Rev. Rul. 86-15

1986-1 C.B. 7, 1986-5 I.R.B. 7.

INVESTMENT CREDIT; DEFINITION OF BUILDING AND STRUCTURAL COMPONENTS

Published: February 10, 1986

Section 48.-Definitions; Special Rules, 26 CFR 1.48-1: Definition of section 38 property

  Investment credit; definition of building and structural components. Certain natural gas pipeline compressor station structures are not section 38 property for purposes of the investment tax credit. Rev. Rul. 66-215 distinguished.

ISSUE

  Whether natural gas pipeline compressor station structures described below are section 38 property for investment tax credit purpose.

FACTS

  The taxpayer, a natural gas pipeline transmission company, constructed compressor station structures that house compressor station machinery, equipment and fixtures for natural gas pipelines. The structures house compressors and engines; auxiliary service machinery; natural gas metering and pressure regulating equipment; telemetering, communication, and calorimetric devices; and other laboratory equipment. Following industry practice, each structure encloses multiple compressor/engine unites and can be extended to accommodate additional units. Each structure consists of removable side panels mounted on a steel framework supporting a single roof. Removal of the side panels near a compressor/engine unit without affecting the remainder of the structure. The steel framework also supports a craneway for use in moving equipment and in maintenance. No partitions or other separations are placed between the compressor/engine units. In addition to enclosing the compressor/engine units, instrumentation, controls, piping, and other required equipment, the structure provides working space to permit repositioning of the equipment, if necessary, and a 24-hour schedule of operation, maintenance, overhaul and repair.

LAW AND ANALYSIS

  Section 38 of the Internal Revenue Code CH"CHows a credit against federal income tax for qualified investment in section 38 property. Section 38 property, as defined in section 48(a)(1), includes (A) tangible personal property, and (B) other tangible property (not including buildings and their structural components) only if used as an integral part of certain activities. Section 38 property must be recovery property or depreciable property having a useful life of 3 years or more. Section 1.48-1(c) of the Income Tax Regulations provides that the term 'tangible personal property' means any tangible property except land and improvements thereto, such as buildings or other inherently permanent structures (including items which are structural components of such buildings or structures).

  Section 1.48-1(e)(1) of the regulations provides that the term 'building' generally means any structure or edifice enclosing a space within its walls, and usually covered by a roof, the purpose of which is, for example, to provide shelter, working, office, parking, display or sales space. It does not include

(i) a structure that is essentially an item of machinery or equipment, or (ii) a structure that houses property used as an integral part of any of the activities specified in section 48(a)(1)(B)(i) of the Code (which include furnishing gas) if the use of the structure is so closely related to the use of such property that the structure clearly can be expected to be replaced when the property it initially houses is replaced. Factors which indicate that a structure is closely related to the use of the property is houses include the fact that the structure is specifically designed to provide for the stress and other demands of such property and the fact that the structure could not be economically used for other purposes.

  The structures described above enclose a space within their walls and are covered by a roof. They provide shelter and sufficient working space to permit repositioning of the equipment, if necessary, and a 24-hour schedule of operation, maintenance, overhaul, and repair. The structures are erected separately from the engines and are independent to a degree that permits the removal and relocation of a compressor/engine unit or units without damage to the structures. The structures are no essentially items of machinery or equipment. Even though they house machinery and equipment used as an integral part of the furnishing of gas, these structures are not so closely related to this machinery and equipment that they meet the definition of section 1.48-

1(e)(1)(ii) as an exception to the term 'building'. In this regard, the Fourth Circuit, in Monk & Co., Inc. v. United States, 686 F.2d 1058 (4th Cir. 1982), stated the following:

  (. . .) a structure housing machinery, in order not to be considered part of a building, but be 'SO CLOSELY related to the use (of the machinery) that the structure CLEARLY can be expected to be replaced when (the machinery) is replaced.' (Emphasis added.) The import is that the taxpayer has the distinct burden of showing the structure has no feasible alternate use than housing the specific machinery it currently houses.

  The structures in the present case resemble standard buildings used by other industries to house equipment. They can be expanded as necessary to house additional units and units can be removed without affecting the structure. These structures can be be used for other purposes and they will not clearly be replaced with the compressor/engine units. Therefore, the structures do not fit the exception contained in section 1.48-1(e)(1)(ii) of the regulations, and they are buildings within the meaning of that section.

  In Rev. Rul. 66-215, 1966-2 C.B. 11, an enclosing structure was built around each compressor/engine unit after the unit was placed on a specially designed, reinforced concrete pad. Removal of the compressor/engine unit would require contemporaneous removal of the compressor station structures. The ruling concludes the the described compressor station structures are section 38 property.

  Under the facts in Rev. Rul. 66-215, the entire structure houses a single unit and would be replaced contemporaneously with the compressor unit; but here the structure houses the multiple compressor facility and the structure would not be so replaced with replacement of a compressor unit. A single compressor unit could be replaced with a minimum of inconvenience with the building continuing to serve its ongoing functions.

HOLDING

  The natural gas pipeline compressor station structures described above are not section 38 property.

EFFECT ON OTHER REVENUE RULINGS

  Rev. Rul. 66-215 is distinguished.

Rev. Rul. 86-15, 1986-1 C.B. 7, 1986-5 I.R.B. 7.