# Petition for Writ of Certiorari — L & B Corp. v. Commissioner > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385002_1177%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1989 - **Citation:** 491 U.S. 905 ## Text 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 4. -_ 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. y% ij PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT a i 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 \ 24 T, Ot, ee. ~~ — a — = ae oni be Se gl a —— 9 a | ay = a a are ci elt Be 2 ca ly a Oe &. yell : a - a! 7 = ao - a") : * = ~~ = ‘i. = =e , 4 -_ * ie —_ as » 4 —- = . ‘ 7 > aa > ! Vira aan Sa agin * han * » 6 ~ @ a = ren ctod ye ee 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 J 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 —- v In The Supreme Court of the United States October Term, 1988 —_— _ L & B CORPORATION, et al., Petitioners, Vs. COMMISSIONER OF INTERNAL REVENUE, Respondent. a wv PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT y % Vv 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. a a 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). o (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 B. 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 (C) elevators and escalators, but only if - (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 (c) Applicable recovery period. For pur- 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) & vw 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. 7 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. 10 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 =~ 11 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 12 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. w 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 13 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. 14 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 15 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 16 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 a 17 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. 18 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. 19 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 20 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. o 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, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. ESTATE OF Howard C. LARSEN, Deceased, Maxine J. Larsen, Executrix and Maxine J. Larsen, Appellants, V. 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 i 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, V. Commissioner of Internal Revenue Appellee. ¥ + 2 2 & F Larry A. Larsen and Betty J. Larsen, Appellants, V. Commissioner of Internal Revenue, Appellee. + + & * © & Estate of Howard C. Larsen, Deceased, Maxine, J. Larsen, Executrix and Maxine J. Larsen, Appellants, V. 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 ee 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 [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385002_1177%3A1. Public record. Not legal advice.