[Emphasis added.]

Respondent contends that unit 513 and the galvanizing portion of unit 509 are "buildings" for which an investment credit is not allowable. Petitioner argues that these structures are 1980 U.S. Tax Ct. LEXIS 170">*192 not "buildings" within the meaning of section 48, but instead, are "other tangible property" used as an integral part of its production process. For the reasons set out below, we agree with respondent.

Pursuant to section 38(b), respondent, in sec. 1.48-1(e), Income Tax Regs., has defined the term "buildings" as follows:

Sec. 1.48-1 Definition of section 38 property.

(e) Definition of building and structural components. (1) Buildings and structural components thereof do not qualify as section 38 property. The term "building" generally means any structure or edifice enclosing a space within its walls, and usually covered by a roof, the purpose of which is, for example, to provide shelter or housing, or to provide working, office, parking, display, or sales space. The term includes, for example, 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 1980 U.S. Tax Ct. LEXIS 170">*193 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 structure clearly can be expected to be replaced when the property it initially houses is replaced. 73 T.C. 1059">*1072 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 oil and gas storage tanks, grain storage bins, silos, fractionating towers, blast furnaces, basic oxygen furnaces, coke ovens, brick kilns, and coal tipples.

This regulation reflects congressional intent that the term "building" be given its commonly accepted meaning. Satrum v. Commissioner, 62 T.C. 413">62 T.C. 413, 62 T.C. 413">416 (1974); H. Rept. 1447, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 516; S. Rept. 1881, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 858-859.

This regulation has been construed as establishing 1980 U.S. Tax Ct. LEXIS 170">*194 a function or use test for determining whether a given structure was a "building." Lesher v. Commissioner, 73 T.C. 340">73 T.C. 340 (1979); Brown-Forman Distillers Corp. v. United States, 205 Ct. Cl. 402">205 Ct. Cl. 402, 499 F.2d 1263">499 F.2d 1263 (1974). Thirup v. Commissioner, 508 F.2d 915">508 F.2d 915, 508 F.2d 915">919 (9th Cir. 1974), revg. 59 T.C. 122">59 T.C. 122 (1972). Under this test, the major inquiry has been whether the structure provides "working space" for employees that is more than merely incidental to the primary function of that structure. 205 Ct. Cl. 402">Brown-Forman Distillers Corp. v. United States, supra;Catron v. Commissioner, 50 T.C. 306">50 T.C. 306, 50 T.C. 306">311 (1968).

In Yellow Freight System, Inc. v. United States, 538 F.2d 790">538 F.2d 790 (8th Cir. 1976), however, the Eighth Circuit interpreted this regulation and the legislative history underlying the investment credit provisions as requiring a consideration of both the function and the appearance of the structure in question. Since an appeal in this case lies in the Eighth Circuit, ¹⁰ we will also apply the two-prong test adopted by that court. See 73 T.C. 340">Lesher v. Commissioner, supra.

In terms of their physical appearance, petitioner's galvanizing facilities bear the unmistakable look of buildings. The structural 1980 U.S. Tax Ct. LEXIS 170">*195 design, dimension, and physical attributes of these facilities are such that they closely resemble the examples of "buildings" listed in the regulations. Photographs in the record and the testimony of witnesses confirm this conclusion. Moreover, on brief, petitioner made no argument to the contrary. Accordingly, we hold for respondent on the "appearance test."

73 T.C. 1059">*1073 Respondent next contends that the structures also qualify as "buildings" under the function or use test. Respondent asserts that these facilities provided "working space" where petitioner's employees engaged in a broad range of activities directly related and highly essential to the operation of the galvanizing process.

Petitioner contends that the work done by those employees was both insubstantial and insignificant in relation to its entire galvanizing operation. Relying principally upon 62 T.C. 413">Satrum v. Commissioner, supra, and 205 Ct. Cl. 402">Brown-Forman Distillers Corp. v. United States, supra, petitioner further argues that the employee activity within those two facilities involved nothing more than mere maintenance and collection of goods. Accordingly, petitioner concludes that these structures only served as storage or processing chambers 1980 U.S. Tax Ct. LEXIS 170">*196 and did not furnish sufficient working space to constitute buildings for investment credit purposes. We disagree.

In our view, the record clearly demonstrates that petitioner's galvanizing facilities provided the requisite "working space" to satisfy the functional test. We reach this conclusion based upon a consideration of both the quantity and nature of the employee activity within the two facilities. ¹¹

See 538 F.2d 790">Yellow Freight System, Inc. v. United States, supra at 796-797; 62 T.C. 413">Satrum v. Commissioner, supra at 417.

Although the amount of human activity inside the galvanizing facilities did not approach the levels of either 538 F.2d 790">Yellow Freight System, Inc. v. United States, supra (a maximum of 80 full-time employees working approximately 1,925 man-hours per day), or Sunnyside Nurseries v. Commissioner, 59 T.C. 113">59 T.C. 113 (1972) (approximately 50 employees working 5 days a week, 7 1/2 hours per day), we do not believe that there exists any minimum degree of activity, below which a structure 1980 U.S. Tax Ct. LEXIS 170">*197 ceases to provide "working space." Instead, the proper inquiry is whether "a substantial number of employees were frequently and regularly occupied" in the facility. 59 T.C. 113">Sunnyside Nurseries v. Commissioner, supra at 121. This determination will necessarily depend upon the nature of the business venture housed within that structure.

Applying this standard to the facts before us, we conclude that the quantum of employee activity in units 509 and 513 was 73 T.C. 1059">*1074 sufficiently substantial to indicate that those structures provided working space. Since the galvanizing process was not automated, constant employee participation was required at each step of the operation. Thus, the crane operators, manually directing the craneway apparatus, transported products from the loading station through the processing tanks and finally to the post-production area. Various employees prepared the product for galvanizing while others, using hand-held tools, cleaned the newly treated metal. Still other employees, known as paddlers, skimmed excess zinc from the tops of the kettles. This frequent and regular employee activity was unlike the more limited activity in the cases cited by petitioner. Furthermore, the 1980 U.S. Tax Ct. LEXIS 170">*198 fact that only 10 to 16 employees performed these functions does not change our result, for in the context of petitioner's galvanizing operation, that number was indeed "substantial." Accordingly, we reject petitioner's first contention that the amount of activity was de minimis.

We must also reject petitioner's argument that the nature of the work performed by the employees was insignificant and thus comparable to the maintenance and collection of goods. The record clearly establishes that the metal products could not have been galvanized without the concerted efforts of those individuals. To be sure, some ancillary loading and maintenance work was necessarily involved. However, that activity was simply one aspect of the overall employee responsibility in the operation. Other duties, such as metal preparation, cleaning, and paddling were more directly and fundamentally related to the galvanizing process itself. Petitioner's attempt to downgrade the importance of those functions is, therefore, unpersuasive.

Moreover, the cases relied on by petitioner do not support its position. In both 62 T.C. 413">Satrum v. Commissioner, supra, and 205 Ct. Cl. 402">Brown-Forman Distillers Corp. v. United States, supra, the 1980 U.S. Tax Ct. LEXIS 170">*199 employee activity was merely supportive of and ancillary to the principal function of the structures involved therein. Here, on the other hand, the human activity was obviously essential to that function. Consequently, since it is clear that these galvanizing facilities provide "working space," we must hold that they functioned as buildings.

Petitioner argues, however, that its galvanizing facilities were "special purpose structures" within the meaning of section 1.48-1(e)(1), 73 T.C. 1059">*1075 Income Tax Regs., and, therefore, are exempted from the definition of "buildings." We cannot agree.

In pertinent part, section 1.48-1(e)(1)(ii), Income Tax Regs., provides that the term building does not include --

(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 structure 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 1980 U.S. Tax Ct. LEXIS 170">*200 of such property and the fact that the structure could not be economically used for other purposes.

A careful reading of the relevant legislative history clearly indicates that the kind of structure intended to qualify under this regulatory exception are those which are essentially "skin coverings" for the equipment and machinery which they house. S. Rept. 92-437, 92d Cong., 1st Sess. (1971), 1972-1 C.B. 575; Endres Floral Co. v. United States, 450 F. Supp. 16">450 F. Supp. 16, 450 F. Supp. 16">25 (N.D. Ohio 1977). The structures which satisfy this requirement are, in effect, mere extensions of that property and, consequently, are considered to be an integral part thereof for purposes of the investment credit. Examples of these mechanical-type structures are enumerated in the regulation. They include oil and gas storage tanks, grain storage bins, silos, fractionating towers, blast furnaces, coke ovens, brick kilns, and coal tipples.

Petitioner advances three major arguments in support of its position. Petitioner initially contends that since both structures would be replaced at the time the galvanizing process was retired, the facilities fit squarely within the plain language and intended scope of this regulatory 1980 U.S. Tax Ct. LEXIS 170">*201 exclusion. As a basis for this conclusion, petitioner points to the fact that when the galvanizing tanks in unit 509 were replaced in 1972, the roof and walls of that section were also replaced. Finding petitioner's reliance on that incident misplaced, we reject this first argument.

The evidence fails to support petitioner's claim that it is reasonable to expect replacement of these structures if the machinery and equipment housed within were to be replaced. The temporary replacement of the roof and walls in unit 509 was simply a remedial measure taken to correct a then-existing acid fume problem and was not, as petitioner maintains, an inevitable consequence following its removal of the processing tanks. In 73 T.C. 1059">*1076 addition, we note that petitioner subsequently covered the roof and walls with duraform and treated the steel framework with acid-resistant coating. Since that time those structural components have not been replaced nor has petitioner shown deterioration which would make future replacement likely. Accordingly, the acid problem which petitioner cites as causing the contemporaneous replacement of both structure and machinery in unit 509 no longer exists.

Furthermore, respondent's 1980 U.S. Tax Ct. LEXIS 170">*202 engineering expert, William Stewart, testified that units 509 and 513 contain equipment with useful lives significantly shorter than those of the structural elements. These items include heat instrumentation and control equipment, acid pumps, steel processing tanks, galvanizing kettles, and the furnace. Based upon this expert testimony, it is clear that those two structures need not be replaced when that equipment is eventually retired.

Petitioner next argues that units 509 and 513 were "special purpose" structures because they could not be economically used for purposes other than zinc galvanizing. Petitioner's reasoning is as follows: (1) The size and location of the processing equipment would limit the available space necessary to support other manufacturing or production operations; (2) the costs and related problems involved in removing the concrete platform housing the galvanizing tanks would be prohibitive; and (3) the costs of heating and lighting the structures for "normal" manufacturing purposes would be substantial considering the excessive height of these structures.

Disputing each of these claims, respondent maintains that it would be economically feasible to convert 1980 U.S. Tax Ct. LEXIS 170">*203 units 509 and 513 to alternative uses. In this regard, respondent contends that the clear span construction of these facilities renders them particularly ideal for line production work. The open interior areas, respondent argues, could easily be adapted for other types of processing or manufacturing operations. Respondent further contends that the platform area could readily be removed from the facilities or, alternatively, boarded over and used for storage. Since we find these structures not restricted to their present function and believe that they can be economically adapted to other uses, we must hold for respondent.

Petitioner has simply failed to offer any evidence supporting its assertion that these facilities are limited to the purposes for 73 T.C. 1059">*1077 which they now serve. Notwithstanding the size and location of the concrete platform, these structures contain vast open areas which presently are used for loading and cleanup activities. In unit 513, for example, this nonprocessing area measures 200 feet by 79 feet and consists totally of flat, unobstructed floor space. Consequently, there is nothing which would prevent this area from being used as working space for any number of 1980 U.S. Tax Ct. LEXIS 170">*204 activities.

Moreover, the raised platform area itself can be adapted to alternative uses. In fact, during their 1978 inspection of unit 509, respondent's representatives discovered petitioner's employees preparing to utilize that platform for storage in an unrelated manufacturing business. Accordingly, since petitioner obviously believed that its facilities were suitable for other purposes, its contentions, on brief, to the contrary must be rejected.

Petitioner's argument with respect to the economic cost of converting these facilities to alternative uses is also unpersuasive. While petitioner would undoubtedly incur some additional costs, there has been no showing that such a conversion would be economically unfeasible. Cf. 73 T.C. 340">Lesher v. Commissioner, supra; cf. 62 T.C. 413">Satrum v. Commissioner, supra.The structural layout of these facilities is such that the steel galvanizing tanks could be removed through the large doors without damaging the structural elements. Although the concrete tanks could not be removed, testimony supports that they could be easily demolished with a jackhammer or similar equipment. In this connection, William Stewart has stated that "it's cheaper to use common labor 1980 U.S. Tax Ct. LEXIS 170">*205 to tear out something like that than it is to build a new building." Moreover, we find it highly significant that petitioner, in fact, removed the entire platform from unit 509 at the time of the reconstruction in 1972. Certainly, if it was possible to replace the platform in 1972, there is no reason to assume that future removal would be economically unfeasible.

Petitioner's third major argument is that since units 509 and 513 were specially designed to provide for the stress and demand of the galvanizing process, they are, therefore, "special purpose" structures within the meaning of section 1.48-1(e)(1), Income Tax Regs. In support of this position, petitioner points to such special construction features as the duraform siding and roofing, the wood framework of unit 513, and the height of each enclosure. We find this argument unpersuasive.

Petitioner has obviously failed to distinguish between a 73 T.C. 1059">*1078 qualifying "special purpose structure" and a building designed for a specific use. To be sure, every manufacturing facility is, to some extent, specially designed to accommodate the nature of the process conducted within. Thus, walls, floors, and roofs may be of a specific dimension, 1980 U.S. Tax Ct. LEXIS 170">*206 design, or construction. In the instant case, this is clearly illustrated by the use of acid-resistant materials to extend the useful lives of these structures. Such measures, however, do not necessarily transform a building into a "special purpose" structure. Instead, that term is far more limited in its meaning. Only those specially designed structures which are so integrally related to the equipment they house that they constitute mere coverings for that equipment qualify. Units 509 and 513 were not specifically designed simply to "cover" the galvanizing tanks and related equipment within those facilities. Thus, they are unlike storage bins, oil tanks, blast furnaces, and other regulatory examples of "special purpose" structures.

For all of the reasons discussed herein, we hold that units 509 and 513 are "buildings" and, accordingly, deny petitioner's claimed investment credit.

The next issue is whether petitioner is entitled to depreciate the reconstructed galvanizing enclosure of unit 509 and the entire structural enclosure of unit 513 using the double declining balance method. Petitioner argues that since these structures are "section 1245" property, they 1980 U.S. Tax Ct. LEXIS 170">*207 can be depreciated under that accelerated method. Respondent contends that these structures constitute "section 1250" property for which double declining balance depreciation is unavailable. For the reasons set out below, we hold for respondent.

As defined by section 1250(c), the term "section 1250 property" means any real property (other than section 1245 property) which is or has been property of a character subject to the allowance for depreciation provided by section 167. ¹²

Section 1245(a)(3), moreover, specifically excludes buildings and their structural components from the definition of "section 1245 property." Furthermore, section 1.1245-3(c)(2), Income Tax 73 T.C. 1059">*1079 Regs., provides that "building" is defined by reference to its meaning for investment credit purposes. Accordingly, since we have held these structures to be nonqualifying "buildings" under section 48, we conclude that they are also "section 1250 property."

Having resolved this initial question, we must now decide the substantive depreciation issue. 1980 U.S. Tax Ct. LEXIS 170">*208 Section 167(b)(2) generally permits a taxpayer to compute an allowance for depreciation using the double declining balance method. In the case of "section 1250 property," however, the availability of this accelerated method is substantially limited by section 167(j)(1). ^{131980 U.S. Tax Ct. LEXIS 170">*209} An exception to this limitation is contained in section 167(j)(3) which, in relevant part, provides as follows:

Paragraph (1) of this subsection shall not apply, and subsection (b) shall apply, in the case of property --

(A) the construction, reconstruction, or erection of which was begun before July 25, 1969 * * *

Since unit 513 was constructed in 1972, it clearly does not fall within this exception. Accordingly, double declining balance depreciation cannot be taken on that structure.

With respect to unit 509, petitioner originally constructed the galvanizing portion in 1966 and has depreciated that section using the double declining balance method. Respondent does not dispute the correctness of that action. In 1972, petitioner reconstructed that section and now seeks to depreciate the costs on the same accelerated method. The issue, therefore, 1980 U.S. Tax Ct. LEXIS 170">*210 is whether 73 T.C. 1059">*1080 we look to the pre-July 25, 1969, construction or the post-1969 reconstruction.

In this regard, we note that the statutory provision and the regulations thereunder provide little insight. See sec. 1.167(j)-4, Income Tax Regs. Thus, one could possibly read that statute to allow double declining balance depreciation in this case because construction of the galvanizing portion began before July 25, 1969, even though reconstruction began after. We believe, however, that such an interpretation would be contrary to the legislative intent and could effectively nullify the depreciation limitations provided by section 167(j)(1). See H. Rept. 91-413 (1969), 1969-3 C.B. 407; S. Rept. 91-552 (1969), 1969-3 C.B. 557. Accordingly, since reconstruction began after the statutory focal date, we hold that petitioner cannot depreciate that section on a declining balance method. ^{141980 U.S. Tax Ct. LEXIS 170">*211} Petitioner can, however, continue to use that accelerated method with respect to the original construction costs of unit 509.

The final issue is whether petitioner is entitled to depreciation and an investment credit on the initial zinc charges to the galvanizing kettles in units 509 and 513. Respondent argues that the zinc charge is not depreciable property nor does it have a useful life of more than 3 years for investment credit purposes. Instead, respondent claims that the zinc is an inventory item which is replenishable as used in the galvanizing process.

Petitioner, on the other hand, argues that the zinc ceases to be inventory once it is placed in the galvanizing kettles. Accordingly, petitioner maintains that because the zinc is so integrally related to the galvanizing process, it should be considered part of the kettle itself and entitled to depreciation and investment credit on the same basis. We disagree.

It is well-settled law that the section 167 allowance for depreciation does not apply to inventory or stock in trade. See, sec. 1.167(a)-2, Income Tax Regs.; Luhring Motor Co. v. Commissioner, 42 T.C. 732">42 T.C. 732, 42 T.C. 732">751 (1964). Thus, the products manufactured and sold by petitioner 1980 U.S. Tax Ct. LEXIS 170">*212 in the ordinary course of business are 73 T.C. 1059">*1081 clearly nondepreciable items. Moreover, direct costs incident to the manufacture or processing of such items are includable in the "inventorial costs" of the products. See sec. 1.471-11(b)(2)(i), Income Tax Regs.

In the instant case, the initial zinc was consumed in the ordinary course of the galvanizing process and became an integral part of the finished product. Being a direct inventory production cost, it constitutes nondepreciable property. Accordingly, it follows that the investment credit with respect to the zinc is also denied. See sec. 48(a)(1). ¹⁵

To reflect the foregoing,

Decision will be entered under Rule 155.