1974 U.S. Tax Ct. LEXIS 82">*82
Petitioner's egg-producing operations were contained within several sheet metal, quonset-type structures. Each was designed specifically for housing chickens, provided the proper environment, and required a minimum of human maintenance and supervision.
62 T.C. 413">*413 The Commissioner determined deficiencies in the petitioners' Federal income taxes as follows:
Year | Deficiency |
1967 | $ 7,240 |
1968 | 14,698 |
1969 | 48,990 |
The parties have made certain concessions leaving for adjudication the issue of whether certain structures, known as egg-producing facilities, were "[buildings]" within the meaning of
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of facts, together with attached exhibits, are incorporated herein by this reference.
62 T.C. 413">*414 Petitioners Melvin Satrum and Thordis Satrum are 1974 U.S. Tax Ct. LEXIS 82">*84 husband and wife, and resided at Woodburn, Oreg., at the time of the filing of their petition herein. The petitioners filed joint Federal income tax returns for the calendar years 1967, 1968, and 1969 with the Internal Revenue Service Western Service Center at Ogden, Utah. At all relevant times the petitioners used the cash basis method of accounting. We will hereinafter refer to Melvin Satrum as "petitioner."
During the years at issue petitioner was a farmer engaged principally in the business of producing eggs for sale. His egg business was conducted as a sole proprietorship known as "Valley View Egg Farm." The petitioner expended the following amounts in the construction and remodeling of walls, concrete slab base, and roof of the egg-producing facilities used in this business:
Year | Amount |
1967 | $ 21,009 |
1968 | 3,500 |
1969 | 49,284 |
These expenditures do not relate to the costs or installation of equipment or machinery used in the egg-producing facilities. The petitioners claimed an investment credit in respect of the expenditures above under the provisions of section 38.
Each egg-producing facility is a rectangular structure, 240 feet long and 51 feet wide. The height1974 U.S. Tax Ct. LEXIS 82">*85 ranges from some 8 feet where the side walls are in contact with the roof to in excess of 14 feet at the roof's uppermost point or peak. The outer walls are constructed of corrugated metal, resembling a quonset hut. The walls actually consist of three separate partial walls, containing louvers, designed specifically to control ventilation.
The floors are made of concrete slab with a thickness of 2 inches. The floor slopes approximately 1/2 inch for every 8 feet in length and is designed to provide a continuous water flow for the chickens.
The roof supports 13 air coolers controlled by thermostats which provide forced air throughout the structure. The roof, because of the weight, is supported by braces 8 feet apart throughout the structure.
Each facility houses 20,000 chickens in double-decked cages. The roof braces help support the cages and the cages are separated by aisles. At the end of each structure is a small area where eggs may be stacked prior to placement in cooler rooms. Running next to the cages are troughs for feed and water. The cages themselves are sloped, thereby causing eggs which have been freshly laid to roll forward onto trays from which they are collected.
1974 U.S. Tax Ct. LEXIS 82">*86 62 T.C. 413">*415 During the years at issue the petitioner employed seven individuals. The normal duties carried on inside the egg-producing facilities were threefold: (1) Egg gathering from trays below the cages, a chore carried out by two employees and requiring between 2 and 2 1/2 hours to complete; (2) feeding of chickens, requiring one employee on an electric feeder 40 minutes; (3) removal of chicken droppings, requiring 30 minutes and one employee with a forklift-type machine which scrapes dropping boards below the cages. During these operations employees will check for dead chickens and remove them.
Every 20 to 24 months the chickens will no longer lay eggs profitably and must be removed. Petitioner will hire 14 to 16 youths, who carry the chickens out of the structure and load them on trucks to be sold later. It takes approximately 5 hours to carry out the chickens from one structure. Twenty thousand (20,000) new chickens are brought in during 1 day, requiring approximately 10 hours.
OPINION
We have been called upon to determine whether petitioner's investment in the walls, roof, and floors of an egg-producing facility qualify for the credit provided in section 38. 2 Among 1974 U.S. Tax Ct. LEXIS 82">*87 the requirements necessary to qualify for the credit, and the only requirement at issue with the parties, is that the property for which the credit is sought must be "section 38 property," as defined by
(1) In general. -- Except as provided in this subsection, 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 manufacturing, production, or extraction * * *, or (ii) constitutes a research or storage facility used in connection with any of the activities referred to in clause (i), * * *
1974 U.S. Tax Ct. LEXIS 82">*88 In the instant case the respondent has concluded that the facility's outer structure was "a building." Petitioner contends that the structure was "other tangible property" used as an integral part of production.
62 T.C. 413">*416 Under the broad authority granted him by section 38(b), respondent has defined the term "building" as follows:
While the legislative history of the investment credit indicates that "building" is to be given its commonly accepted meaning (H. Rept. No. 1447, 87th Cong., 2d Sess. (1962),
1974 U.S. Tax Ct. LEXIS 82">*91 In the instant case there is little doubt in our mind that the structure was specially designed as an integral part of the egg-producing process. The sides of the structure did not have a normal wall, but rather had three louvered wall sections to enable proper control of ventilation. Closely spaced beams, which supported the roof and numerous coolers 62 T.C. 413">*417 located on the roof, were also necessary supports for the cages where the chickens were housed. Further the concrete floor sloped to provide a continuous water flow. Because of the sheet metal construction, the closely spaced beams, and the sloping floor, we do not believe that this structure could be economically used for any purpose other than for the specific purpose for which it was designed. Moreover we think it reasonable to expect replacement of the entire facility, if the property housed within were to be abandoned.
In
Though it is difficult to draw the line between providing no working space and providing such a quantum of space for workers that the structure becomes a "building," we believe that the work done within petitioner's facilities can be analogized to the maintenance and collection of goods, a typical activity in any facility that serves merely as a storage area or processing chamber.
It follows that, based on both the nature and amount of work done within each facility, we are constrained to hold that the egg-producing facilities were not "[buildings]" the "purpose of which was to provide working space." See
Thus it is we note with interest the following portion of a subsequently published Senate Finance Committee Report, 1974 U.S. Tax Ct. LEXIS 82">*94 accompanying the to-be Revenue Act of 1971, which undertook to clarify existing law with respect to the term "building":
The committee also desires to make it clear that the term "building" is not intended to include a structure which houses property used as an integral part of a manufacturing or production activity (or other activity referred to in
One example of a type of structure closely related to the product it houses which was called to the attention of the committee is a unitary system for raising hogs which includes automatic feed systems, special airflow units, slatted flooring, pens and partitions. The structure which1974 U.S. Tax Ct. LEXIS 82">*95 can be added to, according to the number of hogs raised, is no more than a cover and way of tying together the specially designed pens, automatic feed systems, etc. There is no other practical use for the structure and it can, therefore, be expected to be used only so long as the equipment it houses is used. Such a structure would be eligible for an investment credit. [S. Rept. No. 92-437, 92d Cong., 1st Sess. (1971),
In light of Congress' expressed intentions, and because we believe that each facility is designed to function as one integrated unit, we find that they qualify as "other tangible property" used as "an integral part of production [of eggs] * * *" as contemplated by
Dawson,
The majority has arrived at its conclusion that petitioners' henhouses were not buildings by discounting the human activity that took place inside the houses. It discounts the activity because of the nature and quantity thereof. The nature of the activity is characterized as "the maintenance and collection of goods, a typical activity in any facility that serves merely as a storage area or processing1974 U.S. Tax Ct. LEXIS 82">*97 chamber." The quantity of the activity is described as that which would occupy one person for 6 hours per day.
To my mind the maintenance and collection of goods is comparable to what went on in the greenhouses in
It seems to me that the majority has erroneously applied settled law to the facts of this case. I would sustain the respondent herein and hold that the structures do not qualify for the investment credit. See
62 T.C. 413">*420 Quealy,
In any modern commercial operation, whether it be producing eggs, cows' milk, or manufacturing television sets, the building which houses the operation may be specially designed for that purpose. Its utility for any other purpose will be limited. The equipment used1974 U.S. Tax Ct. LEXIS 82">*100 in the operation will be attached to the building. None of these considerations make the structure any less a building as that term is commonly understood. If the Congress had wished to grant an investment credit for this type of building it should not have specifically excluded "buildings" without qualification in
1. All statutory references are to the Internal Revenue Code of 1954 unless otherwise indicated.↩
2. SEC. 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 or his delegate shall prescribe such regulations as may be necessary to carry out the purposes of this section and subpart B.↩
3. See also
1. Classic English folk tale. See the modern version, "Henny Penny" by Paul Galdone, The Seabury Press, New York (1968).↩
2. The majority's reference to the so-called clarification in a Senate committee report relating to an automated structure for raising hogs is misleading. The committee obviously was of the impression, whether rightly or wrongly, that the structure did not involve any human activity of consequence -- a situation different from that in the present case -- and was more to be compared to such structures as blast furnaces, brickkilns, etc., which are not treated as "buildings." The facts herein call for the opposite conclusion.↩