Rev. Rul. 85-27

1985-1 C.B. 17, 1985-11 I.R.B. 5.

INVESTMENT CREDIT; RECYCLING EQUIPMENT; TRUCK USED IN SCRAP METAL

RECOVERY PROCESS

Published: March 18, 1985

Section 48.-Definition, Special Rules (Investment Credit), 26 CFR 1.48-1: Definition of section 38 property.

  Investment credit; recycling equipment; truck used in scrap metal recovery process. A new truck that replaces a truck of lesser capacity used exclusively to recover scrap metal from a waste mixture of slag and scrap does not qualify as recycling equipment because the use of the larger truck does not result in an increase in the recycling capacity at the facility.

ISSUE

  Whether, under the circumstances described below, taxpayer has increased its recycling capacity within the meaning of section 1.48-9(g)(7) of the Income Tax Regulations when it replaced an off-highway truck used exclusively in the process of recovering scrap metal with a truck of greater capacity.

FACTS

  Taxpayer operates under a long term contract with a steel mill to handle and process the waste products resulting from the production of steel. Under the terms of the contract, taxpayer performs a wide variety of services, including the recovery of scrap metal from a waste mixture of slag and scrap generated in an electric furnace steelmaking process. The taxpayer's working area is located on land owned by the steel mill and is adjacent to the steelmaking operations.

  The metal recovery process consists of mechanically separating and recovering scrap metal from a solid waste material consisting primarily of slag and scrap metal. Off-highway trucks are used to transport the still hot waste material from the pit area within the steel mill to the taxpayer's work area, and to transport recovered scrap metal meeting size requirements from metal recovery stations to the steel mill scrap storage area. The recovered scrap is reused as a raw material in the steel making process. In the metal recovery process, a crane sweeps a large electromagnet over water cooled waste material to remove large scrap. Scrap, which is too large for the steel mill specifications, is broken by a 12-ton drop ball that is raised and released by a crane. Harder to remove scrap is recovered at a screening plant where the waste material is crushed, sorted, and sized into steel scrap and metal free slag.

  In 1981, taxpayer replaced one of its off-highway trucks used exclusively in the scrap metal recovery process with a new truck that had a greater load carrying capacity. However, because the rest of the taxpayer's recovery equipment is operating at capacity, the use of the new truck in the metal recovery process does not increase the overall capacity of scrap metal recovered by the taxpayer from the waste mixture of slag and scrap.

LAW AND ANALYSIS

  Section 48(1)(2)(A)(iv) of the Code defines the term energy property to include property that is recycling equipment.

  Section 48(1)(6)(A) of the Code provides that the term recycling equipment means any equipment that is used exclusive:

  (i) to sort and prepare solid waste for recycling, or

  (ii) in the recycling of solid wastes.

  The waste slag and scrap mixture resulting from the electric furnace steel making operations is 'solid waste' within the meaning of section 1.48-9(g)(5) of the regulations.

  Section 1.48-9(g)(2) of the regulations provides that recycling equipment includes equipment that

  (i) separates solid waste from a mixture of waste,

  (ii) applies a thermal, mechanical, or chemical treatment to solid waste to ensure the waste will properly respond to recycling, or

  (iii) recycles solid waste to recover usable raw materials. However, in the case of recycling iron and steel, recycling equipment does not include any equipment used to reduce solid waste to a molten state or any process thereafter.

  Section 1.48-9(g)(4) of the regulations provides that recycling equipment also includes on-site loading and transportation equipment, such as conveyors, integrally related to other recycling equipment.

  Section 1.48-9(g)(7) of the regulations provides that if the equipment both replaces recycling capacity and increases that capacity at a particular site, only the incremental cost (as defined in paragraph (k) of this section) of increasing the capacity qualifies. Recycling capacity is determined by the ability to produce products not previously provided by the taxpayer, or more of an existing product, in a way that does not lower overall production.

  Merely replacing an on-site transportation vehicle with a larger capacity vehicle does not meet the requirements of section 1.48-9(g)(7) of the regulations unless it results in an increase in total recycling capacity.

HOLDING

  A truck acquired new by the taxpayer to replace an off-highway truck of lesser capacity used exclusively in the process of recovering scrap metal from a waste mixture of slag and scrap does not qualify as recycling equipment because the use of the larger truck does not result in an increase in the recycling capacity at the facility.

Rev. Rul. 85-27, 1985-1 C.B. 17, 1985-11 I.R.B. 5.