P purchased equipment which it used to process animal bone into gelatin bone.
98 T.C. 127">*127 OPINION
Tannenwald,
Respondent determined a deficiency of $ 138,340 in petitioner's Federal income tax for the taxable year ending February 29, 1980. The 1992 U.S. Tax Ct. LEXIS 14">*15 issue for decision is whether petitioner's bone-processing equipment qualifies for the investment tax credit as energy property under
This case was submitted to the Court fully stipulated pursuant to Rule 122. The stipulated facts are found accordingly.
At the time the petition in this case was filed, petitioner's principal office was located in Denver, Colorado. For its taxable year ending February 29, 1980, petitioner filed a timely Federal income tax return with the Internal Revenue Service Center in Ogden, Utah.
Petitioner engages in the processing of various animal parts. The animal parts obtained by petitioner are a waste from the meat fabrication industry. During the taxable year at issue, petitioner operated three different types of processing facilities. Two of petitioner's operations are typical rendering facilities. 1992 U.S. Tax Ct. LEXIS 14">*16 98 T.C. 127">*128 The third type of facility operated by petitioner in the year at issue processes only animal bones. This bone-processing facility was constructed in 1979 and placed in service in January 1980. It is physically separated from the rendering operations. Prior to the year at issue, petitioner did not operate a facility which solely processed animal bones.
The primary product of the bone-processing facility is gelatin bone. Substantially all of the gelatin bone is sold to the photographic industry as a raw material for use as a coating on film. Other uses for gelatin bone include coating of pharmaceutical products as well as an ingredient in food products such as gelatin.
Petitioner constructed the bone-processing facility to utilize an advance in the method of production, processing, and marketing of meat known as "boxed-beef" fabrication. Boxed-beef is meat which has been cut from the bone, trimmed, and is ready for sale to the retail consumer. In this process, the animal is slaughtered, dressed, and packaged for human consumption in a single processing facility. A substantial increase occurred in the volume of animal bones produced at a centralized location as a 1992 U.S. Tax Ct. LEXIS 14">*17 result of boxed-beef fabrication. The typical rendering process is unable to consume the volume of bones produced by boxed-beef fabricators due to the decreased protein content of the meat and bone meal and the need for a typical rendering process to use the proper mixture of animal bones and other materials. Further, animal bones are not easily transportable due to potential contamination. The bones must be disposed of quickly after the animal is slaughtered and dressed. These factors resulted in the inability of boxed-beef fabricators to utilize or dispose of the entire volume of animal bones through established commercial channels.
Petitioner's bone processing starts with the receipt of the animal bones from the boxed-beef fabricators. The animal bones are then chopped and ground into a fine particle consistency. The bone particle is then made into a slurry by adding water. The mixture is heated and pumped into a decanter which separates the slurry into liquids and solids through a centrifugal process. The liquid consists of fats while the solids are the remaining bone material. After separation, the bone material is dried and sized, with the larger pieces of 98 T.C. 127">*129 1992 U.S. Tax Ct. LEXIS 14">*18 bone material being used for gelatin bone. The smaller bone pieces are used for bone meal.
In processing animal bones, there is no commercially marketable product produced prior to the production of gelatin bone. Further, petitioner's bone-processing facility does not process animal bones beyond the point at which gelatin bone is produced.
We must decide whether petitioner's facility for processing animal bones constitutes "recycling equipment" as defined in (6) Recycling equipment. -- (A) In general. -- The term "recycling equipment" means any equipment which is used exclusively -- (i) to sort and prepare solid waste for recycling, or (ii) in the recycling of solid waste. (B) Certain equipment not included. -- The term recycling equipment does not include -- (i) any equipment used in a process after the first marketable product is produced, or (ii) in the case of recycling iron or steel, any equipment used to reduce the waste to a molten state and in any process thereafter. (C) 10 percent virgin material1992 U.S. Tax Ct. LEXIS 14">*19 allowed. -- Any equipment used in the recycling of material which includes some virgin materials shall not be treated as failing to meet the exclusive use requirements of subparagraph (A) if the amount of such virgin materials is 10 percent or less. (D) Certain equipment included. -- The term "recycling equipment" includes any equipment which is used in the conversion of solid waste into a fuel or into useful energy such as steam, electricity, or hot water.
Section 38(b) states that the Secretary "shall provide such regulations as may be necessary to carry out the purposes" of subpart B, which includes
Pursuant to that authority,
(g) Recycling equipment -- (1) In general. Recycling equipment is equipment used exclusively to sort and prepare, or recycle, solid waste (
(2) Recovery equipment. Recovery1992 U.S. Tax Ct. LEXIS 14">*20 equipment includes equipment that --
(i) Separates solid waste from a mixture of waste,
98 T.C. 127">*130 (ii) Applies a thermal, mechanical, or chemical treatment to solid waste to ensure the waste will properly respond to recycling, or
(iii) Recycles solid waste to recover usable raw materials, but not beyond occurrence of the first of the following:
(A) The point at which a material has been created that can be used in beginning the fabrication of an end-product in the same way as materials from a virgin substance. Examples are the fiber stage in textile recycling, the newsprint or paperboard stage in paper recycling, and the ingot stage for other metals (other than iron or steel). In the case of recycling iron or steel, recycling equipment does not include any equipment used to reduce solid waste to a molten state or any process thereafter.
(B) The point at which the material is a marketable product (i.e., has a value other than for recycling) even if the material is not marketed by the taxpayer at that point.
[Emphasis added.]
The requirements for "recycling equipment" can be summarized as follows:
(1) The process must constitute recycling.
(2) The equipment must be used exclusively1992 U.S. Tax Ct. LEXIS 14">*21 to process or sort and prepare solid waste for processing.
(3) The item produced in the process must be the first marketable product.
(4) The product to be processed cannot contain more than 10 percent virgin material.
The parties agree that requirements (3) and (4) are met. Petitioner argues that its processing of animal bones constitutes recycling of solid waste and that the exclusion of animal waste from the definition of recovery equipment by the parenthetical clause in
In keeping with the principle that we should, if possible, avoid a construction which will question the validity of a regulation, see
In the final regulations the parenthetical references to animal waste were added to clarify but not change the meaning of the term recycling equipment for purposes of the energy credit. The term animal waste is intended to include the type of waste material collected and used by the rendering industry.
In this "clarification", the TAM explains the exclusion as follows:
With respect to equipment used to recover useable raw materials from solid waste (recovery equipment), the 1992 U.S. Tax Ct. LEXIS 14">*23 intent of Congress is indicated by its reference, in the committee report, to post-consumer waste materials and industrial fabricating waste. A further indication of the intent of Congress is provided by the examples included in the committee report of eligible equipment used in the actual recycling function to recover useable recyclable materials. The examples include equipment to produce ingots in metal recycling, fibers in textiles, and newsprint or paperboard in the paper industry. All of these examples involve the recovery of useable raw materials that can be processed back into the same type or similar end product.
Based upon this rationale, 3 respondent argues that the use of petitioner's equipment does not constitute recycling because (a) processing of the animal bone into gelatin bone is part of a forward-moving, one-way operation in which the boxed-beef fabricator first trims the meat from the bone and then passes the bone on to petitioner to complete the second phase of the operation, and/or (b) unlike metal waste which is processed back into metal and used in metal products, textile fibers waste which are processed back into textile fiber and used in textile products, 1992 U.S. Tax Ct. LEXIS 14">*24 or paper products which are processed back 98 T.C. 127">*132 into paper and used in paper products, the gelatin bone processed from the meat parts is not used in a meat product.
The parties have indulged in a semantical orgy, citing the Court numerous dictionary definitions for the purpose of proving, in the case of petitioner, that the word "recycling" has an everyday ordinary meaning in order to apply the usual rule of statutory construction and, in the case of respondent, that the word "recycling" has no such meaning thereby affording more leeway to the scope of the statute and regulation. We find it unnecessary to enter the esoteric world of lexigraphy and choose between the numerous definitions that have been thrust upon us because we are satisfied that any reasonable reading of the statutory provisions dealing1992 U.S. Tax Ct. LEXIS 14">*25 with "recycling equipment", in light of the natural import of the word "recycle" and the legislative history, supports petitioner's substantive position herein. See
No mention is made in the Code, regulations, or legislative history of a same type or similar end-product requirement. To be sure, the legislative history sets forth end-product examples of metal waste, textile fibers, and paper products as reflected in
We conclude that, at least in the absence of respondent's regulation, petitioner's processing of animal bones constitutes recycling so that its equipment is "recycling equipment" within the meaning of
Much of our earlier analysis is applicable to the issue of the validity of the exclusion, but we think it appropriate1992 U.S. Tax Ct. LEXIS 14">*28 to deal with some further considerations which respondent has advanced with the observation that some of those considerations are also relevant to our earlier analysis.
Initially, we note that
Respondent's dual use of the term "solid waste" in the regulations conflicts with the use of the term in the Code. As we have previously pointed out, see
Second, the
(5) Solid Waste. (i) The term "solid waste" has the same meaning as in § 1.103-8(f)(2)(ii)(
(A) The date the equipment is placed in service is substituted in the first sentence of § 1.103-8(f)(2)(ii)(
(B) Material that has a market value at the place it is located only by reason of its value for recycling is not considered to have a market value.
Section 1.103-8(f)(2)(ii)(
98 T.C. 127">*135 (
(4) The term "solid waste" means garbage, refuse, and other discarded solid materials, including solid-waste materials resulting from industrial, commercial, and
The fact that
Solid waste collection and disposal activities create one of the most serious and most neglected aspects of environmental contamination affecting public health and welfare. Solid wastes include a great variety of things that individuals, manufacturers, commercial establishments, and communities discard as no longer usable, such as garbage, rubbish, ashes, street refuse, * * * and the1992 U.S. Tax Ct. LEXIS 14">*32
Third, the Code and legislative history of
Lastly, we note that, in
In response to a request for clarification, the final rules specify that equipment that processes animal waste is not recycling equipment.
Respondent seizes upon the word "clarification" to support his argument that the animal waste exclusion is simply interpretative of an ambiguity 1992 U.S. Tax Ct. LEXIS 14">*34 in the phrase "solid waste". As is the case with
Moreover,
There is no indication that Congress intended to alter the tax definition of solid waste * * *
* * *
However, Congress clearly intended certain changes be made in the tax definition of solid waste for purposes of the energy credit. The section 103 regulation excludes from the definition of solid waste any substance that may be sold (
Therefore, the proposed regulation defined solid waste by beginning with the section 103 definition but has modified it by deleting an irrelevant 98 T.C. 127">*137 reference to the date of issue of obligations, by adding a provision which indicates that if the market value of material is attributable only to its recycling use the material is not considered to have a market value, and by permitting the recycled material to include not more than 10 percent virgin material during a taxable year.
[
Reference to the section 103 regulation reveals no separate treatment of animal waste in the definition of solid waste. See
The foregoing analysis clearly supports the view that there is nothing in the statutory language or the legislative history to suggest that Congress had an unarticulated agenda to treat "animal waste" as a separate category of solid waste not eligible for recycling.
1992 U.S. Tax Ct. LEXIS 14">*36 The long and short of the matter is that the animal waste exclusion in
We hold that the exclusion of "animal waste" from "solid waste" in the definition of "recovery equipment" in
Nims, Chabot, Korner, Shields, Hamblen, Cohen, Swift, Jacobs, Gerber, Wright, Parr, Wells, Ruwe, Whalen, Colvin, and Beghe,
Ruwe,
The process that transforms animals into finished products such as meat, hides, bone gelatin, and bone meal, appears to be an ongoing process that 1992 U.S. Tax Ct. LEXIS 14">*37 transforms raw materials (animals) into saleable products. Based on the facts presented, it is unclear whether
I am not convinced that
Any possibility of justifying the validity of the regulation by employing this rationale and then applying the regulation to the facts in this case was effectively eliminated by respondent's concession that animal bone is a "solid waste". This concession completely undercuts respondent's arguments. In the context of a manufacturing or processing cycle, waste is something that is of no further use in the manufacturing or processing cycle. Waste would either be disposed of as garbage or "recycled". Thus, 1992 U.S. Tax Ct. LEXIS 14">*39 respondent's concession takes animal bone out of the traditional processing cycle in the meat fabrication business. Any further use of the bones would be "recycling" of solid waste and the equipment so used would fall within the explicit statutory definition of "recycling equipment".
98 T.C. 127">*139 Korner and Swift,
Halpern,
Respectfully, I must dissent. By focusing on whether Congress drew a seemingly arbitrary distinction between animal waste and other solid waste, and virtually ignoring the question of what constitutes recycling, the majority, in my opinion, has missed the boat.
(g) Recycling equipment -- (1) In general.
The distinction between "recovery equipment" and "conversion equipment" can also be stated as a distinction between "recovery recycling" and "conversion recycling". Simply put, those are distinct processes: one yields raw materials; the other produces energy. Accordingly, it should be no surprise if certain types of waste are usable for conversion recycling but not for recovery recycling. The starting point must be to define what I have termed recovery recycling. Respondent's arguably narrow definition of recovery recycling limits such process to one in which the raw materials recovered can be reused to produce an end-product that is the same as (or perhaps similar to) the end product that gave rise to the solid waste (the majority describes that limitation as imposing an "end-product requirement"). Under respondent's view, animal waste, inherently incapable of being1992 U.S. Tax Ct. LEXIS 14">*41 used to create a new animal, or at least additional hamburger or pork chops, simply is not susceptible to recovery recycling. Nonetheless, animal waste can be used to create fuel or other useful energy and, therefore, is susceptible to conversion recycling. The "disparate 98 T.C. 127">*140 treatment" stems from the distinct nature of the two processes, assuming respondent's definition of recovery recycling.
The majority, however, argues that solid waste should be treated the same in both contexts:
The regulations, however, differentiate between the two references to the term "solid waste".
In my opinion, the majority misunderstands the meaning of
1992 U.S. Tax Ct. LEXIS 14">*43 Thus, we must determine whether respondent's definition of the term "recovery recycling" is reasonable or is plainly inconsistent with the Code. See
Inexplicably, the majority casts deference aside, conclusorily asserting that "any reasonable reading of the statutory provisions dealing with 'recycling equipment,' in light of the natural import of the word 'recycle' and the legislative history, supports petitioner's substantive position herein." Majority op. p. 132. The majority seems content to observe that: "No mention is made in the Code, regulations, or legislative history of a same type or similar end-product requirement." However, the majority concedes that "the legislative history sets forth end-product examples of metal waste, textile fibers, and paper products." Majority op. p. 132. Moreover, the majority fails to cite even one example1992 U.S. Tax Ct. LEXIS 14">*44 from the legislative history of a non-end-product example. Thus, while the legislative history lacks any explicit statement that there is an end-product requirement, it equally lacks any explicit statement that there is not. Further, the fact that, with respect to recovery recycling, the legislative history lists end-product examples
Parker,
1. This case was reassigned to Judge Tannenwald by order of the Chief Judge dated Oct. 29, 1991.↩
2. All statutory references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
3. We note that Technical Advice Memorandums are not precedent. Sec. 6110(j)(3);
4. Although entitled to consideration, revenue rulings are also not precedent.
1. Just as the phrase "colors other than blue" does not suggest that blue is not a color, the phrase "solid waste other than animal waste" does not suggest that animal waste is not solid waste. To reduce respondent's argument to the defense of an inconsistent definition of the term "solid waste" is to construct a straw dummy and ignore the real issue in this case.↩
