION

The sole issue on appeal is whether, under section 38

and section 48(a)(1)(B) of the Internal Revenue Code? the

3 Section 38, in effect during the pertinent period,

provided:

(a) General Rule. - There shall be allowed, as a credit

against the tax imposed by this chapter, the amount deter-

mined under subpart B of this part.

(b) Regulations. —- The Secretary shall prescribe such regula-

tions as may be necessary to carry out the purpose of this

section and subpart B.

Internal Revenue Code of 1954, 26 U.S.C. § 38 [as added by Sec.

2(a), Revenue Act of 1962, Pub.L. No. 87-834, 76 Stat. 960].

Section 48, in effect during the pertinent period, provided:

(a) Section 38 property. —

(1)In general. - Except as provided in this subsection,

the term “section 38 property” means -

(A) tangible personal property (other than an air con-

ditioner or heating unit), or

(B) other tangible property (not including a building and

its structural components) but only if such property —

(i) is used as an integral part of manufacturing, produc-

tion, or extraction or of furnishing transportation, com-

munications, electrical energy, gas, water, or sewage

disposal services,” * *

Internal Revenue Code of 1954, 2 U.S.C. § 48(a)(1)(A)-(B)(i) [as

added by Sec. 2(a), Revenue Act of 1962, Pub. L. No. 87-834, 76

Stat. 960] (emphasis added).

App. 7

refrigerated structures, the truck turnarounds and the

railroad tracks are “other tangible property,” other than

buildings, used as an integral part of manufacturing or

production.‘ The issues before this Court are whether the

refrigerated structures constitute buildings and whether

any of the property is being used in manufacturing or

production.

A. The Refrigerated Structures

Section 48 of the Internal Revenue Code authorized a

tax credit for tangible property, excluding buildings, used

4 The investment credit provisions of the Internal Revenue

Code, effective in 1979 and 1980, allowed a tax credit for

investments in certain types of depreciable property. These

credits were enacted in 1962 to create tax incentives to pur-

chase new equipment. Congress hoped to improve our compet-

itive position abroad and to stimulate the economy by

encouraging the modernization and expanded use of capital

equipment and machinery. Yellow Freight System, Inc. v. United

States, 538 F.2d 790, 794 (8th Cir.1976); Illinois Cereal Mills, Inc.

v. Commissioner, 789 F.2d 1234, 1236 (7th Cir.), cert. denied, 479

U.S. 995, 107 S.Ct. 600, 93 L.Ed.2d 600 (1986). The purpose of

the investment tax credit was to encourage investment in

machinery and equipment. H.R.Rep. No. 1447, 87th Cong., 2d

Sess. (1962-3 Cum.Bull. 405, 413). Most tangible personal prop-

erty qualified for a tax credit under section 48(a)(1)(A). Id.

Congress also allowed investment credits for improvements to

real property in section 48(a)(1)(B) if the real property was

used as an integral part manufacturing or production.

H.R.Rep. No. 1447, supra (1962-3 Cum.Bull. at 413, 415); S.Rep.

No. 1881, 87th Cong., 2d Sess. (1962-3 Cum.Bull. at 720, 722),

U.S. Code Cong. & Admin.News 1962, p. 3297. Buildings and

structural components of buildings were expressly excluded

from this provision. H.R.Rep. No. 1447, supra (1962-3

Cum.Bull. at 415); S.Rep. No. 1881, supra (1962-3 Cum.Bull at

722).

App. 8

in manufacturing industries. Although the Code does not

define what constitutes a “building,” the Treasury Regu-

lations restate major portions of legislative history and

give some indication of what types of structures Congress

intended to exclude from the tax credit provision.

Section 1.48-1(e)(1) of the Treasury Regulations

defines a building and its structural components as:

*** any structure or edifice enclosing a space within

it walls, and usually covered by a roof, the purposes

of which is, for example, to provide shelter or hous-

ing, or to provide working, office, parking, display,

or sales space. The term includes, for example, struc-

tures such as apartment houses, factory and office

buildings, warehouses, barns, garages, railway or bus

stations, and stores.

26 C.F.R. § 1.48-1(e)(1) (emphasis added).

The regulation and the relevant legislative history

define a “building” in terms of physical appearance and

function. Yellow Freight System, Inc. v. United States, 538

F.2d 790, 796 (8th Cir.1976). The test that this Court and

others have used to categorize structures is: 1) whether

the structures resemble buildings; and 2) whether ey

function as buildings.

1. Resemblance

The Tax Court held, and this Court concurs, that the

structures look like buildings. Tax Court Opinion, at 23.

“The structures are permanent structures of substantia]

dimensions which enclose spaces surrounded by walls

and covered by roofs.” Id.

App. 9

2. Function

We disagree, however, with the Tax Court’s conclu-

sion with respect to the second question. We believe that

the refrigerated structures do function as buildings for

several reasons.

First, Congress and the Treasury Regulations specifi-

cally list a warehouse as a building. 26 C.F.R. § 1.48-1(e);

H.R.Rep. No. 1447, supra (1962-3 Cum.Bull. at 516); S.Rep.

No. 1881, supra (1962-3 Cum.Bull. at 859).

Second, the Tax Court applied an unduly restrictive

version of the function test in this case. Following Mun-

ford, Inc. v. Commissioner, 87 T.C. 463 (1986) [available on

WESTLAW, 1986 WL 22010] aff’d 849 F.2d 1398 (11th

Cir.1988),5 the Tax Court held that the structures in the

present case are not “buildings” because they do not

primarily provide working space for humans. Tax Court

Opinion, at 25. We believe that this holding ignores the

full definition in Treas.Reg. § 1.48-1(e)(1), which specifi-

cally includes structures that provide shelter, housing,

working space, office space, parking, display areas, or

sales space within the definition of “buildings.” Nothing,

either in the Code or in the Regulations, implies that this

space must be primarily occupied by humans to qualify

as a building.

5 In Munford, a taxpayer sought an investment tax credit

for refrigerated warehouses in which he stored prepackaged

and prefrozen foods. Both the Tax Court and the Eleventh

Circuit denied a tax credit because the warehcuses did not

provide working space for humans which was more than inci-

dental to the main purpose of the structure to store frozen

goods. Munford, 849 F.2d at 1404.

App. 10

Moreover, the Tax Court’s test contradicts Congress’

instruction that the term “building” be given its com-

monly accepted meaning. H.R.Rep. No. 1447, supra

(1962-3 Cum.Bull. at 516); S.Rep. No. 1881, supra (1962-3

Cum.Bull. at 859). In Munford, the Eleventh Circuit

acknowledged that the Tax Court has formulated a nar-

rower definition of “building” than was intended by Con-

gress. That court stated:

In reviewing this determination, we begin with the

premise that “in the investment tax credit context,

the term ‘building’ has become a term of art,” not-

withstanding Congress’ original intent that the term

be accorded its commonly accepted meaning.

Munford, 849 F.2d at 1403, citing Munford, 87 T.C. at 478.

Thus, the Tax Court’s definition nullifies Congress’

intent. We decline to follow Munford’s acquiescence in

this reading of the Treasury Regulations.®

6 The Tax Court’s departure from the original intent of

Congress stems from its interpretation of Yellow Freight System,

Inc. v. United States, 538 F.2d 790 (8th Cir.1976). In Yellow

Freight, this Court held that docks and inspection lanes con-

structed by a freight carrier constituted “buildings” within the

meaning of section 48(a)(1)(B). The loading docks and inspec-

tion lanes were permanent structures used to expedite freight

and to inspect the long-haul vehicles. In a footnote to its

discussion of the “function” test, this court stated:

We consider the amount of human activity which occurs

within the structure an important consideration under

§ 48(a)(1)(B) since “buildings,” according to Treas.Reg.

§ 1.48-1(e)(1), typically provide work space for such

human activity. The quantum of employee activity is, in

our opinion, critical in determining whether the function

of a given structure is principally, or only incidentally, to

provide work space.

(Continued on following page)

App. 11

We prefer the analysis of Starr Farms, Inc. v. United

States, 447 F.Supp. 580 (W.D.Ark.1977), in which the Dis-

trict Court of Arkansas refused to follow the Tax Court’s

narrow description of “building.” In Starr Farms, the tax-

payer claimed an investment credit for construction of

several environmentally controlled chicken coops. The

court held that the coops were buildings within the

meaning of Treas.Reg. § 1.48-1(e)(i), even though the

coops did not primarily provide humans with working

space. The district court argued quite persuasively:

[A] structure will be deemed to function as a build-

ing even if the activity which it shelters is performed

solely by machine or animal. To hold otherwise

would mean that all structures housing only

machines would automatically be deemed non-

buildings under the functional test.

Starr Farms, 447 F.Supp. at 583.

(Continued from previous page)

Yellow Freight, 538 F.2d at 797 n. 11 (citations omitted).

Footnote 11, discussing the amount of human activity car-

ried On, was in response to a case in which the Ninth Circuit

held that the nature of human activity was relevant to the

definition of “building,” but the amount of human activity was

not. See Thirup v. Commissioner, 508 F.2d 915, 919 (9th Cir.1974),

rev'g 59 T.C. 122 (1972) [available on WESTLAW, 1972 WL

2565].

Although this footnote may lend some support to the Tax

Court’s application of the function test, the holding of Yellow

Freight does not. In Yellow Freight, this Court held that the

loading docks and inspection lanes constituted “buildings”

because the property provided “shelter and work space so that

the men and equipment can perform their functions.” Id. at

796. This Court did not hold that only structures providing

working space for humans constitute “buildings.”

App. 12

We believe that the functional test in Starr Farms is closer

to congressional intent and provides a more enduring

analytical framework for this question. Thus a structure

functions as a “building” it it provides shelter for signifi-

cant machine or animal activity or if it provides working

space for humans.”

Under this broader concept of “function,” the refrige-

rated structures constitute “buildings.” Although

employee activity is limited to unloading, palletizing, and

moving meat from one storage area to another, significant

machine activity is conducted inside the structures by the

blast freezers. The refrigerated structures provide shelter

for the refrigeration equipment and provide working

space for the employees so that meat can be rapidly

frozen, stored and shipped. Applying the test above, we

find that these structures function as “buildings.” Our

holding is consistent with Congress’ intent that the term

“building” be given its commonly accepted meaning,

with the “function” test used by this Court in Yellow

Freight, and with the district court’s approach in Starr

Farms.8

7 This test does not include highly specialized structures

which actually perform the activity. These structures would

qualify as exceptions under Treas.Reg. § 1.48-1(c)(1)(i) or (ii).

See, Section I A 3, infra.

8 This court acknowledges that it departs from the narrow

definition of “building” used by the Tax Court and several

other circuits. See, e.g., Munford, supra; Brown and Williamson

Tobacco Corp. v. United States, 369 F.Supp. 1283 (W.D.Ky.1973),

aff'd percuriam, 491 F.2d 1258 (6th Cir.1974) (tobacco drying

(Continued on following page)

App. 13

We also recognize that several courts have applied

the narrower function test to determine whether refrige-

rated structures constitute “buildings.” See Brown-Forman

Distillers, Corp. v. United States, 499 F.2d 1263, 1272, 205

Ct.Cl. 402 (1974) (whiskey maturation facilities constitute

“storage facilities” and not “buildings”), Merchants Refrig-

erating Co. v. Commissioner, 60 T.C. 856 (1973) [available on

WESTLAW, 1973 WL 2607] (a large freezer room used for

storing frozen foods was not a building but a storage

facility under section 48(a)(1)(B)(ii) as then in effect); and

Central Citrus Company v. Commissioner, 58 T.C. 365, 371

(1972) [available on WESTLAW, 1972 WL 2547] (atmo-

spherically controlled “sweet rooms” used to ripen fruit

were not buildings but storage facilities under section

48(a)(1)(B)(ii) as then in effect); Catron v. Commissioner, 50

T.C. 306 (1968) [available on WESTLAW, 1968 WL 1547]

(the refrigerated area of a Quonset-type structure used

for the cold storage of apples qualified for the tax credit

as a “storage facility” under section 48(a)(1)(B)(ii) as then

in effect).

At the time these cases were decided, however, the

Internal Revenue Code allowed a tax credit for all storage

facilities used in connection with a qualifying activity.

Thus, the distinction drawn between structures merely

housing goods or equipment and structures providing

(Continued from previous page)

sheds used solely for storage are not buildings); Thirup v.

Commissioner, supra, (a greenhouse-does not function as a

building). The Internal Revenue Service, as well, has been

unwilling to follow the limited approach taken by these cases.

See Rev. ruling 77-363 (1977-2 Cum.Bull. 10), modified by

Rev.Ruling 79-343 (1979-2 Cum.Bull. 18) (Internal Revenue Ser-

vice refuses to follow Thirup decision).

App. 14

working space for humans was used to distinguish stor-

age facilities from buildings. The provision has since been

limited to cover only facilities used to store fungible

commodities.? The Tax Court decided that the structures

in this case do not constitute such a storage facility

because the meats were not fungible commodities. Tax

Court Opinion, at 34. We agree with the Tax Court’s

assessment and note that because these refrigerated

structures do not qualify as a storage facility under sec-

tion 48(a)(1)(B)(ii), they must be “buildings” within the

meaning of section 48(a)(1)(B).

3. Exceptions Under Treas.Reg.

§ 1.48-1(c)(1)(i) and (ii).

ah betas th

Lastly, the partners argued in oral argument that the

structures are not buildings because they fall into the

exceptions of Treas.Reg. § 1.48-1(e)(1)(i) and (ii).1° They

9 Congress amended section 48(a)(1)(B)(ii) by section

102(a)(2) and 104(a)(1) of the Revenue Act of 1971, Pub.L. No.

92-178, 85 Stat. 497, replacing the term “storage facility” with

the narrower concept of a “facility used * * * for the bulk

storage of fungible commodities.” 26 U.S.C. § 48(a)(1)(B)(ii).

10 Section 1.48-1(e)(1)(i) provides that the term “building”

does not include structures which are essentially an item of

equipment. Section 1.48-1(e)(1)(ii) excludes any structure:

which houses property used as an integral part of any

activity specified in section 48(a)(1)(B)(i) if the use of the

structure is so closely related to the use of such property

that the structure clearly can be expected to be replaced

when the property it initially houses is replaced.

Treas.Reg. § 1.48-1(e)(1)(ii).

The regulation cites to structures such as oil and gas storage

tanks, grain storage bins, silos, fractioning towers, blast fur-

naces, coke ovens and coal tipples as examples. /d.

App. 15

argued that the warehouse structures served as “giant

refrigerators,” without which the refrigeration equipment

would be unable to function. The Tax Court acknowl-

edged the parties’ arguments on this point but refused to

reach the issue in light of its decision that the warehouses

did not function as buildings. Tax Court Opinion, at 27, n.

4. Because we reverse this decision, we must address the

issue Of whether the structures qualify for either

exception.

Under section 1.48-1(e)(i)(i), a structure warrants a

tax credit if it actually functions as a piece of equipment.

After reviewing the record, we find that the structures in

this case do not perform the function of freezing the

meat. Rather, they were designed to withstand the cold

temperatures produced by the compressor engines, the

refrigeration coils, and the blowers. The insulation helped

maintain the conditions in the structure; the structure

itself did not create those conditions. Based on these

facts, it appears that the structures are sufficiently sepa-

rate from the equipment that it cannot fairly be said that

the structures perform the function.

Under section 1.48-1(e)(1)(ii), the appropriate factors

to consider are whether the structure is specially

designed to meet the demands of the refrigeration equip-

ment, and whether the structure could be economically

used for other purposes.

The structures were designed and constructed in

such a manner “as to provide for the cold storage of

certain meats and other products.” Tax Court Opinion, at

6. The walls, floor and ceiling were insulated. Clay pipes

had been laid under the cement floor through which hot

App. 16

air was pumped to keep the floors from freezing, buck-

ling or heaving. Special lighting systems and sprinkler

systems which would adapt to the extremely cold tem-

peratures had been installed. Thus, the structures appear

to have been designed to meet the demands of the blast

freezing process.

Expert testimony indicates, however, that these struc-

tures are easily converted from blast freezers to eithe

cold storage facilities or conventional dry storage space

without any modifications. Engineering Report of Mic-

hael A. Gregory, Exh. AR at 11; Exh. AS at 9. An expert

for the partners conceded at trial that the freezer struc-

tures could be used for dry storage. Doc. 45 at 144, 256.

To convert the structures to other uses, one might replace

the lighting system and remove the refrigeration equip-

ment, but neither is necessary to convert the structures to

conventional warehouses. Id., at 252-53. Even if the stor-

age racks and the refrigeration equipment had to be

removed, it could be done without causing any structural

damage.!! Tax Court Opinion, at 12-13. Because these

structures could be used for either cold storage or dry

storage without any modifications, we find that they do

not fit the exception of section 1.48(a)(1)(B)(ii).

11 We understand that these structures have some special

features, such as the clay pipes, the lighting system, and the

sprinklers, which would not be found in a conventional ware-

house. Yet, none of these features appears to impede the use of

the freezers as warehouses. The partners’ expert witness con-

ceded that the structures were “over designed” to be conven-

tional warehouses, but that they were conducive to dry

storage. Doc. 45 at 244-256.

App. 17

B. Other Property

Although the partners may not claim an investment

tax credit for the warehouse structures, they may offset

the cost of the truck turnaround areas and railroad track-

age if this property qualifies as “other tangible property”

used as an integral part of a qualifying activity. Thus, we

must address whether the blast freezing of meat consti-

tutes “manufacturing, production, and extraction,” and

whether the truck turnarounds and railroad tracks are

used as an integral part of the activity pursuant to section

48(a)(1)(B)(i).

1. Manufacturing, Production,

and Extraction

The Tax Court held that no investment tax credit

should be allowed for the structures, the truck turn-

arounds and the railroad trackage because the structures

were used primarily for cold storage and the initial freez-

ing function was not necessary for providing a desirable

or finished product. Tax Court Opinion, at 31. We

disagree.

The Treasury regulations define “production” as

follows:

(2) Manufacturing, production, and extraction. For

purposes of the credit allowed by section 38, the

terms “manufacturing”, “production”, and “extrac-

tion” include the construction, reconstruction, or

making of property * * * from new or raw material,

by processing, manipulating, refining, or changing

the form of an article, or by combining or assembling

two or more articles, and include the cultivation of

soil,-the raising of livestock, and the mining of min-

erals. Thus, section 38 property would include, for

App. 18

example, property used as an integral part of * * * the

processing of meat, fish, or other foodstuffs * * *.

Treas.Reg. § 1.48-1(d)(2) (emphasis added).

The Tax Court clearly erred in finding that the prop-

erty was not used as an integral part of processing

meat.12 First, the Tax Court heard the expert testimony of

Dr. Robert E. Rust, Professor in the Department of Ani-

mal Science at lowa State University, who testified in his

report that “freeezing or chilling to a specific temperature

constitutes a process just as would canning or steriliz-

ing.” Exhibit AQ, at 1. Dr. R. Paul Singh, Professor of

Food Engineering at the University of California-Davis,

testified that blast freezing, as conducted in the partner-

ship’s warehouses, constituted the processing of meat

because the freezing prevented spoilage of the meat.

Exhibit 44 at 1. Dr. Daryl Lung, Professor of food science

at the University of Wisconsin-Madison, defined food

processing as “the application of chemical, microbiologi-

cal, and engineering principles to food products for the

purpose of improving the value of the product to the

consumer.” Exhibit 45 at 1. It appears auite clear from the

statements of these three experts that the freezing of meat

12 This issue involves an analysis of fact and law, as the

term “processing of meat” may have one meaning within the

food processing industry but another meaning in the Internal

Revenue Code. In mixed law-fact questions involving the inter-

pretations of the Internal Revenue Code, the Court will only

reverse if the lower court’s finding is clearly erroneous. Mer-

chants Refrigerating Co. v. United States, 659 F.2d 116, 117 (9th

Cir.1981), cert. denied, 456 U.S. 973, 102 S.Ct. 2236, 72 L.Ed.2d

846 (1982) (clearly erroneous standard applied to question of

what constitutes a facility used for bulk storage of fungible

commodities).

App. 19

is considered by the food science industry as a part of the

overall processing scheme.

Other tax cases support the partners’ position that

the blast freezing of meat constitutes the processing of

meat within the meaning of the Treasury Regulations. In

Giannini Packing Corp. v. Commissioner, 83 T.C. 526, 533-34

(1984) [available on WESTLAW, 1984 WL 15615], the Tax

Court held that two cooler rooms used to lower the

temperature of apples qualified for an investment tax

credit because they prevented the apples from dehydrat-

ing and shriveling. This process was found necessary to

prepare the fruit for shipment. Id. at 534. Similarly, in

Central Citrus Co. v. Commissioner, 58 T.C. 365, 371 (1972),

the Tax Court allowed an investment tax credit for “sweet

rooms” in which fruit was degreened through the con-

trolling of atmospheric conditions.!%

The Tax Court attempts to distinguish these cases by

stating that in Giannini and Central Citrus, the atmo-

spheric conditions changed the food product into a desir-

able or finished product. Tax Court Opinion, at 31. It

implied that blast freezing meat did not enhance the meat

product in any way. Id. The Tax Court, however,

neglected to acknowledge that only through freezing or

13 See also, Brown-Forman Distillers Corp. v. United States,

499 F.2d 1263, 1272-3, 205 Ct.Cl. 402 (1974) (maturation of

whiskey constitutes a process because it aged whiskey); and

Schuyler Grain Co. v. Commissioner, 50 T.C. 265, 272 (1968)

[available on WESTLAW, 1968 WL 1543] aff'd 411 F.2d 649 (7th

Cir.1969) (aeration and drying of grain is a process because it

improves the quality of grain for its intended use).

App. 20

other similar preserving processes can fresh meat prod-

ucts arrive at their final destination in an edible

condition. Like the process used in Giannini, the process

of blast freezing is necessary to prepare the meat for

shipment. We believe that the blast freezing rendered a

change in the meat which was necessary to providing

consumers with an edible product. We see no relevant

distinguishing factors between Giannini and this case.

Even more disturbing is the apparent conflict

between this case and Loda Poultry Co. v. Commissioner, 88

T.C. 816 (1987) [available on WESTLAW, 1987 WL 49301],

in which the Tax Court held that a 32-degree compart-

ment used to store chickens to prevent spoilage before

the meat was sold and shipped qualified for an invest-

ment tax credit because it was used as an integral part of

a chicken processing business. The only distinction

between the storage of meat in the Loda case and in the

present case is that the chicken had been cut, cleaned,

inspected, packaged, and then stored on the same prem-

ises. This distinction hardly warrants the legal signifi-

cance attributed to it by the Tax Court. Thus, blast

freezing constitutes the processing of meat and the Tax

Court clearly erred in determining otherwise.

2. Integral Part of Production

In order for property to qualify for the investment

tax credit, it must be used as an integral part of produc-

tion. Treas. Reg. § 1.48-1(d)(4) includes property which is:

used directly in the activity and is essential to the

completeness of the activity. * * * [AJ]ll properties

used by the taxpayer in acquiring or transporting

raw materials or supplies to the point where the

actual processing commences (such as docks, railroad

tracks, and bridges), or in processing raw materials

App. 21

into the taxpayer’s final product, would be consid-

ered as property used as an integral part of manufac-

turing. Specific examples of property which normally

would be used * * * are * * * railroad tracks and

signals * * *.

Treas.Reg. § 1.48-1(d)(4).

The Commissioner concedes that the truck turn-

arounds and the railroad tracks at the Millard-DM ware-

house qualify for the investment tax credit if used as an

integral part of the processing of meat. Appellee’s Brief,

at 23 n. 16. As the turnarounds and railroad tracks were

used in transporting fresh meat into the refrigerated

structures, they constitute property “used directly in the

activity” of blast freezing meat.

HI. CONCLUSION

We reverse the Tax Court and hold that the refrige-

rated structures in this case function as buildings because

they are non-specialized structures which provide shelter

for significant machine and human activity. We also hold

that the blast freezing conducted in the refrigerated struc-

tures constitutes the processing of meat. Thus, all of the

truck turnarounds and the railroad tracks at Millard-DM

qualify for an investment tax credit.

Because the truck turnarounds qualify as other tang-

ible property under section 1.48-1(d) of the Treasury Reg-

ulations and Section 48(a)(1)(B)(i) of the Code, they also

qualify as “other property” under section 1245(a)(3)(B)(i)

of the Code and may be depreciated under the 200%

declining balance method of depreciation under section

167(b)(2).

App. 22

APPENDIX B

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

No. 87-2387

L & B Corporation, a

Nebraska corporation,

Appellant,

Commissioner of Internal

Revenue

Appellee.

¥ + 2 2 & F

Larry A. Larsen and Betty J.

Larsen,

Appellants,

Commissioner of Internal

Revenue,

Appellee.

+ + & * © &

Estate of Howard C. Larsen,

Deceased, Maxine, J. Larsen,

Executrix and Maxine J.

Larsen,

Appellants,

Commissioner of Internal

Revenue,

Appellee.

JUDGMENT

Appeal from the United

States Tax Court.

(Filed November

25, 1988)

’

App. 23

This appeal from the United States Tax Court was

submitted on the record of the tax court, briefs of the

parties and was argued by counsel.

After consideration, the Tax Court’s order is reversed

in accordance with the opinion of this Court.

November 25, 1988

Order entered in accordance with opinion.

/s/ Robert D. St. Vrain

Clerk, U.S. Court of Appeals, Eighth Circuit.

App. 24

APPENDIX C

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

No. 87-2387

L & B Corporation, etc. °

Appellant, : ee

, Appeal from the United

VS. : States Tax Court

Commissioner of Internal

Revenue

Appellee. °

Appellant’s petition for rehearing has been consid-

ered by the Court and is denied.

January 6, 1989

Order Entered at the Direction of the Court:

/s/ Robert D. St. Vrain

Clerk, U.S. Court of Appeals, Eighth Circuit.

—

App. 25

APPENDIX D

L&B CorporaATION, A NEBRASKA CORPORATION, ET AL.! PETi-

TIONERS Vv. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 32911-84, 32935-84, Filed April 6, 1987.

33261-84.

Petitioners’ partnerships placed in service refriger-

ated structures, truck turn-arounds, and railroad

trackage during the years in issue. Meat packers and

other independent parties rented or leased space in

the refrigerated structures primarily for the cold stor-

age of various meats and certain other food products.

Petitioners sought investment tax credits under sec.

38, I.R.C. of 1954, as amended, with respect to costs

relating to the structures. Respondent allowed credits

only with respect to certain refrigeration system com-

ponents of the refrigerated structures. Held, the

refrigerated structures are not buildings for purposes

of the investment tax credit. Held, further, the cold

storage cf meats and other food products, the pri-

mary function of the refrigerated structures, is not a

“processing of meat” within the meaning of sec.

1.48-1(d)(2), Income Tax Regs., and therefore not an

“integral part of * * * production.” Sec. 48(a)(1)(B)(i).

Held, further, the refrigerated structures are not used

for the bulk storage of fungible commodities within

the meaning of sec. 48(a)(1)(B)(iii). Held, further, the

costs relating to the refrigerated structures, truck

turn-arounds, and railroad trackage are thus eligible

for investment tax credit only to the extent allowed

by respondent. Held, further, the refrigerated struc-

tures and truck turn-arounds may be depreciated

1 Cases of the following petitioners are consolidated here-

with: Larry A. Larsen and Beity J. Larsen, docket No. 32935-84;

and Estate of Howard C. Larsen, Deceased, Maxine J. Larsen,

Executrix and Maxine J. Larsen, docket No. 33261-84.

App. 26

under the 150-percent-declining-balance method but

not the 200-percent-declining-balance method. Held,

further, the useful lives of the refrigerated structures

and railroad trackage determined.

Truman Claire, Steven M. Watson, Paul A. Rauth and

Jackie L. Vencil, for the petitioners.

Robert L. Archambault, for the respondent

CoHEN, Judge: Respondent determined the following

deficiencies in petitioners’ Federal income taxes and

claimed, by amendments to answer, the following

increased deficiencies in petitioners’ Federal income

taxes:

Increased

Petitioner Year Deficiency deficiency

L&B Corp. 2/28/75 $10,353.89

2/29/76 307.58

2/28/79 18,991.04

2/29/80 19,590.06

2/28/81 17,449.75 $3,325.91

Larry A. Larsen and _1976 9,301.73

Betty J. Larsen 1977 22,770.73

1978 13,916.15

1979 27,177.68

1980 20,708.32 4,096.49

Estate of Howard C. 1976 6,803.23

Larsen, deceased, 1977 1,903.85

and 1978 11,843.21

Maxine J. Larsen 1979 29,627.03

1980 28,418.35 1,683.14

Petitioners were partners in certain partnerships. After

concessions, the issues for decision are (1) whether peti-

tioners are entitled to investment tax credits under

nes aaas aia aiii

App. 27

section 382 with respect to certain refrigerated structures,

truck turn-arounds, and railroad tracks placed in service

by the partnerships in 1979 and 1980 to an extent greater

than allowed by respondent; (2) whether the partnerships

are entitled to depreciation deductions with respect to the

refrigerated structures and truck turn-arounds using the

200-percent-declining-balance method of depreciation

under section 167(b)(2); and (3) whether the partnerships

are entitled to depreciation deductions with respect to the

refrigerated structures and railroad tracks based on use-

ful lives of 15 years or 33'/3 years.

FINDINGS OF FACT

Some of the facts have been stipulated. The facts set

forth in the stipulations are incorporated in our findings

by this reference.

Petitioner L&B Corp., a Nebraska corporation, had

its principal place of business in Omaha, Nebraska, when

its petition was filed. The corporation filed 1974 through

1980 corporate income tax returns with the Internal Reve-

nue Service Center in Ogden, Utah, for its fiscal years

ended February 28, 1975, through February 28, 1981,

respectively. Petitioners Larry A. Larsen and Beity J.

Larsen, husband and wife, resided in Omaha, Nebraska,

when they filed their petition. They filed joint Federal

income tax returns for 1976 through 1980 and an

amended return for 1978 with the Internal Revenue Ser-

vice Center in Ogden, Utah. Howard C. Larsen died on

2 Unless otherwise indicated, all statutory references are

to the Internal Revenue Code of 1954 as amended and in effect

during the years in issue.

App. 28

June 7, 1982, and his surviving spouse, Maxine J. Larsen,

is the duly appointed executrix of his estate. Petitioner

Maxine J. Larsen resided in Omaha, Nebraska, when she

filed the petition on behalf of her husband’s estate and

herself. They filed joint Federal income tax returns for

1976 through 1980. They had two chidren, Lance Sterling

Larsen and Ashley Larsen.

Petitioners were partners in Larsen Realty, Millard

Warehouse - Des Moines (Millard-DM), and Millard

Warehouse - Denison (Millard-D) (collectively, the part-

nerships), partnerships with principal offices located in

Omaha, Nebraska. The partnerships filed information

returns with the Internal Revenue Service Center in

Ogden, Utah, as follows: Larsen Realty for calendar years

1979 and 1980, Millard-DM for calendar years 1979 and

1980, and Millard-D for calendar year 1980.

By partnership agreements, the following partners,

including petitioners, were entitled to distributive shares

of income, gain, loss, deductions, and credits of said

partnerships in the percentages and for the years

indicated:

Millard Millard

Warehouse-- Warehouse-

Partners Larsen RealtyDes Moines Denison

(1979-80) (1979-80) (1980 only)

L&B Corp. 50%

Larry A. Larsen 50% 25 60%

Howard and Maxine

Larsen 50

Howard Larsen 25

Lance Sterling Larsen 20

Ashley Larsen 20 (sic)

100 100 100 (sic)

App. 29

Description of the Facilities

Larsen Realty operated its business in facilities

located in Omaha, Nebraska (LR-Omaha), and Lincoln,

Nebraska (LR-Lincoln). LR-Omaha commenced opera-

tions in about 1961, at which time its first cold storage

facility was built. On or about August 1, 1979, Larsen

Realty placed in service the following additions to LR-

Omaha: a refrigerated structure, a loading dock area, and

a paved truck turn-around area.

The refrigerated structure, as described below, was

designed and constructed in such a manner as to provide

for the cold storage of certain meats and other products.

Thus, the structure includes certain insulation and other

special features to maintain cold temperatures inside the

structure and to prevent the penetration of moisture into

the facility.

The refrigerated structure is rectangular in shape,

approximately 160 feet by 130 feet, and stands approx-

imately 25 feet high. The structure rests on a foundation

of poured concrete footings, under each wall and the

dock partition, and concrete block footings, under certain

walls. The structure and the pre-existing facility share a

common wall, an insulated metal panel wall. The floor of

the structure is a 6-inch poured concrete level slab.

Beneath the concrete floor is a 6-inch layer of polystyrene

insulation. Beneath the insulation and extending under

the added loading dock area is a layer of gravel. Approx-

imately 40 rows of 4-inch clay pipe run north to south

within the gravel layer under the floor of the cold storage

facility and dock area. Waste heat from refrigerator com-

pressors is pumped through the clay tiles to the outside

App. 30

to keep the ground below the floor from freezing which,

if it did, would cause the floor of the structure to buckle

or heave. Prior to construction, the soil was tested to

determine if the water table was sufficiently low so that

unnecessary moisture would not be drawn up to the floor

of the structure.

Steel wall panels and concrete blocks form the walls

of the structure. The panels, approximately 25 feet high

and 5 feet wide, are connected by tongue and groove. The

panels are 5 inches thick and are constructed of a corru-

gated metal outer face and a smooth metal inner face

which sandwich about 5 inches of polyurethane insula-

tion. The panels are placed and sealed in a track that is

glued to the footings around the perimeter of the storage

facility. The insides of the panels are bolted to the steel

framing, and the tops of the panels are sealed in a track.

A concrete bumper, which was poured against the panels

on the inside of the exterior walls and anchored to the

floor slab, prevents forklifts from backing up into the

wall.

The roof of the structure is relatively flat, sloping '/s

inch per foot. It is supported by steel roof joists that are

welded to outside wall beams and certain interior beams.

A 1'/2 inch thick, 22-gauge corrugated steel decking is

situated on the roof joists. Nine inch insulation boards lie

over the steel decking above the cold storage area, and

41/2-inch insulation boards lie over the decking above the

added dock area. A single-ply membrane roof cover lies

over the insulation.

The equipment attached to the interior of the struc-

ture consists of storage racks, refrigeration coils and

App. 31

blowers (chiller units), and piping from the pre-existing

refrigeration compressor room. The storage racks are

bolted to the concrete slab floor. The two chiller units are

attached above the storage racks close to the west wall

and supported from the ceiling and structural I-beams.

The costs of the additions to LR-Omaha were as

follows:

Building Cost

oe eed CRRA Ea eS $39,484.97

Freezer area

ENR feo rk oil cin eek $337,307.65

Refrigeration equipment..... 42,834.81 380,142.46

Non-refrigeration equipment

Stornee TACKS .......-.....-. 53,068.07

ee ry esta wa 19,242.54

Eee GROWENUE oko Sos 3,969.46

2 ae te FOE PE VEO ore 437.22 76,717.29

fic co Bi rr rr nr 17,673.30

yo a ner Per arte ray tena ae 514,018.02

In 1979, Larsen Realty also made certain improve-

ments to LR-Lincoln. The costs of the additions were as

follows:

Property Cost

Addition improvements...........----+-- $78,551.45

Non-refrigeration equipment ............-. 18,863.61

Be Ql SARE aa Rar a ear Rene” 14,490.84

111,905.90

Millard-DM operated its business in facilities located

in Des Moines, Iowa. On December 1, 1979, Millard-DM

placed in service its main cold storage facility, or refriger-

ated structure. An addition to this facility was placed in

service on March 1, 1980. On or about September 1, 1980,

a railroad spur leading up to the addition was placed in

App. 32

service. The main refrigerated structure and its addition

were designed and constructed, in a manner similar to

the LR-Omaha facility, to provide for the cold storage of

meats and other products.

The main facility is approximately 289 feet by 194

feet and is approximately 25 feet tall. It includes several

truck docks, general offices, a mezzanine, a cooler storage

area, and a freezer storage area. The cooler storage area is

divided by interior walls into four coolers, of which two

measure 64 feet by 64 feet and the other two measure 64

feet by 32 feet. The freezer storage area, which is adjacent

to the cooler area, is approximately 160 feet by 191 feet

and includes two 32-foot by 25-foot areas, with movable

wood partitions, that are called blast cells or blast

freezers.

The addition placed in service in 1980 is located

immediately west of the main facility and includes a

railroad dock, a compressor or engine room, and a refrig-

erated structure. The compressor room services both the

main and additional facilities. The cold storage area of

the addition is 64 feet by 160 feet and is approximately 25

feet high. It includes a 25-foot by 30-foot blast freezer

area segmented off by movable wood partitions and a 25-

foot by 25-foot area segmented off by wire mesh and

referred to on blueprints as the “cage,” which allows for

the isolation of certain meats when so required by the

U.S. Department of Agriculture (USDA). Equipment

attached to the interior of the main facility and the addi-

tion includes storage racks, refrigeration coils and

blowers, and piping from the compressor room. The

equipment is attached in a manner similar to the equip-

ment in the LR-Omaha addition.

App. 33

The costs incurred with regard to the main facility

placed in service on or about December 1, 1979, were as

follows:

Building Cost

Mezzanine, offices and dock areas...... $298,352.28

Freezer/cooler areas

a $913,237.86

Refrigeration equipment... 153,455.43 1,066,693.29

Land improvements

Truck turn-around area.... 116,231.68

Customer and employee park-

ing and landscaping..... 74,565.47 190,797.15

Non-refrigeration equipment

poem beverers ............. 10,979.10

Pe gk vga sa nace 198,648.48 209,627.58

UUme WOE FEXEMEVOS 2... ee eee ee 3,284.45

rs Ua lgg ss vos oa dss nsaes 1,768,754.75

The costs of the additions placed in service on or

about March 1, 1980, were as follows:

Building Cost

Lessee alterations........... $22,493.39

ca ee 45,411.44 $67,904.83

Freezer/cooler areas

kG 198,505.89

Refrigeration equipment.... 53,347.52 = 251,853.41

I as ooo Sse ccs ces ence css 65,023.12

Land improvements

ood cc nas yess senses Pn a

Non-refrigeration equipment

Sinks and lavatories........ 2,728.00

ES kay acca d ass. 198,288.94 201,016.94

Furniture and fixtures .........

SE eared yn eee ess sess 478.65

ERG 6 syne ce ak cess. 3,241.30 3,719.95

a 590,713.57

App. 34

On November 1, 1980, Millard-D placed in service a

refrigerated structure in Denison, Iowa, including a truck

turn-around and railroad spur to the facility. The design

and construction of the facility, to provide for the cold

storage of meats and other products, were similar to the

other refrigerated structures described above. The facility

is rectangular in shape, 227 feet by 194 feet, and 25 feet in

height. It includes truck and railroad docks, a mezzanine

area with offices, a compressor room, a pork processing

room including a meat inspection room for Federal

inspectors, and a cold storage area. The cold storage area

of the facility is 192 feet by 192 feet, including an engine

room of 32 feet by 32 feet. The cold storage facility

contains two cooler rooms, 64 feet by 96 feet each, and

three blast freezers, 30 feet by 32 feet each.

The costs of the Millard-D facility were as follows:

Building Cost

Mezzanine, offices and dock areas...... $157,097.99

Freezer/cooler areas

Ne rte ee a ana $798,649.64

Refrigeration equipment... 118,627.27. 917,276.91

Land improvements

Truck turn-around area.... 23,839.21 :

Customer and employee

Pe ee eee 4,767.84 28,607.05

IE AOE oi 6 ak hak wn cue eee 57,011.82

Non-refrigeration equipment

Cee TEUEEEEE nn cack... 3,397.57

Telephone-pager system ... 4,571.25

RUE ce itu cas cs nua ss 239,480.74 247,449.56

Office equipment

PN MS Scene erie eases 873.00

a” rere ear errs 5,455.40 6,328.40

Transportation equipment—auto 2,800.00

Nt eee ic oe ee en 1,416,571.73

App. 35

Storage racks in the LR-Omaha, Millard-DM, and

Millard-D cold storage facilities were designed to facili-

tate the circulation of air over and around the meat and

other products. Although the storage racks could be

removed without damage to the structures, holes in the

floors of the structures where the storage racks are bolted

would have to be plugged if the racks were removed. The

facilities included special lighting systems adaptable to

extremely low temperatures and elaborate sprinkler sys-

tems, designed so that water would not freeze in the

pipes. The refrigeration equipment within each of the

storage facilities, including the refrigeration coils and

blowers or chiller units, could be removed from the facili-

ties without damage to the structures. Where such equip-

ment is installed on the roof, removal would leave screw

holes.

Operation of the Facilities

The partnerships prepared a “Cold Storage TARIFF,”

or schedule of rates and charges, for 1979 and 1980. These

documents included information regarding operating

hours, plant addresses, and effective dates. Contract

terms and conditions for storage were described, includ-

ing the following: (1) Tender For Storage - all goods shall

be delivered properly marked and packed for handling;

(2) Storage Period - goods are generally stored on a

month-to-month basis; (3) Storage Rates and Insurance;

(4) Handling Charges; (5) Delivery Requirements; (6) Lia-

bility; (7) Liens and Security Interests; and (8) Controlling

Law. The schedules described the partnerships’ handling

rates and storage rates for the following products:

App. 36

Coolers Freezer

1. Cheese 1. Candy

2. Butter and butter 2. Eggs - canned and

substitutes dried

3. Candy 3. Fish and seafoods

4. Dried fruit 4. Fruit

5. Shelled and unshelled 5. Vegetables

nuts 6. Juices

6. Eggs - shelled and 7. Soups

dried 8. Prepared and cooked

7. Fruit juices foods

8. Horticultural goods a. Cakes

9. Lard b. Meat cuts

10. Meat - canned and c. Pastries

smoked d. Pies

11. Milk and cream e. Rolls

(powdered) f. Waffles

12. Potatoes g. Ice cream

h. Convenience

foods

i. Toppings

9. Meats

a. Loose hams

b. Cuts

c. Pork bellies

d. Carcasses

10. Potatoes - french fries

11. Poultry

12. Turkeys

Additional charges were described for, among other

things, collection, distribution, extra labor, freezing,

exports, inspection, and sorting.

Most of the space in the facilities was operated on a

public storage basis. During 1979 and 1980, the partner-

ships handled as much as 20 million pounds of meat per

week. Customers of the partnerships were primarily

App. 37

packers such as Swift, Dupaco, Iowa Beef Packers, and

Farmland Foods, which used the storage facilities in 1979

and 1980 to build inventories of certain products with

seasonal demand, such as canned hams for Christmas,

corned beef for St. Patrick’s Day, and pork bellies for

bacon having a high demand in summer months. Nearly

all products received at the partnerships’ storage facili-

ties in 1979 and 1980 were boxed or packaged with labels

or brand names of the processor printed or attached to

the box. Such products, when received, were unloaded at

the rail and truck docks by employees and placed on

pallets. They were inventoried and assigned lot numbers

and placed by forklift in numbered storage racks. Inven-

tory cards were maintained for all shipments, and the

inventory was generally handled on a first-in first-out

(FIFO) basis. The packers normally retained title to the

foods stored until they were sold and shipped out, except

for the pork bellies, which were often traded as commod-

ities on the exchange. Overall employee activity was min-

imal and consisted essentially of unloading, storing, and

loading products.

The facilities served two functions. First, meat that

was “hot,” i.e., freshly cut, was frozen. It generally took 1

or 2 days, at most, to freeze meat, depending on whether

the freezer or sharp freezer area was used. Second, meat

and other products were stored at cold to extremely cold

temperatures. Although the facilities sometimes turned

over a complete inventory in a couple of weeks, many

products remained in storage for months. The refrigera-

tion equipment in each of the refrigerated structures was

two-tiered, i.e., the equipment could provide for either

cooler or freezer services. The cooler or cold storage areas

ciileeatiaaaanc attains

App. 38

were maintained at temperatures of approximately 32

degrees. The freezer areas were maintained at about

minus 10 degrees to minus 20 degrees. Some of the

freezer areas included small sharp freezer areas designed

for rapid freezing at minus 30 degrees to minus 40

degrees using high wind velocity.

The rail facilities at Millard-D and Millard-DM

accommodated the partnerships’ export business. The

railroad tracks at Millard-DM were used for both in-

shipments and out-shipments, but the railroad tracks at

Millard-D were used almost exclusively for out-

shipments.

Notices of Deficiency

In their returns for 1979 and 1980, petitioners claimed

investment tax credits for certain of the partnerships’

improvements and additions. Among the items claimed

were (1) the cold storage facilities, which included the

refrigerated structures, the refrigeration equipment, and

other equipment and improvements; (2) the truck turn-

around areas; and (3) the railroad trackage. The partner-

ships claimed depreciation expense deductions for the

refrigerated structures, railroad tracks, and truck turn-

arounds using the 200-percent-declining-balance method

ana useful lives of 15 years.

In his notices of deficiency, respondent allowed

investment tax credits for the refrigeration equipment

and the railroad trackage but disallowed credits for the

refrigerated structures and the truck turn-arounds. In

amendments to answers, respondent asserts that the rail-

road trackage is not eligible for investment tax credit.

App. 39

Respondent also determined in his notices of deficiency

that the partnerships must use (1) the 150-percent-declin-

ing-balance method for computing the allowances for

depreciation of the refrigerated structures and the truck

turn-arounds, and (2) useful lives of 33'/3 years for com-

puting the allowances for depreciation of the refrigerated

structures and the railroad trackage.

The deficiencies determined in docket No. 32911-84

for fiscal years ended February 28, 1975, February 29,

1976, and February 28, 1979; in docket No. 32935-84 for

taxable years 1976, 1977, and 1978; and in docket No.

33261-84 for taxable years 1976, 1977, and 1978 are attrib-

utable to the disallowance of investment credit car-

rybacks with respect to properties each of the

partnerships placed in service during 1979 and 1980.

OPINION

Investment Tax Credit Issue

The primary issue for consideration is whether peti-

tioners are entitled to investment tax credits under sec-

tion 38 with respect to certain refrigerated structures,

paved truck turn-around areas, and railroad tracks, all of

which were placed in service during the years in issue.

Resolution of this issue depends on whether any or all of

the property may be characterized as “section 38 prop-

erty” that is eligible for credit against Federal income tax

under section 38.

The term “section 38 property” is defined in section

48(a)(1), which provides, in relevant part, as follows:

—————

App. 40

(1) IN GENERAL. — * * * the term “section 38 property”

means —

(A) tangible personal property * * *, or

(B) other tangible property (not including a

building and its structural components) but only if

such property —

(i) is used as an integral part of manufactur-

ing, production, or extraction, or of furnishing

transportation, communications, electrical energy,

gas, water, or sewage disposal services, or * * *

* * * * * * +

(iii) constitutes a facility used in connection

with any of the activities referred to in clause (i) for

the bulk storage of fungible commodities (includ-

ing commodities in a liquid or gaseous state), * * *

a es a a oe ee eee

Such term includes only property with respect to which

depreciation (or amortization in lieu of depreciation) is

allowable and having a useful life (determined as of the

time such property is placed in service) of 3 years or

more..."

Petitioners contend that the properties in question

qualify as “other tangible property” pursuant to section

48(a)(1)(B). Specifically, petitioners argue that the proper-

ties are not buildings but, instead, that the properties are

used as an integral part of production or, alternatively,

that the properties constitute facilities that provide bulk

storage of fungible commodities. See sec. 48(a)(1)(B)(i)

and (iii). Petitioners bear the burden of proving entitle-

ment to the claimed investment tax credits. Munford, Inc.

v. Commissioner, 87 T.C. 463, 488 (1986); Rule 142(a), Tax

Court Rules of Practice and Procedure.

App. 41

Because the statute specifically excludes buildings

from investment tax credit and because such a determina-

tion would obviate the need for further inquiry, we shall

first address whether the refrigerated structures consti-

tute buildings.

Building — Section 48(a)(1)(B)

The term “building” is defined in section 1.48-1(e)(1),

Income Tax Regs., as follows:

(e) Definition of building and structural components.

(1) Buildings and structural components thereof do not

qualify as section 38 property. The term “building” gener-

ally means any structure or edifice enclosing a space

within its walls, and usually covered by a roof, the pur-

pose of which is, for example, to provide shelter or

housing, or to provide working, office, parking, display,

or sales space. The term includes, for example, structures

such as apartment houses, factory and office buildings,

warehouses, barns, garages, railway or bus stations, and

stores. Such term includes any such structure constructed

by, or for, a lessee even if such structure must be

removed, or ownership of such structure reverts to the

lessor, at the termination of the lease. Such term does not

include (i) a structure which is essentially an item of

machinery or equipment, or (ii) a structure which houses

property used as an integral part of an activity specified

in section 48(a)(1)(B)(i) if the use of the structure is so

closely related to the use of such property that the struc-

ture clearly can be expected to be replaced when the

property it initially houses is replaced. Factors which

indicate that a structure is closely related to the use of the

property it houses include the fact that the structure is

specifically designed to provide for the stress and other

demands of such property and the fact that the structure

could not be economically used for other purposes. Thus,

the term “building” does not include such structures as

App. 42

oil and gas storage tanks, grain storage bins, silos, frac-

tionating towers, blast furnaces, basic oxygen furnaces,

coke ovens, brick kilns, and coal tipples.

This regulation was issued pursuant to section 38(b),

which authorized the Treasury to “prescribe such regula-

tions as may be necessary to carry out the purposes” of

the investment tax credit provisions. It conforms to con-

gressional understanding of the term “building” as

described in the legislative history. See H. Rept. 1447,

87th Cong., 2d Sess. (1962), 1962-3 C.B. 405, 516; S. Rept.

1811, 87th Cong., 2d Sess (1962), 1962-3 C.B. 707, 858-859.

It is thus a legislative regulation, almost as binding as the

statute itself. Yellow Freight System, Inc. v. United States,

538 F.2d 790, 795-796 (8th Cir. 1976).

The regulation defines “building” in terms of two

tests, or a two-part test. The appearance test generally

requires a “structure or edifice enclosing a space within

its walls, and usually covered by a roof,” and the func-

tion test generally requires the structure “to provide shel-

ter or housing, or to provide working, office, parking,

display, or sales space,” or to provide a similar function.

Sec. 1.48-1(e)(1), Income Tax Regs.; Munford, Inc. v. Com-

missioner, 87 T.C. at 479.

Many courts, including this Court, emphasize the

function of a structure to determine whether it is a build-

ing. See Munford, Inc. v. Commissioner, 87 T.C. at 479-480,

and cases cited therein. Other courts, including the Court

of Appeals for the Eighth Circuit, to which an appeal in

this case would lie, require that a structure satisfy both

the appearance test and the function test to qualify as a

building. Yellow Freight System, Inc. v. United States, 538 -

F.2d at 796-798; Illinois Cereal Mills, Inc. v. Commissioner,

789 F.2d 1234, 1238 (7th Cir. 1986); A.C. Monk & Co. v.

United States, 686 F.2d 1058, 1061 (4th Cir. 1982).

App. 43

In Yellow Freight System, the taxpayer sought invest-

ment tax credit for the cost of certain loading docks and

inspection lanes. The issue was whether the property

qualified as “other tangible property” under section

48(a)(1)(B). The District Court applied the function test

and allowed the investment tax credit. It concluded that

because of the specialized purpose of the property, i.e.,

that it facilitated the transfer of freight in the taxpayer’s

transportation business, the structures did not function as

buildings under section 48(a)(1)(B). Yellow Freight System,

Inc. v. United States, 413 F. Supp. 357, 367-368 (W.D. Mo.

1975). The Court of Appeals reversed, rejecting the Dis-

trict Court’s application of the function test to the extent

it ignored the appearance of the structure and to the

extent it emphasized the nature of employee activity

within the structure without consideration of the amount

of human activity within the structure. 538 F.2d at 797.

The court stated that the regulation and legislative his-

tory require consideration of both appearance and func-

tion, that the function test is no less “imprecise” than the

appearance test, and that appearance and function are

not mutually exclusive, i.e., “a given structure is

designed to accommodate the functions for which it is to

be used.” 538 F.2d at 797-798.

In Yellow Freight System, the Court of Appeals applied

both tests to the loading docks and inspection lanes and

held that they each resembled buildings and functioned

as buildings, thus denying investment tax credit to the

taxpayer. Specifically, the court found that the property

resembled buildings in that (1) they were permanent

structures with substantial dimensions, and (2) they were

not uniquely designed, or structurally different, from

App. 44

other buildings. (That neither the docks nor the inspec-

tion lanes had clearly discernible walls was not regarded

as controlling by the court because the definition in the

regulation furnishes only a general description of build-

ings.) The court also found that the property functioned

as buildings in that the property essentially provided

shelter and work space for men and equipment. 538 F.2d

at 796.

Petitioners argue that the elements persuading the

court in Yellow Freight System that the properties therein

were buildings are not present in this case, i.e., (1) the

refrigerated structures here are uniquely designed and

uniquely functional, (2) they do not provide shelter or

working space, and (3) to convert the refrigerated struc-

tures to an alternative use would require major structural

and building material changes as well as prohibitive

costs. Petitioners contend that because of these factors the

refrigerated structures are not buildings as that term is

defined for purposes of section 48(a)(1)(B).

Applying the appearance test of the regulation as

mandated by Yellow Freight System, and Golsen v. Commis-

sioner, 54 T.C. 742 (1970), affd. 445 F2d 985 (10th Cir.

1971), we conclude that the refrigerated structures in

issue resemble buildings. We have examined photographs

and blueprints of the structures and have considered the

testimony of witnesses; the structures are permanent

structures of substantial dimensions which enclose spaces

surrounded by walls and covered by roofs. See sec.

1.48-1(e)(1), Income Tax Regs.; Yellow Freight System, Inc.

v. United States, 538 F.2d at 796; Munford, Inc. v. Commis-

sioner, 87 T.C. at 481.

App. 45

Petitioners argue that the refrigerated structures do

not appear as buildings because of their unique design.

We agree that the structures were specially designed in

order to meet their intended purpose, i.e., to freeze meats

and other food products and to provide cold storage for

them. These specialized or “unique” features, however,

do not alter the building-like appearance of the structure.

Although it might be possible for a structure to be so

unique in its design that its appearance is not that of a

building in the ordinary sense, such is not the case with

the refrigerated structures in issue here.

We must next consider whether the refrigerated

structures function as buildings. This Court recently

applied the function test to determine whether refriger-

ated structures, similar to the ones in issue here, were

buildings. Munford, Inc. v. Commissioner, 87 T.C. 463

(1986). Therein, we reiterated that the function tesi

requires a determination of “whether the purpose of the

structure at issue is a purpose ejusdem generis to the

purposes described by example in section 1.48-1(e)(1),

Income Tax Regs.” 87 T.C. at 480, citing Consolidated

Freightways v. Commissioner, 74 T.C. 768, 795 (1980), affd.

on this issue 708 F.2d 1385 (9th Cir. 1983). We also stated:

In applying the functional test, a major focus of

inquiry is whether the structure provides working space

for employees which is more than merely incidental to

the primary function of the structure. See, e.g., Brown-

Forman Distillers Corp. v. United States, 205 Ct. Cl. [402] at

418, 499 F.2d [1263] at 1271 [Ct. Cl. 1974]; Valmont Indus-

tries, Inc. v. Commissioner, [73 T.C. 1059] supra at 1072

[1980]; Scott Paper Co. v. Commissioner, [74 T.C. 137] supra

at 178 [1980]; Catron v. Commissioner, [50 T.C. 306] supra at

316 [1968]. In this regard, it is appropriate to consider

both the quantity and quality of the human activity

App. 46

within the structure. See Consolidated Freightways, Inc. v.

United States, 223 Ct. Cl. [443] at 461, 620 F.2d [862] at 873

[Ct. Cl. 1980]; Consolidated Freightways v. Commissioner, 74

T.C. at 795; Satrum v. Commissioner, [62 T.C. 413] supra at

417 [1974]. * * * [Munford, Inc. v. Commissioner, 87 T.C. at

480.]

Applying the function test to the refrigerated struc-

ture in Munford, we concluded that the structure was not

a building:

We think that the principal purpose or function of the

refrigerated area is not to furnish working space for

petitioner’s employees, but rather, to provide an area in

which frozen foods may be stored at low temperature. In

contrast with the truck and rail loading platforms [also at

issue in Munford], the refrigerated area of the Addition is

maintained at a temperature which limits, rather than

promotes, human activity. Due to the cold temperature,

the activities of petitioner’s employees are limited in both

scope and duration. In the case of the Addition’s refriger-

ated area, the structure itself serves the principal function

of low temperature storage of products, and the activities

of petitioner’s employees are merely supportive of and

ancillary to this function. Accordingly, we conclude that

the refrigerated portion of the Addition is not a building

under the functional test. [87 T.C. at 483.]

Petitioners argue that the facts in this case are vir-

tually indistinguishable from those in Munford and that

we should likewise conclude that the structures do not

function as buildings. Respondent argues that Munford is

inapplicable because, among other things, we there con-

sidered whether property was eligible for investment tax

credit under section 48(a)(1)(A). Indeed, the analysis in

this case clearly falls under section 48(a)(1)(B); however,

the regulations and the applicable cases make no distinc-

tion in the definition of “building” for purposes of sub-

paragraph (A) or subparagraph (B) of section 48(a)(1).

sinctiereennasssmeasssmaaacsrri

App. 47

See Munford, Inc. v. Commissioner, 87 T.C. at 478 n. 9. We

agree with petitioners that the facts are similar and that,

in this case, the refrigerated structures do not function as

buildings. Although “hot” or fresh meat was sometimes

delivered to the facilities to be frozen and then stored,

unlike the facts in Munford where the foodstuff was

already frozen, the evidence does not indicate that signi-

ficant human activity, of quantity or quality, took place in

the refrigerated structures. The structures did not func-

tion as working space for employees and equipment;

rather, the refrigerated structures functioned to freeze

meat and provide low temperature storage space for the

meat and other food products.

Our conclusion is consistent with the application of

the function test in Yellow Freight System, Inc. v. United

States, 538 F.2d 790 (8th Cir. 1976). In that case, the Court

of Appeals for the Eighth Circuit found that the struc-

tures in issue, loading docks and inspection lanes, did not

serve the purpose of expediting the transfer of freight but

merely provided working space for the employees and

equipment performing that function. 538 F.2d at 796. In

this case, however, the refrigerated structures performed

the function identified, not the employees.

Respondent argues that because we ultimately deter-

mined that the structure in Munford was “inherently per-

manent” and thus ineligible for investment tax credit

under section 48(a)(1)(A) and section 1.48-1(c), Income

Tax Regs., our determination therein that the structures

were not buildings, i.e., did not function as buildings, is

dictum and therefore not binding in this case. We dis-

agree. Our resolution of the building issue in Munford

was hardly a mere observation or remark of little bearing

App. 48

on the ultimate decision. Rather, the building issue was,

because of the language of the statute and regulations

there in issue, properly a threshold question for consid-

eration. The same is true in this case, although we are

applying a different subparagraph of section 48(a)(1).

We have thus concluded that the refrigerated struc-

tures resemble buildings and function not as buildings.

Because we understand the Court of Appeals for the

Eighth Circuit to require that a structure appear and

function as a building to be deemed a building under

section 48(a)(1)(B),3 we hold that the refrigerated struc-

tures are not buildings.

3 See Stuppy, Inc. v. United States, 454 F. Supp. 1378, 1385

(W.D. Mo. 1978) (greenhouses are not buildings under either

the appearance or function test); Starr Farms, Inc. v. United

States, 447 F. Supp. 580 (W.D. Ark. 1977) (chicken houses

appear and function as buildings in Eighth Circuit despite

cases in other circuits and Tax Court holding otherwise). See

generally Valmont Industries, Inc. v. Commissioner, 73 T.C. 1059

(1980).

4 In addition to identifying an appearance test and func-

tion test for determining if a structure is a building, sec.

1.48-1(e)(1), Income Tax Regs., allows for two exceptions from

the general definition of a building. The exceptions include (1)

structures that are essentially machinery or equipment, or (2)

certain structures that house property used in a qualifying

activity under sec. 48(a)(1)(B)(i) if the structure and housed

property are so closely related that they can be expected to be

replaced together. Petitioners argue that their refrigerated

structures fall with the first exception because they are essen-

tially large refrigerator-freezers. Petitioners rely on Rev. Rul.

71-489, 1971-2 C.B. 64. Respondent argues that petitioners’

(Continued on following page)

App. 49

Having concluded that the refrigerated structures are

not buildings, we must now determine whether the

refrigerated structures, the truck turn-arounds, and the

railroad tracks otherwise qualify for investment tax credit

under either section 48(a)(1)(B)(i) or section

48(a)(1)(B) (iii).

Integral Part of Production — Section 48(a)(1)(B)(i)

Petitioners maintain that the refrigerated structures,

paved truck turn-arounds, and railroad tracks qualify for

investment tax credit because they were used as an inte-

gral part of production within the meaning of section

48(a)(1)(B)Gi). The regulations define “production” as

follows:

(Continued from previous page)

structures do not refrigerate as machines or equipment but

merely facilitate the operation of refrigeration equipment for

which investment tax credits were allowed. Although peti-

tioners do not affirmatively assert application of the second

exception, respondent further argues that the property fails the

second exception because it was reasonably adaptable to other

commercial uses. Petitioners contend that any conversion to

other uses would be unreasonable and uneconomical. Cf. Mun-

ford, Inc. v. Commissioner, 87 T.C. at 487-488. We have previ-

ously noted the confusion surrounding the application of the

alternative use test. See Munford, Inc. v. Commissioner, 87 T.C.

463, 486-487 (1986), where we noted that reasonable

adaptability has been considered for purposes of determining

whether a structure is (1) a qualifying storage facility under

sec. 48(a)(1)(B)(iii), (2) a structure housing qualifying property

under sec. 1.48-1(e)(1)(ii), Income Tax Regs., and (3) a qualify-

ing single purpose agriculture or horticulture structure under

sec. 48(a)(1)(D). Because of the parties’ exhaustive argumenta-

tion respecting these exceptions, we describe their positions

thereon. Our conclusion that the structures are not buildings,

however, precludes any need to address these arguments.

App. 50

(2) Manufacturing, production, and extraction. For

purposes of the credit allowed by section 38, the terms

“manufacturing”, “production”, and “extraction” include

the construction, reconstruction, or making of property

out of scrap, salvage, or junk material, as well as from

new or raw material, by processing, manipulating, refin-

ing, or changing the form of an article, or by combining

or assembling two or more articles, and include the culti-

vation of the soil, the raising of livestock, and the mining

of minerals. Thus, section 38 property would include, for

example, property used as an integral part of the extract-

ing, processing, or refining of metallic and nonmetallic

minerals, including oil, gas, rock, marble, or slate; the

construction of roads, bridges, or housing; the processing

of meat, tish; or other foodstuffs; the cultivation of

orchards, gardens, or nurseries; the operation of saw-

mills, the production of lumber, lumber products or other

building materials; the fabrication or treatment of tex-

tiles, paper, leather goods, or glass; and the rebuilding, as

distinguished from the mere repairing, of machinery.

[Sec. 1.48-1(d)(2), Income Tax Regs. Emphasis supplied.]

Petitioners argue that the property in issue was used

as an integral part of the processing of meat. Petitioners

thus contend that the freezing and ultimate storage of

meat is a process, i.e., a qualifying activity. Petitioners

rely on certain cases, including Giannini Packing Corp. v.

Commissioner, 83 T.C. 526 (1984), and Central Citrus Co. v.

Commissioner, 58 T.C. 365 (1972), for the proposition that

the controlling of atmospheric conditions is essential to

the production of agricultural products and the prepara-

tion of such products for shipment.

If we determine that the refrigerated structures were

used as an integral part of processing and were therefore

eligible for investment tax credit, respondent concedes

the investment tax credits for all the truck turn-arounds

and for the Millard-DM railroad tracks. Respondent does

not, in like manner, concede the investment tax credit for

App. 51

the Millard-D railroad tracks because he contends that

the evidence shows that the Millard-D tracks were used

only for out-shipments of food, not both in- and out-

shipments like the tracks at Millard-DM. See sec.

1.48-1(d)(4), Income Tax Regs. Respondent argues, nev-

ertheless, that neither the freezing nor storage of meat is

a process as that term is defined for purposes of section

48(a)(1)(B)(i). Instead, respondent contends that the freez-

ing and cold storage of meat is simply a “marketing

process” (as compared to a qualifying manufacturing or

production process) that merely extends the shelf life of

the product.

In Giannini Packing Corp. v. Commissioner, supra, we

allowed investment tax credits, holding that rooms in the

taxpayer’s packing plant used for cooling apples were an

integral part of processing because they prevented the

apples from dehydrating and shriveling and were other-

wise essential to the taxpayer’s production of fresh fruit.

In Central Citrus Co. v. Commissioner, supra, we allowed

investment tax credits, holding that taxpayer’s “sweet

rooms,” wherein fruit incurred “degreening” as a result

of specific atmospheric conditions involving temperature,

humidity, gas, and air-movement control, were an inte-

gral part of the taxpayer’s production of fresh fruit.

Petitioners offered the testimony of two food experts

and respondent offered the testimony of one food expert.

Although each expert described a different definition of

the term “process,” their reports and testimony all indi-

cate that processing brings about a desired change to

meet public safety standards or consumer demands. Peti-

tioners’ experts predictably state that the freezing of meat

and its frozen storage constitute a continuing processing

of the meat. They admit that freezing does not enhance

App. 52

the quality of the individual cut of meat but suggest that

its value is nevertheless increased. Respondent's expert

stated that frozen storage of meat is not a process. He

further noted, however, that he considered the initial

freezing of meat to constitute a process. He thus con-

cluded that the refrigerated structures in question pro-

vided two functions: a freezing as a process function and

a freezer storage or warehousing function. A problem

respondent’s expert encountered was how or where to

draw the line between these two functions. The facilities

do not have separate rooms for the separate functions;

instead, both functions occur in the same area(s), and

often simultaneously.

Upon consideration of all the facts, including the

extensive testimony by the food experts, we conclude

that a “process” did not occur at petitioners’ refrigerated

structures within the meaning of the relevant statute and

regulations. Although we have found the testimony of

respondent’s expert to be the most persuasive, we believe

that the initial freezing function was secondary and

merely a necessary step toward the primary function of

the refrigerated structures, i.e., low temperature storage.

The cases relied upon by petitioners are distinguish-

able in that they represent situations where the food

product incurred changes necessary, in those particular

circumstances, for providing a desirable or finished prod-

uct. Such changes included (1) the prevention of dehy-

dration and shrinkage and the removal of ethylene gas in

the production of fresh fruit (Giannini Pack Corp. v. Com-

missioner, supra), and (2) the necessary “degreening” of

certain fruit (Central Citrus Co. v. Commissioner, supra). See

also Brown-Forman Distillers Corp. v. United States, 205 Ct.

App. 53

Cl. 402, 499 F.2d 1263 (1974), where the maturation of

whiskey was determined a process because it aged the

whiskey; and Schuyler Grain Co. v. Commissioner, 50 T.C.

265 (1968), affd. 411 F2d 649 (7th Cir. 1969), where the

aeration and drying of grain was determined a process

because it improved the quality of the grain for its

intended use. The freezing and storage of meat in peti-

tioners’ refrigerated structures simply did not render a

change in the product consistent with the decided cases.

We therefore hold that in this case the freezing and cold

storage of meat was not a “processing of meat” that

qualifies for investment tax credit under section

48(a)(1)(B)(i).°

In Loda Poultry Co. v. Commissioner, 88 T.C. 816 (1987),

filed this date, we also held that the cold storage of meat

was not a “processing of meat” that qualifies for invest-

ment tax credit regarding certain compartments in the

taxpayer’s refrigerated structure. Specifically, investment

tax credit was denied for a zero-degree compartment and

a 28-degree compartment where storage in such compart-

ments was not part of a qualifying activity. The credit

was allowed, however, for a 32-degree compartment.

Insofar as that particular compartment is concerned, Loda

Poultry is factually distinguishable from this case. The

taxpayer in Loda Poultry was otherwise engaged in pro-

cessing meat, i.e., chickens were cut, cleaned, inspected,

> We note that freezing of meat might be considered a

process or part of a process in other circumstances, such as ~

where a taxpayer was seeking a desired texture of the meat

facilitating grinding or chopping. Such is not the case here.

App. 54

and packaged in a 55-degree compartment of the struc-

ture, and then stored, to prevent spoilage, in the 32-

degree compartment as the final step in the on-premises

processing before the chickens were sold and shipped

out. We therefore concluded that the 32-degree compart-

ment was an “integral part of * * * [taxpayer’s] produc-

tion.” See sec. 48(a)(1)(B)(i). In this case, petitioner is not

otherwise engaged in what may be considered a qualify-

ing activity, for which storage in any of the refrigerated

structures might be deemed a necessary final step.

Bulk Storage of Fungible Commodities — Section

48(a)(1)(B)(111)

Petitioners contend that the refrigerated structures

were facilities used for the bulk storage of fungible com-

modities within section 48(a)(1)(B)(iii) That section, how-

ever, also requires that such storage be in connection with

any of the qualifying activities identified under section

48(a)(1)(B)(i). We have already determined that peti-

tioners’ refrigerated structures were not used in a quali-

fying activity, and the evidence does not otherwise

indicate a qualifying activity occurring at petitioners’

businesses. Petitioners are therefore precluded from

investment tax credits under section 48(a)(1)(B)(iii).

Even if the facilities were used in a qualifying activ-

ity, petitioners nevertheless fail to qualify for investment

tax credit under section 48(a)(1)(B)(iii). The refrigerated

structures were not used for the “bulk storage of fungible

commodities.” Bulk storage is described in section

1.48-1(d)(5)(ii), Income Tax Regs., as follows:

App. 55

Bulk storage means the storage of a commodity in a large

mass prior to its consumption or utilization. Thus, if a

facility is used to store oranges that have been sorted and

boxed, it is not used for bulk storage.

Applying the regulation to the facts in this case, the

meats and other food products, which were boxed and

labeled, were not stored in bulk.

In Merchants Refrigeration Co. of California v. United

States, 659 F.2d 116 (9th Cir. 1981), investment tax credit

was not allowed where goods stored in the taxpayer’s

facilities were identified as to individual owner, who

segregated the food and retained control over its ultimate

disposition. The court held that the goods were not fung-

ible because, among other things, ownership of such

goods was not “in common.” Petitioners attempt to dis-

tinguish this case but fail. The evidence in this case,

including photographs, indicates that the meats and

other products were containerized, identified, and segre-

gated by owner. The products therefore were not

fungible.

Depreciation Issues

[he second issue for consideration is whether the

partnerships may use the 200-percent-declining-balance

method for computing the allowances for depreciation of

the refrigerated structures and truck turn-arounds. The

parties agree that our resolution of the investment tax

credit issue would also determine this issue. Compare

sec. 48(a)(1) with sec. 1245(a)(3). See sec. 1.1245-3

Income Tax Regs.

val P

App. 56

Section 167(b)(2) generally permits taxpayers to use

the double-declining-balance method for computing an

allowance for depreciation. In the case of “section 1250

property,” however, section 167(j)(i) limits the declining-

balance method to a rate not exceeding 150 percent. Sec.

167(j)(1)(B). The term “section 1250 property” is defined

as “any real property (other than section 1245 property,

as defined in section 1245(a)(3))” which is or has been

depreciable under section,167. Sec. 1250(c).

The term “section o. property” is defined in sec-

tion 1245(a)(3) as follows:

(3) SEcTION 1245 property. — For purposes of this sec-

tion, the term “section 1245 property” means any

property which is or has been property of a character

subject to the allowance for depreciation provided in

section 167 (or subject to the allowance of amortiza-

tion provided in section 185) and is either -

(A) personal property,

(B) other property{not including a building or

its structural compo ngnts) but only if such other

property is tangible and has an adjusted basis in

which there are reflected adjustments described in

paragraph (2) for a period in which such property (or

other property) -

(i) was used as an integral part of manufac-

turing, production, or extraction or of furnishing

transportation, communications, electrical energy,

gas, water, or sewage disposal services, or

(ii) constituted a research facility used in con-

nection with any of the activities referred to in

clause (i), or

(iii) constituted a facility used in connection

with any of the activities referred to in clause (i) for

App. 57

the bulk storage of fungible commodities (includ-

ing commodities in a liquid or gaseous state),

(D) so much of any real property (other than

any property described in subparagraph (B)) which

has an adjusted basis in which there are reflected

adjustments for amortization under section 169, 185,

188, 190, 193, or 194.

Subparagraph (B) of section 1245(a)(3) essentially tracks

the language in subparagraph (B) of section 48(a)(1).

Because we have already determined that the property in

question was not eligible for investment tax credit under

section 48(a)(1)(B) and because the property does not

otherwise satisfy the definition of “section 1245 prop-

erty,” we conclude that the property is section 1250 prop-

erty. Accordingly, the 200-percent-declining-balance

method is not available for the refrigerated structures

and truck turn-arounds. The partnerships must use the

150-percent-declining-balance method.

The third issue for consideration is whether the part-

nerships may compute the allowances for depreciation of

the refrigerated structures and railroad tracks based on

useful lives of 15 years, as claimed by petitioners, or 33!/3

years, as determined by respondent. Petitioners bear the

burden of proving error in respondent’s determination.

Casey v. Commissioner, 38 T.C. 357, 381 (1962).

Section 1.167(a)-1(b), Income Tax Regs., defines

“useful life,” in pertinent part, as follows:

(b) Useful life. For the purpose of section 167 the

estimated useful life of an asset is not necessarily the

useful life inherent in the asset but is the period over

which the asset may reasonably be expected to be useful

App. 58

to the taxpayer in his trade or business or in the produc-

tion of his income. This period shall be determined by

reference to his experience with similar property taking

into account present conditions and probable future

developments. Some of the factors to be considered in

determining this period are (1) wear and tear and decay

or decline from natural causes, (2) the normal progress of

the art, economic changes, inventions and current devel-

opments within the industry and the taxpayer’s trade or

business, (3) the climatic and other local conditions pecu-

liar to the taxpayer’s trade or business, and (4) the tax-

payer’s policy as to repairs, renewals, and replacements.

Salvage value is not a factor for the purpose of determin-

ing useful life. If the taxpayer’s experience is inadequate,

the general experience in the industry may be used until

such time as the taxpayer’s own experience forms an

adequate basis for making the determination. * * *

Respondent’s engineering experts examined the

refrigerated structures and estimated their useful lives,

economic and physical, in the range of 35 to 45 years.

Respondent argues that a 15-year useful life 1s not consis-

tent with the 33'/3-year useful life claimed by the partner-

ships for other structures and building improvements,

i.e., docks, mezzanines, and offices, and that petitioners

rely solely on the testimony of petitioner Larry Larsen.

The quoted regulation, however, indicates that the

best source for determining useful life is the taxpayers’s

own experience, if any. Petitioner Larry Larsen, unlike

respondent’s experts, has constructed and maintained

refrigerated structures for approximately 25 years. He

testified that the structures incur substantial wear and

tear, especially the roof and the insulation. He also noted

that technological advances render certain of the spe-

cialized materials obsolete in a matter of years. Although

respondent’s experts disagreed with petitioner Larry

App. 59

Larsen, we were nevertheless more persuaded by his

testimony. His testimony as to the useful life of such

structures was articulate, credible, and more convincing.

The useful life of the refrigerated structures is thus 15

years for purposes of computing the allowance for

depreciation.

Respondent correctly notes that petitioners offer no

evidence regarding the useful life of the railroad tracks;

moreover, petitioners’ briefs are silent on the issue. Peti-

tioners have thus failed to meet their burden of proof,

and respondent’s determination as to the useful life of the

railroad tracks must be sustained.

Decisions will be entered under Rule 155.

App. 60

APPENDIX E

UNITED STATES TAX COURT

L & B CORPORATION,

a Nebraska corporation,

)

Petitioner,

V. ) Docket No. 32911-84

)

COMMISSIONER OF INTERNAL

REVENUE,

Respondent.

DECISION

Pursuant to the opinion of the Court filed April 6,

1987, and incorporating herein the facts recited in the

respondent’s computation as the findings of the Court, it

ORDERED and DECIDED: That there are deficiencies

in income taxes due from the petitioner for the fiscal

years ended February 28, 1975, February 29, 1976, Febru-

ary 28, 1979, February 29, 1980, and February 28, 1981, in

the amounts of $10,353.89, $307.58, $18,991.04, $18,591.01

and $2,954.77, respectively.

(Signed) Mary Ann Cohen

Judge.

Entered: AUG 6 1987

+ * *

It is hereby stipulated that the foregoing decision is

in accordance with the opinion of the Court and the

respondent’s computation, and that the Court may enter

this decision without prejudice to the right of either party

to contest the correctness of the decision entered herein.

App. 61

WILLIAM F. NELSON

Chief Counsel

Internal Revenue Service

/s/ Truman Clare By: (Signed) Ronald M. Frykberg

TRUMAN CLARE RONALD M. FRYKBERG

Counsel for Petitioner District Counsel

American Charter Center P. O. Box 1500

1623 Farnam Street, Downtown Station

Suite 900 Omaha, Nebraska 68101

Omaha, Nebraska 68102 Tel. No. (402) 221-3733

Tel. No. (402) 422-0900

Date: July 29, 1987 Date: JUL 29 1987

UNITED STATES TAX COURT

LARRY A. LARSEN and

BETTY J. LARSEN,

)

Petitioners,

V. ) Docket No. 32935-84

)

COMMISSIONER OF INTERNAL

REVENUE,

Respondent.

DECISION

Pursuant to the opinion of the Court filed April 6,

1987, and incorporating herein the facts recited in the

respondent’s computation as the findings of the Court, it

ORDERED and DECIDED: That there are deficiencies

in income taxes due from the petitioners for the taxable

years 1976, 1977, 1978, 1979, and 1980 in the amounts of

App. 62

$9 301.73, $22,770.73, $13,916.15, $23,553.70 and $6,102.16,

respectively.

(Signed) Mary Ann Cohen

Judge.

Entered: AUG 6 1987

* * *

It is hereby stipulated that the foregoing decision is

in accordance with the opinion of the Court and the

respondent’s computation, and that the Court may enter

this decision without prejudice to the right of either party

to contest the correctness of the decision entered herein.

WILLIAM F. NELSON

Chief Counsel

Internal Revenue Service

/s/ Truman Clare By: (Signed) Ronald M. Frykberg

TRUMAN CLARE RONALD M. FRYKBERG

Counsel for Petitioners District Counsel

American Charter Center P. O. Box 1500

1623 Farnam Street, Downtown Station

Suite 900 Omaha, Nebraska 68101

Omaha, Nebraska 68102 Tel. No. (402) 221-3733

Tel. No. (402) 422-0900

Date: July 29, 1987 Date: JUL 29 1987

App. 63

UNITED STATES TAX COURT

ESTATE OF HOWARD C. LARSEN,

Deceased, MAXINE J. LARSEN,

Executrix, and

MAXINE J. LARSEN,

)

Petitioners,

V. Docket No. 33261-84

COMMISSIONER OF INTERNAL

REVENUE,

Respondent.

DECISION

Pursuant to the opinion of the Court filed April 6,

1987, and incorporating herein the facts recited in the

respondent’s computation as the findings of the Court, it

ORDERED and DECIDED: That there are deficiencies

in income taxes due from the petitioners for the taxable

years 1976, 1977, 1978 and 1979 in the amounts of

$6,803.23, $1,903.85, $11,843.21 and $25,996.80, respec-

tively; and

That there is a deficiency in income tax due from the

petitioners for the taxable year 1980 in the amount of

$15,810.74, without taking into consideration a tentative

investment credit carryback allowance from the taxable

year 1983 made on October 15, 1984, under the provisions

of 1954 I.R.C. § 6411.

App. 64

(Signed) Mary Ann Cohen

Judge.

Entered: AUG 6 1987

* * +

It is hereby stipulated that the foregoing decision is

in accordance with the opinion of the Court and the

respondent’s computation, and that the Court may enter

this decision without prejudice to the right of either party

to contest the correctness of the decision entered herein.

WILLIAM F. NELSON

Chief Counsel

Internal Revenue Service

/s/ Truman Clare By: (Signed) Ronald M. Frykberg

TRUMAN CLARE RONALD M. FRYKBERG

Counsel for Petitioners District Counsel

American Charter Center P. O. Box 1500

1623 Farnam Street, Downtown Station

Suite 900 Omaha, Nebraska 68101

Omaha, Nebraska 68102 Tel. No. (402) 221-3733

Tel. No. (402) 422-0900

Date: July 29, 1987 Date: JUL 29 1987

App. 65

APPENDIX F

§ 1.48-1 Definition of section 38 property

* » *

(e) Definition of building and structural compo-

nents. (1) Buildings and structural components thereof

do not qualify as section 38 property. The term “building”

generally means any structure or edifice enclosing a

space within its walls, and usually covered by a roof, the

purpose of which is, for example, to provide shelter or

housing, or to provide working, office, parking, display,

or sales space. The term includes, for example, struciures

such as apartment houses, factory and office buildings,

warehouses, barns, garages, railway or bus stations, and

stores. Such term includes any such structure constructed

by, or for, a lessee even if such structure must be

removed, or ownership of such structure reverts to the

lessor, at the termination of the lease. Such term does not

include (i) a structure which is essentially an item of

machinery or equipment, or (ii) a structure which houses

property used as an integral part of an activity specified

in section 48(a)(1)(B)(i) if the use of the structure is so

closely related to the use of such property that the struc-

ture clearly can be expected to be replaced when the

property it initially houses is replaced. Factors which

indicate that a structure is closely related to the use of the

property it houses include the fact that the structure is

specifically designed to provide for the stress and other

demands of such property and the fact that the structure

could not be economically used for other purposes. Thus,

the term “building” does not include such structures as

App. 66

oil and gas storage tanks, grain storage bins, silos, frac-

tionating towers, blast furnaces, basic oxygen furnaces,

coke ovens, brick kilns, and coal tipples.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.