cluded in the description of assets classified in asset guideline class 46.0. However, this guideline class was intended to include the carrying of oil as part of an integrated system where eventually the petroleum was delivered as a product of a transmission carrying system. Here, the oil pipeline expenditures were charged under the Federal Power Commission Uniform System of Accounts to Electric Steam Production Plant, Account 311-Structures and improvements. Guideline Class 46.0 was not intended to include private fuel systems such as we have here operated for the sole purpose of supplying fuel for a taxpayer's own use in producing electricity.

Accordingly, the utility's oil pipeline is "public utility property" within the meaning of section 46(c)(3) of the Code and thus limited to 4/7 of the amount of qualified investment determined under section 46(c) (1). Further, the pipeline is included in Asset Guideline Class 49.13 (Electric utility steam production plant). Section 46(a)(2) provides for a 10 percent investment credit for all taxpayers (including public utilities) for property acquired and placed in service after January 21, 1975, and before January 1, 1981.

Section 47.-Certain Dispositions Etc., of Section 38 Property

26 CFR 1.47-1: Recomputation of credit allowed by section 38.

Whether merger or consolidation of several partnerships results in recomputation of investment credit. See Rev. Rul. 77458, page 220.

26 CFR 1.47-3: Exceptions to the application of section 1.47-1.

Investment credit; recapture; transfer of property to new corporation; subsequent reorganization. The 1974 tax-free transfer of all a sole proprietor's business assets, including section 38 property property acquired in 1973, for all the stock

The taxpayer operated a business as a sole proprietorship. In 1973, the taxpayer acquired property that qualified as section 38 property for use in the taxpayer's business and claimed the investment credit. The property had a useful life of 7 years or more. In 1974, the taxpayer transferred the property to X, a newly formed corporation, in exchange for all the outstanding stock of X in a transaction qualifying for nonrecognition treatment under section 351 of the Internal Revenue Code of 1954. In 1975, Y corporation, a wholly owned subsidiary of Z corporation, was merged into X in a transaction that qualified as a reorganization under section 368 (a) (1) (A) and (a) (2) (E). As a result of this transaction, the taxpayer surrendered all interest in X and received in exchange a 0.6 percent interest in Z corporation. X survived this transaction as a wholly owned subsidiary of Z.

Section 47 (a) (1) of the Code provides that if during any taxable year any property is disposed of, or otherwise ceases to be section 38 property with respect to the taxpayer, before the close of the useful life that was taken into account in computing the investment credit under section 38, then the credit shall be redetermined. The redetermination is made by substituting, in determining the qualified investment, the period beginning with the time the section 38 property was placed in service by the taxpayer and

ending with the time such property ceased to be section 38 property for the estimated useful life taken into account in computing the investment credit.

In general, property will be considered disposed of whenever it is sold, exchanged, transferred, distributed, involuntarily converted, or disposed of by gift. See S. Rep. No. 1881, 87th Cong., 2nd Sess. 149 (1962), 1962-3 C.B. 707, 852-853.

Section 47(b) of the Code provides specific exceptions to the recapture provisions of section 47 (a). Under section 47(b) property is not treated as ceasing to be section 38 property with respect to the taxpayer by reason of a mere change in the form of conducting the trade or business so long as the property is retained in such trade or business as section 38 property and the taxpayer retains a substantial interest in such trade or business.

Section 1.47-3 (f) (1) of the Income Tax Regulations states, in part, that the following conditions must exist if the mere change in form exception is to apply:

(a) the section 38 property must be retained as section 38 property in the same trade or business;

(b) the transferor must retain a substantial interest in the trade or business;

(c) substantially all of the assets necessary to operate such a trade or business must be transferred along with the section 38 property; and

(d) the basis of the section 38 property in the hands of the transferee must be determined in whole or in part by reference to the transferor's basis.

Section 1.47-3 (f) (5) (ii) of the regulations provides if in any taxable year the transferor of section 38 property does not retain a substantial interest in the trade or business directly or indirectly then, under section 1.47-1 (a), such property ceases to be section

38 property with respect to the transferor and the transferor shall make a recapture determination. For purposes of recomputing the qualified investment with respect to property described in this subdivision, its actual useful life shall be the period beginning with the date on which it was placed in service by the transferor and ending with the first date on which the transferor does not retain a substantial interest in the trade or busi

ness.

Section 1.47-3 (f) (2) of the regulations provides, in part, that a transferor shall be considered as having retained a substantial interest in the trade or business only if, after the change in form, the transferor's interest in the trade or business is substantial in relation to the total interest of all persons, or equal to or greater than the transferor's interest prior to the change in form. Thus, there may be a decrease or increase in the transferor's interest provided a substantial interest is retained.

In James Soares, 50 T.C. 909 (1968), the taxpayer formed a partnership with a corporation, transferring all the assets of the sole proprie torship in exchange for a 48 pecrent partnership interest. Subsequently, the taxpayer exchanged the 48 percent interest in the partnership for a 7.22 percent interest in the corporation. The taxpayer claimed the investment credit on assets acquired by the sole proprietorship and a share of the investment credit on assets acquired by the partnership.

The Tax Court of the United States held that to retain a substantial interest for purposes of section 1.47-3(f) (2) of the regulations the taxpayer must own a significant portion of all of the outstanding stock of the corporation. The interest must be substantial in relation to the total interest

of all persons. Further, in determining whether the taxpayer retained an interest equal to or greater than the interest held prior to the change in the

business, it is the percentage interest in the business rather than the value of the interest exchanged that must be equal. Retention by the taxpayer of 7.22 percent of the stock did not amount to a substantial interest and therefore the investment credit attributable to the section 38 property disposed of was recaptured under section 47 (a) (1) of the Code.

In the instant case, the section 38 property has been retained in the same trade or business. After the 1974 trans

fer, the taxpayer retained a substantial

interest in that trade or business through the ownership of 100 percent of the stock of X corporation, which acquired all the taxpayer's business assets. However, the 1975 reorganization resulted in a substantial decrease in the taxpayer's interest in the trade or business since, after the reorganization, the taxpayer owned only 0.6 percent of the corporation that then owned 100 percent of X's outstanding stock.

Accordingly, the recapture provisions of section 47 (a) (1) of the Code will not apply as a result of the transfer in 1974 since, the taxpayer met the requirements of section 1.47-3(f) (1) of the regulations. However, the recapture provisions will apply as a result of the 1975 transaction since, after the transaction, the taxpayer no longer met the substantial interest requirement of section 1.47-3 (f) (1) (ii) (b) with respect to the trade or business in which the section 38 property was retained. Under section 1.47-3 (f) (5) (ii), the actual life for purposes of the recomputation will be the period beginning with the date the property was first placed in service by the taxpayer and ending with the date the taxpayer failed to retain a substantial interest in the trade or business as a result of the reorganization.

Section 48.-Definitions; Special Rules

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

(Also Section 179; 1.179-3.)

Investment credit; trailer utilized as laundry facility. A mobile trailer that is converted to and used as a launderette, equipped with appropriate permanent type laundry equipment and mounted on concrete blocks mortared together and set on concrete footings, is inherently permanent and does not qualify for the investment credit as section 38 property or for the additional first-year depreciation allowance as section 179 property; Rev. Rul. 67-156 superseded.

Rev. Rul. 77-291

Advice has been requested whether, under the circumstances described below, a trailer located in a trailer park and used as a launderette qualifies as "section 38 property" for purposes of

the investment credit allowed under section 38 of the Internal Revenue Code of 1954, and as "section 179 property" for purposes of qualifying for the additional first year depreciation allowance permitted under section 179.

A taxpayer operates a trailer park containing housetrailers of a permanent nature and also accommodates overnight parking of housetrailers for persons who are transient. The trailer park also provides laundry facilities for its tenants in a mobile trailer converted to a launderette.

The launderette is equipped with washing machines and dryers, appropriate permanent type water and electrical connections, and other equipment ordinarily found in a laundry. The launderette trailer, from which the wheels have been removed, is mounted on concrete blocks that are mortared together and set on concrete footings. It is depreciable and has a useful life in excess of 6 years. The launderette site is surrounded by shrubbery and other landscaping.

Section 38 of the Internal Revenue Code of 1954 allows a credit against Federal income tax for qualified investment in section 38 property. The determination of what property quali

fies as section 38 property is made in accordance with the rules provided in section 48.

Section 48(a)(1) of the Code provides 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 the other tangible property is used as an integral part of manufacturing, production, or extraction, or furnishing transportation, communications, electrical energy, gas, water, or sewage disposal services, or constitutes a research or storage facility used in connection with any of the foregoing activities. To qualify as section 38 property, the property must also be property with respect to which depreciation is allowable and must have 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 their structural components.

Section 1.48-1 (d) (1) of the regulations provides that, in addition to tangible personal property, any other tangible property (but not including a building and its structural components) used as an integral part of any of the activities specified in section 48(a)(1) of the Code may qualify as section 38 property.

Section 1.48-1 (e) (1) of the regulations defines a building as generally meaning any structure enclosing a space within its walls, and usually covered by a roof, the purpose of which is, for example, to provide shelter or housing, or to provide working, office, parking, display, or sales space.

Under section 179 of the Code, a taxpayer may elect, for the first taxable year in which a deduction for depreciation is allowable on tangible personal property, an additional de

preciation allowance deduction of 20 percent of the cost of the property subject to certain limitations. Only depreciable tangible personal property that has a useful life of 6 years or more qualifies.

Section 1.179-3 (b) of the regulations provides that local law definitions will not be controlling for purposes of determining the meaning of the term "tangible personal property." Land and land improvements such as buildings or other inherently permanent structures (including items which are structural components of such buildings or structures) are excluded from the term "tangible personal property."

Rev. Rul. 67-156, 1967-1 C.B. 7, holds, under circumstances similar to those in the instant case, that a trailer used as a launderette does not qualify for the investment credit under section 38 of the Code nor the additional first year depreciation allowance permitted under section 179. Rev. Rul. 67-156 states that the trailer's actual functional use rather than its possible use will be controlling. It also states that the fact that an asset, incidental to its primary use, may be moved from one location to another location, does not detract from its primary use as a building. In discussing the additional first year depreciation allowance, Rev. Rul. 67-156 states that for purposes determining whether property qualifies as section 179 property the distinction between a land improvement and tangible personal property for a structure that is designed with mobility characteristics depends on the relative permanence of the structure.

of

Rev. Rul. 75-178, 1975-1 C.B. 9, states that a functional or equivalency test will no longer be used to classify property as inherently permanent. Rather, the classification of property as "personal" or "inherently permanent" should be made on the basis of the manner of attachment to the land and how permanently the property is designed to remain in place.

Rev. Rul. 77-8, 1977-1 C.B. 3, holds that certain movable trailers that remain on location for use as on-site offices by a construction company for an average of one year qualify as section 38 property for investment credit purposes. It is stated therein that the functional use test of trailers as offices does not automat

ically classify them as buildings. It

must first be determined whether the trailers are permanent improvements to the land.

Under the principles of Rev. Rul. 75-178, the use of the trailer as a laundry facility is not controlling.

The launderette trailer is attached to the land and is designed to remain in place indefinitely. The trailer is inherently permanent. It is therefore a permanent improvement to the land and not tangible personal property for purposes of section 38 and 179 of the Code.

However, for purposes of section 48, the determination that the trailer is not tangible personal property does not disqualify it. The trailer may qualify as other tangible property. Therefore, its use then must be determined. Since the trailer is a structure that meets the definition of section 1.48-1 (e) (1) of the regulations, it is a building.

Accordingly, the launderette trailer does not qualify as either section 38 property or section 179 property.

The holding in Rev. Rul. 67-156 is modified to the extent that it relied solely on the functional use test and is included in the instant ruling. Therefore Rev. Rul. 67-156 is superseded.

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

Investment credit; fire protection system. A fire protection system that is designed to remain in place permanently but has a variety of component parts, each of which may be mechanically removed, is

a structural component of the building and does not qualify as section 38 property.

Rev. Rul. 77-362

Advice has been requested whether, under the circumstances described below, a fire protection system qualifies as "section 38 property" for investment credit purposes.

A taxpayer purchased and installed a fire protection system in a building used in the taxpayer's business. The system is designed to detect fire at any point in the building, report it electronically to a fire control panel located in the lobby and, through a computer, initiate safety measures including elevator recall, turning off fans, stairwell door unlocking, and fire department notification. Fire detection is accomplished through sensors strategically placed in the ceiling throughout the building. The loudspeakers are attached to the walls on each floor and are wired to a central station on the ground floor.

The computer is in a free-standing metal cabinet on wheels and is connected to the rest of the fire protection system, which in turn is connected with the electrical system of the building. The system requires horizontal wiring, primarily between the peripheral and switching equipment, to be installed in metal casing along the walls on each floor. The data display board is placed in a 4 by 8 foot sleeve in the lobby wall. Installation of the sleeve itself requires cutting a hole in the wall. These components are designed to remain in place permanently and to operate as part of the system. They can be detached for servicing or for replacement.

The above-described property is depreciable property having a useful life of 3 years or more.

Section 38 of the Internal Revenue Code of 1954 allows a credit against Federal income tax for qualified investment in "section 38 property." The determination of what property

qualifies as "section 38 property" is made in accordance with the rules provided in section 48 of the Code.

Section 48(a) (1) of the Code provides 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 property is used as an integral part of certain specified activities. Further, section 48(a) (1) (C) of the Code specifically provides that the term "section 38 property" includes elevators and escalators that were acquired, or construction of which was completed, after June 30, 1963. To qualify as section 38 property, the property must also be property with respect to which depreciation is allowable and must have a useful life of 3 years or

more.

Section 1.48-1(e) (2) of the Income Tax Regulations provides that the term "structural components" includes such parts of a building as all components (whether in, on, or adjacent to the building) of a central air-conditioning or heating system, including motors, compressors, pipes and ducts; plumbing and plumbing fixtures, such as sinks and bathtubs; electric wiring and lighting fixtures; chimneys; stairs, escalators and elevators, including all components thereof; sprinkler systems; fire escapes; and other components relating to the operation or maintenance of a building.

Section 1.48-1 (m) (2) of the regulations defines the term "elevator" and includes within its meaning functionally related equipment that is essential to the operation of the elevator.

Rev. Rul. 75-178, 1975-1 C.B. 9, provides that the problem of classification of property as "personal" or "inherently permanent" should be made

on the basis of the manner of attachment to the land or the structure and how permanently the property is designed to remain in place. In C. C. Everhart v. Commissioner, 61 T.C. 328 (1973), the United States Tax

Court held that a self-contained, prefabricated sewage disposal unit was a "structural component" of a building even though it was removable and not directly attached to the building. Further, the Circuit Court of Appeals in Kramertown Co., Inc. v. Commissioner, 488 F.2d 728 (5th Cir. 1974), held that the quality of removability is not the sole determinant of whether a piece of machinery is a structural component. The court concluded that rooftop air-conditioning and heating units are structural components of a building even though they may be removed by relatively simple mechanical methods.

Installation of the fire protection system requires cutting a hole in the wall to place a metal sleeve, installing metal-encased wiring along and through walls and the use of existing wiring that is within the walls of the building, and the fastening of alarm devices to ceilings and walls. The system, although parts are removable by mechanical means, is designed to remain in place permanently. Therefore, it does not satisfy the criteria in Rev. Rul. 75-178 for being "personal" property and must be considered a permanent and integral part of the building.

The system must be viewed as including all component parts that function to perform the task of providing automatic fire protection for the building. Thus, the fire protection system must be viewed in its entirety rather than with respect to the individual component parts thereof. For example, the computer, even though detachable and transportable, is attached to the rest of the fire protection system and is necessary for the system to provide the automatic fire protection for which it was designed. Further, the elevator recall is not essential to the normal operation of the elevator but only functions with the fire protection system; thus the elevator recall is also a component of the

Finally, the fire protection system, including all of its components, is a structural component because it is an integral part of the operation of the building.

Accordingly, the fire protection system in the instant case is a structural component of the building within the meaning of section 1.48-1 (e) (2) of the regulations, and does not qualify as section 38 property for investment credit purposes.

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

Investment credit; greenhouses. Greenhouses provide a controlled environment and work space in which indoor commercial gardening work can be conducted and are buildings within the meaning of section 1.48-1(e)(1) of the regulations; the Service will not follow the Thirup decision holding that greenhouses qualify for the investment credit.

Rev. Rul. 77-363

Advice has been requested whether, under the circumstances described below, greenhouses qualify as "section 38 property" for purposes of the in

vestment tax credit.

The taxpayer, a corporation, is in the business of growing and caring for flowers and plants. In conjunction with its business, the taxpayer built several greenhouses. Some of the greenhouses are constructed with metal frames, while others are built with wooden ones. The frames of all the greenhouses support windows that are either normal window glass or translucent fiberglass. The frames with windows form walls and a roof that completely enclose and cover a space.

Some of the greenhouses have concrete floors on which are placed long tables. These tables support the pots in which the plants are grown. Other

The greenhouses, by virtue of their design and construction, are attached to the land and are inherently permanent. They are, therefore, permanent improvements to the land.

The space inside the greenhouses is divided into parallel bays extending the length of each structure. Between the bays are aisles that allow workers to move freely throughout the struc

ture.

Each greenhouse has an automatic temperature-control system. When the temperature inside the structure rises above a certain level, louvers open at the end of the bays and electric fans draw in air from the outside. When

the inside temperature falls below a certain level, a system of ground-level and elevated pipes is activated to provide radiant heat throughout the structure. Other pipes carry water and liquid fertilizer throughout the struc

ture.

The greenhouses provide a substantial amount of work space for the employees. The employees are continually working in various activities inside the greenhouses including preparation of soil, weeding, watering, fumigating, pruning, cutting, and harvesting the plants.

Section 38 of the Internal Revenue

Code of 1954 allows a credit against Federal income tax for qualified investment in "section 38 property" as defined in section 48 of the Code.

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

Section 1.48-1(d) (2) of the Income Tax Regulations provides that the terms "manufacturing", "produc

tion", and "extraction" include the cultivation of orchards, gardens, or

nurseries.

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 working or office space. The term includes, for example, structures such as factory and office buildings, warehouses, and barns. Such term 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 manufacturing, production, or extraction 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 that indicate a structure is closely related to the use of the property it 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.

structures

The United States Tax Court in Sunnyside Nurseries v. Commissioner, 59 T.C. 113 (1972), and in Thirup v. Commissioner, 59 T.C. 122 (1972), held that greenhouses, similar to the described herein, were "buildings" within the meaning of section 48(a) (1) of the Code. In both cases, the court concluded that the structures had the appearance of buildings and that a substantial amount of employee activity took place within them. Because of the structures' appearance and the frequent and regular employee activity conducted within the structures, the court concluded that the greenhouses came within the definition of a "building" found in section 1.48-1(e) (1) of the regulations.