Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 75-1

1975-1 C.B. 5

Sec. 38
Sec. 46

IRS Headnote

Investment credit; CATV manufactured for partnership lessor. A cable antenna television system, owned by a partnership formed solely to finance the construction and lease of the system to a corporate operator, does not qualify as property manufactured by the partnership within the meaning of section 1.46-4(d)(1)(i) of the regulations and the partnership is not entitled to investment credit; Rev. Rul. 68-445 distinguished.

Full Text

Rev. Rul. 75-1

Advice has been requested whether, under the circumstances described below, a noncorporate lessor of property, in the ordinary course of his business, manufactured or produced the property subject to a lease within the meaning of section 46(d)(3)(A) of Internal Revenue Code of 1954 and section 1.46-4(d)(1)(i) of the Income Tax Regulations.

In January 1972 X corporation was granted a franchise to operate a cable antenna television system (CATV). Subsequent thereto, a group of individuals formed a partnership solely for purposes of financing the construction and subsequent leasing of a CATV system to X. The partnership contracted with corporation Y for Y to manufacture and produce the CATV system. The partnership leased the CATV system to corporation X, but retained ownership of the system.

Section 38 of the Code allows a credit against Federal income tax for qualified investment in "section 38 property."

Section 46(d)(3) of the Code limits the extent to which the credit allowed by section 38 is available to noncorporate lessors.

Section 46(d)(3)(A) of the Code provides that a noncorporate lessor will be allowed the investment credit only if he has manufactured or produced the property subject to the lease.

Section 1.46-4(d)(1)(i) of the regulations provides that with respect to leases entered into after September 22, 1971, a credit shall be allowed under section 38 of the Code to a noncorporate lessor of property only if such property has been manufactured or produced by the lessor in the ordinary course of his business.

The specific question is whether the CATV system was manufactured or produced by the partnership in the ordinary course of its business within the meaning of section 46(d)(3)(A) of the Code and section 1.46-4(d)(1)(i) of the regulations.

Consistent with the purposes of section 46(d)(3)(A) of the Code as expressed in the House of Representatives Report No. 92-533, 92nd Cong., 1st Sess. 29 (1971), the terms "manufactured or produced" are used in their ordinary sense to mean that the noncorporate lessor must have actually manufactured or produced the property subject to the lease in the ordinary course of his business.

Where the noncorporate lessor actually manufactures or produces the property subject to the lease in the ordinary course of his business, the leasing transaction is an integral part of his business and is not likely to be entered into for the purpose of reducing tax liabilities.

In the instant case, the partnership was formed for the purpose of financing the construction of a CATV system. The partnership merely purchased the CATV system and has not actually manufactured or produced anything in the ordinary course of its business.

Accordingly, in the instant case, the property that is subject to the lease (the CATV system) does not qualify as property manufactured or produced by the lessor within the meaning of section 46(d)(3)(A) of the Code and section 1.46-4(d)(1)(i) of the regulations. Thus, the partnership is not entitled to the investment credit under section 38 for the property subject to the lease.

Rev. Rul. 68-445, 1968-2 C.B. 40, holds that the construction of vessels according to the specifications of a taxpayer constitutes "construction" by the taxpayer for purposes of section 48(b) of the Code. That Revenue Ruling is distinguishable since section 48(b) defines "new section 38 property" and provides for the determination of the appropriate basis of such property for the computation of the investment credit. For this specific purpose the term "construction" is given a more expansive meaning than its ordinary one, consistent with the purpose of section 48(b). Section 1.48-2(b)(1) of the regulations.

Rev. Rul. 68-445 distinguished.