UNITED STATES TAX COURT



PAYLESS CASHWAYS, INC., AND ITS SUBSIDIARIES, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



  Docket No. 26342-95.            Filed February 16, 2000.



       P equipped and furnished 5 of 11 floors of a
  building it leased for its corporate headquarters. The
  owner of the building was a limited partnership (TPS)
  in which P had a 16-2/3-percent interest. TPS signed a
  contract for the construction of the building on Apr.
  4, 1985. P took possession of the leased space in
  October 1986.

       P claimed an investment tax credit for its taxable
  year ending Nov. 29, 1986, for the cost of the
  equipment and furnishings acquired and placed in
  service at P’s corporate headquarters. R disallowed
  the claimed credits.

       The Tax Reform Act of 1986 (TRA),   Pub. L. 99-514,
  100 Stat. 2085, generally repealed the   investment
  credit for property acquired or placed   in service after
  Dec. 31, 1985. However, P’s claim for    investment tax
                               - 2 -

     credit relies on transition rules contained in TRA
     secs. 204(a)(7) (world headquarters rule) and
     203(b)(1)(C) (equipped building rule), 100 Stat. 2156,
     2144.

          Held: In order for a taxpayer to have a “world
     headquarters” within the meaning of TRA sec. 204(a)(7),
     a taxpayer must have substantial international
     operations which are directed from the headquarters.
     The existence of employees stationed outside the United
     States, exports or foreign source income, liability for
     foreign taxes, a foreign permanent establishment, and
     having foreign subsidiaries or foreign joint venture
     operations are all indicia of international operations.
     P did not have any of these indicia in the year in
     question. P’s importation of some merchandise for
     domestic sale and borrowing from banks and other
     lenders who participated in the international capital
     markets were not sufficient evidence of substantial
     international operations to characterize P’s
     headquarters as a “world headquarters” under TRA sec.
     204(a)(7).

          Held, further: TRA sec. 203(b)(1)(C) (equipped
     building rule) requires the taxpayer claiming the
     investment tax credit to have a specific written plan
     and to have incurred or be committed to more than one-
     half of the total cost of the equipped building by Dec.
     31, 1985. P failed to establish that it had a specific
     written plan, or that it had incurred or committed more
     than one-half of the total cost of the equipped
     building before Jan. 1, 1986, as required by TRA sec.
     203(b)(1)(C).



     Frederick Brook Voght, Rhonda Nesmith Crichlow, David F.

Levy, Michael E. Baillif, and Rajiv Madan, for petitioners.

     Michael L. Boman, for respondent.


     RUWE, Judge:   Respondent determined a deficiency in

petitioners’ Federal income tax for their taxable year ending

November 29, 1986, in the amount of $240,298.   The deficiency
                               - 3 -

results from a disallowance of claimed investment tax credits

attributable to leasehold improvements, furnishings, and

equipment acquired for, and placed in service at, petitioners’

corporate headquarters during petitioners’ 1986 taxable year.

Petitioners now claim they are entitled to an investment credit

in an amount greater than claimed on their return.   The sole

issue for decision is whether petitioners (hereinafter referred

to as Payless) are entitled to an investment tax credit pursuant

to one of the transition rules contained in the Tax Reform Act of

1986 (TRA), Pub. L. 99-514, 100 Stat. 2085.1   An unrelated issue

involving a claimed net operating loss carryback will require a

Rule 1552 computation.

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.   Payless’ principal place

of business was located in Kansas City, Missouri, when the

petition was filed.   Payless has had its corporate headquarters




     1
      The transition rules relied on are secs. 204(a)(7) (world
headquarters rule) and 203(b)(1)(C) (equipped building rule) of
the Tax Reform Act of 1986 (TRA), Pub. L. 99-514, 100 Stat. 2085,
2156, 2144, respectively.
     2
      Unless otherwise indicated, all section 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.
                               - 4 -

at Two Pershing Square, 2300 Main Street, Kansas City, Missouri

(Two Pershing Square), since October 1986.

     Payless is a full-line building materials supplier serving

the home improvement, maintenance, and repair market.   Payless’

customers include both “do-it-yourself” customers and

professional contractors such as remodelers, residential

builders, and other similar businesses that purchase large

quantities of building materials.   In the year in issue, Payless

operated 181 stores in 23 States and had 13,685 employees.

     Payless’ sales for 1986 were $1,525,648,000.   During 1986,

Payless purchased merchandise from approximately 3,000 different

suppliers.   Payless purchased some of its merchandise, including

home improvement products, equipment, supplies, and materials

from foreign manufacturers and vendors.   Beginning in 1981,

Payless purchased merchandise from foreign sources through its

import department with the assistance of various purchasing

agents.   None of the purchasing agents utilized by Payless were

employees of Payless.   Beginning in 1985, Payless purchased

merchandise from foreign sources through Multi-Growth, Ltd., a

limited liability company organized under the laws of Hong Kong.3

In 1986, Payless’ cost of merchandise sold was $1,041,678,000.

In 1986, Payless purchased merchandise from foreign manufacturers


     3
      The record does not disclose any ownership interest held by
Payless in Multi-Growth, Ltd., and petitioner did not assert any
such interest on brief.
                                - 5 -

and vendors for sale in its stores totaling $24,924,968.      This

entire amount was purchased from 28 manufacturers and vendors in

Taiwan.   Prior to 1994, Payless owned no stores or other

facilities outside the United States.     Before 1994, Payless had

no employees located outside the United States, except when

engaged in short-term travel.

     In the 1980's, Payless acquired two companies, Knox Lumber

and Somerville Lumber.   Payless ran those companies as separate

wholly owned entities with their own boards of directors,

presidents, and operating systems.      Both companies had their own

subsidiary headquarters; Knox’s headquarters was in Minnesota,

and Somerville’s headquarters was in Massachusetts.     Payless also

maintained regional headquarters located in Indianapolis, Dallas,

Denver, Phoenix, Houston, and Sacramento.     Each regional

headquarters is managed by a regional vice president.     Each of

the subsidiary and regional headquarters reports to Payless’

corporate headquarters at Two Pershing Square, which houses

Payless’ top corporate managers and staff.

     Physical construction of the building that houses Payless’

corporate headquarters, Two Pershing Square, began on or about

October 15, 1984.   At all relevant times, legal title to Two

Pershing Square was held by Two Pershing Square, Ltd. (TPS).      TPS

was a limited partnership organized on October 15, 1984, under

the laws of the State of Missouri pursuant to an agreement
                                - 6 -

between Trizec Properties, Inc. (Trizec), and PCI Building Corp.

(PCI), a wholly owned subsidiary of Payless.    Trizec owned an 83-

1/3-percent interest in TPS, and PCI owned the remaining 16-2/3-

percent interest.4   Trizec and PCI made initial capital

contributions of $2,500,000 and $500,000, respectively.     TPS

developed Two Pershing Square and operated Two Pershing Square

until November 27, 1992, at which time the partnership was

dissolved and Trizec took over ownership and operational

responsibilities.    On April 4, 1985, TPS contracted with DiCarlo

Construction for the construction of Two Pershing Square

(construction contract).   After April 4, 1985, DiCarlo

Construction relied on the plans incorporated by reference in the

construction contract to construct Two Pershing Square.

     Payless took possession of its headquarters office space at

Two Pershing Square in October 1986.    Payless equipped,

furnished, and leased parts of 5 of 11 floors in the building.

Under the terms of the lease, Payless was initially obligated to

rent approximately 41 percent of the office space at Two Pershing

Square and was entitled to exercise options in the future to

lease the additional office space above the first floor in that

building.


     4
      The record does not definitively disclose whether PCI was a
limited or general partner in the TPS partnership. Trizec,
however, executed Payless’ lease agreement as the general partner
of TPS.
                                  - 7 -

     In 1993, Payless agreed to an incorporated joint venture

with Grupo Industrial Alfa, S.A. de C.V. (Alfa), a Mexican

company.   Alfa and Payless agreed to establish and operate stores

selling home improvement products in Mexico.    On October 18,

1993, Payless and Alfa executed a shareholders agreement that

initiated the Mexican business venture.    In the shareholders

agreement, Payless and Alfa agreed to capitalize Payless de

Mexico, S.A. de C.V. (Payless de Mexico) to distribute and sell

building materials and home improvement products in Mexico.

Payless held a 49-percent interest in Payless de Mexico.    Payless

de Mexico planned to build a chain of 25 stores in Mexico.    In a

supply agreement dated October 18, 1993, Payless agreed to supply

Payless de Mexico with merchandise and products from its

distribution centers.   On December 12, 1994, Payless de Mexico

opened its first store in Monterey, Mexico.    In 1995, Payless

sold its interest in Payless de Mexico to Versax, S.A. de C.V., a

subsidiary of Alfa.

                                 OPINION

     Before 1986, taxpayers who acquired certain machinery and

equipment for use in a trade or business were allowed an

investment tax credit (ITC) against income tax liability in an

amount equal to a percentage of the cost of the “qualified

property”.   Secs. 38, 46, 48.    TRA section 211, 100 Stat. 2166,

generally repealed the investment tax credit for property placed
                               - 8 -

in service after December 31, 1985.     The repeal was subject to a

limited number of transitional ITC rules.     TRA section 204(a),

100 Stat. 2146, contains a number of specific transition rules.

There are also three general transition rules contained in TRA

section 203(b), 100 Stat. 2143.5   TRA section 211 generally

repealed the regular investment tax credit by adding section 49

to the Code.   See TRA sec. 211(a).    Section 49(e) provides an

exception for “transition property”, which is defined as property

placed in service after December 31, 1985, to which the

amendments made by TRA section 201, 100 Stat. 2121, do not apply.

Sec. 49(e)(1).

World Headquarters Rule

     One of the transitional rules in TRA section 204(a) deals

with property used in a leased building that serves as “world

headquarters” of the lessee and its affiliates.     TRA section

204(a)(7) provides:

          (7) Certain Leasehold Improvements.--The
     amendments made by section 201 shall not apply to any
     reasonable leasehold improvements, equipment and
     furnishings placed in service by a lessee or its
     affiliates if--

               (A) the lessee or an affiliate is the
          original lessee of each building in which
          such property is to be used,


     5
      The rules found in TRA sec. 203(b) are known as the binding
contract rule, the self-constructed property rule, and the
equipped building rule. See TRA sec. 203(b)(A), (B), and (C).
Only the equipped building rule, TRA sec. 203(b)(C), is relevant
to this case.
                               - 9 -


                (B) such lessee is obligated to lease
           the building under an agreement to lease
           entered into before September 26, 1985, and
           such property is provided for such building,
           and

                (C) such buildings are to serve as world
           headquarters of the lessee and its
           affiliates.

     For purposes of this paragraph, a corporation is an
     affiliate of another corporation if both corporations
     are members of a controlled group of corporations
     within the meaning of section 1563(a) of the Internal
     Revenue Code of 1954 without regard to section
     1563(b)(2) of such Code. Such lessee shall include a
     securities firm that meets the requirements of
     subparagraph (A), except the lessee is obligated to
     lease the building under a lease entered into on June
     18, 1986.

This exception is commonly referred to as the world headquarters

rule.   The requirements of the world headquarters rule are

cumulative.   Payless must prove that it meets all the

requirements of subparagraphs (A), (B), and (C) in order to

qualify for an investment tax credit under this transitional

rule.   See Rule 142(a); Welch v. Helvering, 

, 115

(1933).

     Respondent argues that Payless fails to meet the

requirements of the world headquarters rule because:     (1) Payless

did not lease the entire building at Two Pershing Square, and (2)

Payless’ headquarters at Two Pershing Square was not a “world

headquarters”.

     TRA section 204(a)(7) contains no explicit requirement that
                               - 10 -

the “entire” building be leased by the taxpayer to qualify for

ITC.   Respondent acknowledges that his argument that the

provision implicitly contains such a requirement has been

rejected by both the District Court for the Western District of

Washington and the Court of Appeals for the Ninth Circuit in

Airborne Freight Corp. v. United States, 78 AFTR 2d 96-6272, 96-2

USTC par. 50,552 (W.D. Wash. 1996), affd. in part and revd. in

part 

(9th Cir. 1998).      On this point, the Court of

Appeals stated:    “There is also no requirement [in TRA section

204(a)(7)] that the whole building be 

.

As the Court of Appeals indicated, the difficulty with the

Government’s argument is that the word “entire” was not written

into the language of TRA section 204(a)(7).      

same

reason, we also decline to accept this implied restriction as

part of the statute in order to restrict its application.

       We must next decide whether Two Pershing Square was Payless’

“world headquarters”.    There is no dispute that Two Pershing

Square was Payless’ corporate headquarters.     What is in dispute

is whether Payless’ international activities were sufficient to

qualify its corporate headquarters as a “world headquarters”.

       The term “world headquarters” is not defined in the relevant

TRA provisions, nor is it defined in the Code.     When a word is

undefined in a statute, it is a fundamental canon of statutory

construction that it will be interpreted as taking its ordinary,
                                - 11 -

contemporary, common meaning.    See Commissioner v. Soliman, 

, 174 (1993); Perrin v. United States, 

, 42

(1979).   In United States v. Kjellstrom, 

(W.D.

Wis. 1996), affd. 

(7th Cir. 1996), the District

Court rejected an argument that a limited percentage of sales

made to foreign customers qualified the taxpayer’s headquarters

as a “world headquarters”.

     We believe that an essential requirement of a “world

headquarters” is that a company have substantial international

operations or intend to have such operations in the immediate

future.   Having employees outside the United States is one

indicium of international operations.    Other indicia of

international operations might include exports or foreign source

income, payment of foreign taxes, or the existence of a foreign

permanent establishment such as a subsidiary or joint venture

operation in a foreign country.    Payless had no exports or

foreign source income.   Before 1994, Payless owned no stores or

other facilities outside the United States and had no employees

located outside the United States, except when engaged in short-

term travel.

     Despite having no foreign facilities or employees stationed

outside the United States and no sales outside the United States,

Payless argues that it has sufficient “international activities”

to justify classifying its headquarters as a “world
                                - 12 -

headquarters”.   Payless principally relies on three international

activities:   The purchase of merchandise from foreign

manufacturers and vendors for domestic sale; the use of foreign

capital markets; and participation in an incorporated joint

venture in Mexico in 1993-95.

     In the year in issue, Payless made foreign merchandise

purchases of $24,924,968 from 28 manufacturers and vendors

located in Taiwan.   During that year, Payless had a total cost of

merchandise sold of $1,041,678,000.      Payless’ cost of goods sold

from foreign vendors and manufacturers was less than 2.4 percent

of the total cost of goods sold in 1986.     In 1985, goods

purchased from foreign manufacturers and vendors accounted for

less than 1.3 percent of Payless’ total cost of goods sold.

During Payless’ 1987 and 1988 tax years, this percentage was 2.1

percent of the total cost of goods sold.6     We do not think that

the mere purchasing of foreign-made goods directly from a foreign


     6
      Payless stipulated the number of foreign manufacturers and
vendors from whom it purchased merchandise, the countries in
which these manufacturers and vendors were located, and the total
amounts of foreign merchandise purchases per year. Nevertheless,
at trial some of Payless’ witnesses testified that other foreign
source merchandise was purchased, such as lumber from Canada. No
documentation of those purchases is in evidence, and the
testimony is vague as to years and amounts. However, it appears
that these items were purchased from sellers who were doing
business in the United States and had offices and distribution
facilities within the United States. Such purchases within the
United States would not transform an otherwise domestic retail
operation into a worldwide business whose headquarters would be
its “world headquarters” within the meaning of TRA sec.
204(a)(7).
                             - 13 -

manufacturer or vendor or through foreign independent purchasing

agents in these relative quantities is a strong indicator of

substantial international operations.7   Nor do we find the fact

that lending institutions with international operations

participated in Payless’ corporate borrowing program supports a

finding that Payless had international operations.

     Finally, while the words of the transition rule “such

buildings are to serve as world headquarters”, are prospective,

we find nothing in the provision itself or the legislative

history that would indicate that those words should be read so

that they include a building becoming a “world headquarters” at

some indeterminate time in the future.   Assuming without deciding

that the Mexican joint venture would have justified a

classification of Two Pershing Square as Payless’ world

headquarters in 1993-95, we find the joint venture in 1993-95 to

be too remote in time to be relevant to the tax year in question.

We are of the opinion that the words “are to serve”, while

prospective, more naturally describe the intended function of the

building when first occupied by the original lessee or sometime

shortly thereafter.8


     7
      The fact that certain Payless employees sometimes traveled
outside the United States to facilitate these purchases, when
viewed alone or with the other facts petitioner relies on, is not
sufficient to transform Two Pershing Square into a world
headquarters.
     8
      It is not necessary for us to determine in this case
whether a taxpayer must have international affiliates to have a
                                                   (continued...)
                               - 14 -

      On the record before us, there is insufficient evidence of

the type of substantial international operations required to

justify classifying Payless’ corporate headquarters at Two

Pershing Square a “world headquarters” as that term is used in

TRA section 204(a)(7).

Equipped Building Rule

      In the alternative, Payless argues that its expenditures

qualify for ITC under the “equipped building rule”.     TRA section

203(b)(1)(C) provides:

           (1) In general.--The amendments made by section
      201 shall not apply to--

               *     *     *      *     *     *     *

                 (C) an equipped building or plant
            facility if construction has commenced as of
            [December 31, 19859], pursuant to a written
            specific plan and more than one-half of the
            cost of such equipped building or facility
            has been incurred or committed by such date.

In order to qualify for transitional relief, Payless must show

that:

      (1)   Construction commenced by December 31, 1985;

      (2)   Construction was pursuant to a written specific plan;

and

      (3)   More than one-half of the cost of the building,

including its machinery and equipment, was incurred or committed



      8
      (...continued)
world headquarters.
      9
      TRA sec. 211(a) amended subpt. E of pt. IV of subch. A of
ch. 1 by adding a new sec. 49. Sec. 49(e)(1)(B) substituted
“Dec. 31, 1985", for “Mar. 1, 1986", in sec. 203(b)(1)(C).
                                - 15 -

on or before December 31, 1985.

     On brief, respondent concedes that the first requirement has

been met in that construction commenced on or before December 31,

1985.    However, respondent argues that Payless has failed to

prove that it meets the remaining requirements.

     Payless bears the burden of proving that it qualifies for

relief under the transitional provision.     See Rule 142(a); Welch

v. 

.     We agree that Payless has failed

to establish that more than one-half of the cost of the building,

including its machinery and equipment, was incurred or committed

before January 1, 1986.     On brief, Payless states:   “Although

actual costs for equipment and furnishings of the other 2

Pershing Square space [the 59-percent of the building not leased

by Payless] is not available, Payless’ costs were $14,812,179 for

41 percent of the building.”     (Emphasis added.)   H. Conf. Rept.

99-841 (Vol. II), at II-56 (1986), 1986-3 C.B. (Vol. 4) 1, 56,

states:

        Where the costs incurred or committed before March 2,
        1986 (January 1, 1986, for the investment tax credit)
        do not equal more than half the cost of the equipped
        building, each item of machinery and equipment is
        treated separately for purposes of determining whether
        the item qualifies for transitional relief.

Payless’ failure to establish the total cost of the building,

including its machinery and equipment, is fatal to the argument

that more than one-half of the cost of the equipped building was

committed or incurred before January 1, 1986.     Without knowing

the total cost, it is logically impossible to establish that more

than one-half of that amount has been exceeded.
                              - 16 -

     Payless would not qualify for transitional relief under TRA

section 203(b)(1)(C) even if it could establish the total cost of

the building because Payless did not have a written specific plan

and did not incur or commit to more than one-half of the cost of

the equipped building.

     TRA section 203(b)(1)(C) does not explicitly state whose

“written specific plan” will satisfy the requirement of the

section.   However, the conference report supports the proposition

that the “written specific plan” referred to in the section must

be the plan of the taxpayer claiming the credit.   The conference

report states:

          Under the equipped building rule, the conference
     agreement [repeal of the ITC] will not apply to
     equipment and machinery to be used in the completed
     building, and also incidental machinery, equipment, and
     structures adjacent to the building (referred to here
     as appurtenances) which are necessary to the planned
     use of the building, where the following conditions are
     met:

          (1) The construction (or reconstruction or
     erection) or acquisition of the building, machinery,
     and equipment was pursuant to a specific written plan
     of a taxpayer in existence on March 1, 1986 (December
     31, 1985, for the investment tax credit); and

          (2) More than 50 percent of the adjusted basis of
     the building and the equipment and machinery to be used
     in it (as contemplated by the written plan) was
     attributable to property the cost of which was incurred
     or committed by March 1, 1986 (December 31, 1985, for
     the investment tax credit), and construction commenced
     on or before March 1, 1986 (December 31, 1985, for the
     investment tax credit).

          The written plan for an equipped building may be
     modified to a minor extent after March 1, 1986,
     (December 31, 1985, for the investment tax credit) and
                                 - 17 -

     the property involved may still come under this rule;
     however, there cannot be substantial modification in
     the plan if the equipped building rule is to apply.
     The plan referred to must be a definite and specific
     plan of the taxpayer that is available in written form
     as evidence of the taxpayer’s intentions.

          The equipped building rule can be illustrated by
     an example where the taxpayer has a plan providing for
     the construction of a $100,000 building * * * [H.
     Conf. Rept. 

at II-56-57, 1986-3 C.B.
     (Vol. 4) at 56-57; emphasis added.]

     Based on the legislative history provided in the conference

report, we think it a fair inference that Congress intended that

the taxpayer claiming the credit would be the party required to

have the relevant plan, as evidence of its intention, and that

the taxpayer be the party that “incurred or committed” more than

50 percent of the adjusted basis of the building and the

equipment to be used in it.10     We therefore hold that the

taxpayer claiming the credit under the exception contained in TRA

section 203(b)(1)(C) must be the party who has the specific

     10
          Payless contends that TRA sec. 203(b)(1)(C)

     was designed to protect those taxpayers who, although
     having committed to incur or having incurred
     substantial costs toward furnishing and equipping a
     building in a large scale project by the end of 1985,
     did not have all the items to be included in the
     completed facility reduced to a timely binding
     contract.

In Payless’ view, a group of taxpayers could be amalgamated so
that as an aggregate they would achieve the required commitment.
Payless suggests no measure for what constitutes a “substantial
commitment”. Additionally, petitioners’ proposed interpretation
of the section, by logical extension, would allow the section to
be read so that a taxpayer who had committed a very minor part of
the total construction and equipping costs could claim an
investment tax credit if other taxpayers had committed more than
half the costs of the equipped building by the cutoff date.
                             - 18 -

written plan and the party that incurred or committed more than

50 percent of the adjusted basis of the equipped building.

     The specific written plan relied on by Payless is the

construction contract between TPS and DiCarlo Construction.

Under that contract TPS not Payless, incurred or committed the

construction costs for Two Pershing Square.

     The TRA transitional provisions make no accommodation for

attributing costs incurred by a limited partnership to the

partners for the purpose of determining whether they have

“incurred or committed” costs.   Even if such attribution were

proper, we would be unwilling to attribute to Payless more than

16.67 percent of the costs of construction, which was the extent

of Payless’ interest in the TPS, partnership.   If 16.67 percent

of the construction costs of $36,600,000 claimed by Payless as

part of its precommitted costs were attributed to Payless, and

assuming we accepted Payless’ total cost of the equipped building

of $77,627,266 and Payless’ other committed costs, Payless’

commitment would amount to substantially less than 50 percent of

the total estimated cost of the equipped building on or before

December 31, 1985.11


     11
      (Ownership interest times cost of Two Pershing Square)
plus tenant allowance plus equipment and furnishings equals
Payless’ pre-1986 committed costs ((.167 x $36,600,000) +
$4,900,000 + $14,812,179 = $25,824,379. $25,824,379/total
estimated costs of $77,627,266 x 100 = 33.3 percent of total
                                                   (continued...)
                              - 19 -

     Payless failed to prove that it had a specific written plan

or that it “incurred or committed” more than one-half of the cost

of the “equipped building”.   For the reasons stated above, we

find that Payless does not satisfy the requirements of either TRA

section 203(b)(1)(C) or TRA section 204(a)(7) and is not entitled

to the investment credit claimed on its 1986 return.



                                         Decision will be entered

                                    under Rule 155.




     11
      (...continued)
estimated costs).