Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 75-77

1975-1 C.B. 7

Sec. 48

IRS Headnote

Investment credit; factory air conditioning and heating units. Built-in air conditioning or heating units that supplement factory-wide central air conditioning and heating systems and those with extensive duct work serving one or more local areas do not qualify as section 38 property for investment credit purposes; but window air conditioning units, portable plug-in heaters, and the air conditioning or heater units used to maintain certain temperature and humidity requirements essential to a particular process or production activity qualify.

Full Text

Rev. Rul. 75-77

Advice has been requested whether certain air conditioning units and unit heaters installed in manufacturing plants qualify as "section 38 property" for investment credit purposes, under the circumstances described below.

A taxpayer engaged in the business of manufacturing owns buildings containing air conditioning units that are mechanical devices consisting basically of a compressor, cooling coils, a blower, controls, and a housing unit or cabinet. Some of these air conditioning units that supplement the central air conditioning system for the total building are built into the wall while others are window air conditioning units. There are other units with extensive duct work serving one or more local areas. Still other air conditioning units are required in order to maintain certain temperature and humidity requirements that are essential to the production activities, such as in the paint shop.

The buildings also contain unit heaters, which are mechanical devices that heat the air in relatively limited volumes within the proximate area of the heaters. Similar to the air conditioning units, some of the unit heaters that supplement or are a part of the overall central heating system are built into the building. Others are portable plug-in types. Still others are related to a particular process and are essential in order to maintain certain temperature and humidity requirements in that process or production activity.

All of the air conditioning units and unit heaters are depreciable property having a useful life of three years or more.

Section 38 of the Internal Revenue Code of 1954 allows a credit against Federal income tax for a qualified investment in "section 38 property." The determination of what qualifies as "section 38 property" is made in accordance with the rules provided in section 48.

Section 48(a)(1) of the Code provides, in part, that the term "section 38 property" means tangible personal property, or other tangible property (not including a building and its structural components) but only if such other tangible property is used as an integral part of certain specified activities, including manufacturing.

Section 1.48-1(c) of the Income Tax Regulations provides, in part, that "tangible personal property" means any tangible property except land and improvements thereto, such as buildings or other inherently permanent structures (including items that are structural components of such buildings or structures). Tangible personal property includes all property (other than structural components) that is contained in or attached to a building such as production machinery, transportation and office equipment, testing equipment, display racks and shelves, and neon and other signs.

Section 1.48-1(e)(2) of the regulations, in part, defines the term "structural components" to mean such parts of a building as walls, partitions, floors, and ceilings, as well as any permanent coverings therefor such as panelling or tiling; windows and doors; all components (whether in, on, or adjacent to the building) of a central air conditioning or heating system, including motors, compressors, pipes, and ducts; and other components relating to the operation or maintenance of a building. However, the term "structural components" does not include machinery, the sole justification for the installation of which is the fact that such machinery is required to meet temperature and humidity requirements that are essential for the operation of other machinery or the processing of materials.

The built-in air conditioning units and unit heaters in the instant case that supplement the central air conditioning and heating systems for the total building and those units that have extensive duct work or serve one or more local areas relate to the ordinary operation or maintenance of the building. These air conditioning units and unit heaters are therefore "structural components" of the building within the meaning of section 1.48-1(e)(2) of the regulations.

See Rev. Rul. 67-417, 1967-2 C.B. 49, which holds that rooftop air conditioning and heating units and gas-fired heater units serving specific portions of a large retail store building together with water coolers, a hot water system, and additional plumbing fixtures beyond minimal building requirements are "structural components" of a building. See also Kramertown Company v. Commissioner 488 F. 2d 728 (5th Cir. 1974) which reaches the same conclusion regarding rooftop air conditioning and heating units.

On the other hand, the window air conditioning units and the portable plug-in unit heaters are tangible personal property. In addition, the air conditioning units and unit heaters that serve to maintain certain temperature and humidity requirements essential for a particular process or activity, such as painting, satisfy the "sole justification" test and, therefore, are not structural components as defined in section 1.48-1(e)(2) of the regulations.

Accordingly, the built-in air conditioning units and unit heaters that supplement the central air conditioning and heating systems of the total building and those units with extensive duct work to serve one or more local areas, do not qualify as "section 38 property" for investment credit purposes.

However, the window air conditioning units, the portable plug-in heaters, and the air conditioning units and unit heaters that maintain certain temperature and humidity requirements that are essential to a particular process or production activity are tangible personal property and qualify as "section 38 property" for investment credit purposes.