Rev. Rul. 86-11

1986-1 C.B. 6, 1986-5 I.R.B. 4.

INVESTMENT CREDIT; SECTION 38 PROPERTY; USED ELEVATORS

Published: February 3, 1986

Section 48.-Definitions; Special Rules

26 CFR 1.48-1: Definition of section 38 property.

  Investment credit; section 38 property; used elevators. Used elevators, although purchased after June 30, 1963, cannot be used section 38 property. Rather, the extent of costs incurred for reconstruction completed after June

30, 1963, the elevators qualify as new section 38 property.

ISSUE

  Are used elevators, purchased after June 30, 1963, used section 38 property?

FACTS

  In 1985, a taxpayer purchased two commercial buildings, each containing an elevator within the meaning of section 1.48-1(m)(2) of the Income Tax Regulations. Both elevators had been previously used. The taxpayer kept one of the elevators in service. The other elevator was taken out of service for reconstruction including the replacement of the motor, cables, controller, and cage.

LAW AND ANALYSIS

  Section 38 of the Internal Revenue Code allows a credit against income tax for investment in certain depreciable property. Under section 48(a)(1)(C), the term 'section 38 property' includes elevators, but only if the construction, reconstruction, or erection of the elevator is completed by the taxpayer after June 30, 1963, or the elevator is acquired after June 30, 1963, and the original use of the elevator commences with the taxpayer and commences after that date.

  Section 48(b)(1) of the Code provides that the term 'new section 38 property' means section 38 property the original use of which commences with the taxpayer. Section 48(c)(1) provides, in general, that the term 'used section 38 property' means section 38 property acquired by purchase after December 31,

1961, that is not new section 38 property.

  Section 1.48-1(m)(1) of the regulation provides, in part, that if an elevator or escalator is is reconstructed by the taxpayer after June 30, 1963, the basis attributable to the reconstruction may be taken into account in determining qualified investment under section 46(c). Section 1.48-2(b)(7) of the regulations provides that the term 'original use' means the first use to which the property is put, whether or not that use corresponds to the use of the property by the taxpayer.

  When section 48 was added to the Code by the Revenue Act of 1962, section

2(b), 1962-3 C.B. 111, 117, the definition of section 38 property did not include elevators. The Revenue Act of 1964, section 203(c), 1964-1 (Part 2) C.B. 6, 18, added elevators to the definition of section 38 property. Congress believed that new elevator and escalator equipment represents an important aspect of modernization of plant and facilities; thus, new elevators and escalators installed after June 30, 1963, and modernization of existing elevators after that date should be eligible for the investment credit. See H.R. Rep. No. 749, 88th Cong., 1st Sess. 35-36 (1963), 1964-1 (Part 2) C.B.

125, 159-160. The definitions of new and used section 38 property were unaffected.

  Because section 48(a) of the Code, regarding the definition of section 38 property, includes only elevators constructed, reconstructed, or erected by the taxpayer and elevators the original use of which commences with the taxpayer, any elevator that meets the requirements of section 48(a), will also satisfy the requirements of section 48(b), regarding new section 38 property. Thus, a qualifying elevator can be only new section 38 property. In the present case, the elevator that the taxpayer purchased and reconstructed in 1985 is section

38 property to the extent of costs incurred for the reconstruction. Since the reconstruction was completed after June 30, 1963, the elevator satisfies the definition of new section 38 property to the extent of those costs.

  However, the other elevator does not qualify as section 38 property; therefore, it can be neither used for new section 38 property (sic). Although the elevator was acquired after June 30, 1963, the original use of the elevator did not commence with the taxpayer after that date.

HOLDING

  Used elevators, although purchased after June 30, 1963, cannot be used section 38 property. Rather, to the extent of costs incurred for reconstruction completed after June 30, 1963, the elevators qualify as new section 38 property.

Rev. Rul. 86-11, 1986-1 C.B. 6, 1986-5 I.R.B. 4.