concept is adopted solely to permit a pass-through of the credit to the lessee edit to the lessee pursuant to section 48(d). Since the taxpayer claims his additional credit under a provision other than section 48(d), the general rule applies in this case. The taxpayer is not the original user of the purchased property, and, therefore, such property is not “new section 38 property' to him. Since the taxpayer has placed nei. ther “new” nor "used section 38 prop erty” in service as the result of purchasing the equipment, his purchase has not generated any qualified investment. Accordingly, in the instant case, the taxpayer is not entitled to an additional investment credit as a result of purchasing the equipment he had been using as a lessee. This result would remain the same whether the taxpayer purchased the equipment in the same taxable year in which he claimed the original credit or in a subsequent taxable year. Rev. Rul. 74-288 otherwise determined under section Advice has been requested regard. 1.46-3 of the regulations, and the ing the proper method for determin- $25,000 limitation specified in section ing the taxable income of a coopera 1.46-1(b)(1) of the regulations, retive to be used in computing qualified computing qualified lating to limitation based on amount latin investment, under the circumstances of tax of tax, shall be reduced to such codescribed below, for the purpose of operative's ratable share of each such the investment credit allowed under amount. Under section 46(d)(2)(C) section 38 of the Internal Revenue a cooperative's ratable share of the Code of 1954. amount described above is the ratio The taxpayer is a cooperative or which "taxable income” for the taxganization described in section 1381 able year bears to "taxable income" of the Code that files its Federal for the taxable year plus amounts to income tax return on a calendar year which section 1382(b) applies and basis. On January 1, 1973, the tax similar amounts the tax treatment of payer acquired a storage facility which is determined without regard which qualifies as "section 38 prop. to subchapter T (section 1381 and erty." The basis of the property was following). $30,000, and it has a useful life of Section 1.1382-2(a)(1) of the regu35 years. lations provides that “* * * in deterThe taxpayer placed the section 38 mining the taxable income of any coproperty in service on January 10. operative organization to which part I, 1973. The taxpayer's taxable income subchapter T, chapter 1 of the Code for 1973 was $95.000 after taking into applies, there shall be allowed as deaccount deductions allowed under ductions from gross income, in addichapter 1 of the Code except for de tion to other deductions allowable ductions of $75,000 allowed under under chapter 1 of the Code, the section 1382(b) of the Code, relating deductions with respect to patronage to patronage dividends and $5,000 of dividends provided in section 1382(b) special deductions allowed under sec and paragraphs (b) and (c) of this tion 243. relating to certain dividend section * * *" relating to deduction distributions. for patronage dividends and deducSection 46(d) of the Code provides tions for amounts paid in redemption limitations with respect to certain per- of certain nonqualified written notices sons in determining the amount of of allocation. investment credit allowed. In the instant case the taxpayer's taxable income after deductions allowed under section 243 $15,000 (Investment in section X = $5,000 38 property) $90,000 taxable income plus the sum of 26 CFR 1.38-1: Investment in certain depreciable property. Proper method for determining the taxable income of a cooperative to be used cooperative to be used in computing qualified investment for purposes of the investment credit. See Rev. Rul. 74-288, below. Subpart B. Rules for Computing Credit for Section 46.-Amount of Credit Investment credit computation by cooperatives. An example illustrates that in the computation of the amount of a qualified investment for purposes of the investment credit a cooperative's "taxable income" for purposes of the ratio provided by section 46(d)(2) (C) of the Code must reflect deductions allowed under section 1382 (b) and special deductions allowed under section 243. Accordingly, in the instant case the taxpayer's qualified investment for the taxable year 1973 is $5,000 as computed above. the property ceased to be section 38 property at that time. Accordingly, it is held, in the instant case, a recapture determination must be made for 1972 in accordance with section 1.47-1 of the regulations. inction 38 Section 47,- Certain Dispositions, etc., of Section 38 Property 26 CFR 1.47-1: Recomputation of credit allowed by section 38. Investment credit recapture; bankruptcy. Section 38 property, acquired in 1971 by a taxpayer who was adjudicated bankrupt in 1972, and sold in 1973 by the trustee who did not continue the taxpayer's business, was transferred in 1972 within the meaning of section 1.47-1(c)(1)(ii) of the regulations and a recapture determination must be made for that year. Rev. Rul. 74-26 Advice has been requested whether the transfer of section 38 property, under the circumstances below, constitutes a disposition requiring the recapture of the investment credit. In 1972, the taxpayer, an individual engaged in the excavating business, was adjudged a bankrupt by the court. During the year, the trustee in bank ruptcy took possession of the taxpayer's property for the purpose of liqui. dating the assets and making distributions to the creditors. The trustee did not continue the taxpayer's business Included in the property taken by the trustee was section 38 property that had been the basis for an investment credit in 1971. The property was sold by the trustee in 1973. Section 47(a)(1) of the Internal Revenue Code of 1954 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 which was taken into account in computing the credit under section 38, then the tax for such taxable year shall be increased by an amount equal to the aggregate de crease in the credits allowed under section 38 for all prior taxable years which would have resulted solely from substituting, in determining qualihed investment, for such useful life the period beginning with the time such property was placed in service by the taxpayer and ending with the time such property ceased to be section 38 property. Section 1.47-1(a)(1)(ii) (b) of the Income Tax Regulations provides that the term “recapture year” means the taxable year in which section 38 property the basis (or cost) of which was taken into account in computing a taxpayer's qualified investment is disposed of, or otherwise ceases to be Section 38 property, before the close of the estimated useful life which was taken into account in computing such qualified investment. Section 1.47-1 (c)(1)(ii) of the regulations states that if during the taxable year property ceases to be section 38 property with respect to the taxpayer as a result of the occurrence of an event on a specific date (for example, a sale, transfer, retirement or other disposi i tion), such cessation shall be treated as having occurred on the actual date of such event. Section 1.47-2(a)(2) (i) of the reg. ulations states that a determination as to whether section 38 property ceases to be section 38 property with respect to the taxpayer must be made for each taxable year subsequent to the credit year. Thus, in each such taxable year the taxpayer must determine, as if such property were placed in service in such taxable year, whether such property would qualify as section 38 property in the hands of the taxpayer for such taxable year. In this case the property was transferred to the trustee for purposes of liquidating the assets, without continuing the taxpayer's business, and making a distribution to the creditors. Thus, a transfer within the meaning of section 1.47-1(c) (1) (ii) of the regulations did in fact occur in 1972 and 26 CFR 1.47-1: Recomputation of credit allowed by section 38. (Also Sections 354, 355, 381; 1.354-1, 1.355-1, 1.381 (a)-1.) Investment credit recapture; "section 38 property" transferred in spin-off. Recapture of investment credit due to early disposition of "section 38 property' is required under section 47(a)(1) of the Code where a corporation, engaged in the same business in three States, transfers its business activities in two States, and all related assets including "section 38 property," to two newly formed corporations solely in exchange for all their stock, and immediately thereafter transfers such stock to its sole shareholder in a divisive section 368(a)(1)(D) reorganization. Rev. Rul, 74-101 Advice has been requested whether the provisions of section 47 of the Internal Revenue Code of 1954 result in a recapture of previously allowed investment credit under the circumstances described below. X is a domestic corporation which, since 1964, has been engaged in the active conduct of three business activities: (1) the manufacturing and selling of ice cream in State A; (2) the manufacturing and selling of ice cream in State B; and (3) the manufacturing and selling of ice cream in State C. In 1970, pursuant to a plan of reorganization, X formed two new corporations, Y and Z. Immediately after formation of Y and Z, X transferred all of the assets of the State B business to Y in exchange solely for all of the stock of Y, and all of the assets of its State C business to Z in exchange solely for all of the stock of the trade or business so long as the received in the exchange to X's sole Z. For good business reasons, immedi- property transferred is retained in shareholder. Thus, X, after the reately upon receiving the Y and Z such trade or business as section 38 organizations was not the owner of a stock, X distributed all of the shares property and the taxpayer retains a substantial interest in either the State of such stock to X's sole shareholder. substantial interest in such trade or B business or the State C business In each instance, the transfer by X of business. transferred to Y and Z, respectively. the respective assets to Y and Z solely Section 381(a)(2) of the Code pro- Accordingly, since the transaction in for Y and Z stock, followed immedi- vides, in effect, that a transaction in the instant case is not a mere change ately by the distribution of the Y and volving an exchange of assets for stock of form within the meaning of section Z stock to X's sole shareholder, con- meeting the requirements of section 47(b) (2) of the Code, the exception stituted a divisive reorganization with 368(a) (1) (D) is subject to the pro- to recapture of the investment credit is in the meaning of section 368(a)(1) visions of section 381 only if the cor- not applicable. Accordingly, the in(D) of the Code and met the require- poration to which the assets are trans- vestment credit allowed to X in prior ments for non-recognition of gain or ferred acquires substantially all of years with respect to the section 38 loss to X's sole shareholder pursuant the assets of the transferor of such property transferred to Y and Z must to section 355(a), including the re- assets and otherwise meets the re- be adjusted in the year of transfer to quirement of section 355(b)(1)(A) quirements of section 354(b)(1). Sec- reflect the early disposition of such that X, Y, and Z be engaged immedi- tion 381 is not applicable to transac- section 38 property by X (prior to the ately after the distribution of stock in tions qualifying as reorganizations un- close of the useful life of such propthe active conduct of a trade or busi- der section 368(a)(1)(D) which so erty) pursuant to the provisions of ness. A portion of the assets trans- qualify only because they meet the re- section 47(a)(1). ferred to Y and Z in this transaction quirements of section 355 as divisive consisted of section 38 property hav- reorganizations. Section 1.381(a)-1(b) 26 CFR 1.47-2: "Disposition" and "cessaing a useful life of 8 years or more on (3) of the regulations provides that tion." which in prior years X had been al- section 381 does not apply to divisive (Also Sections 108, 1017; 1.108(a)-1, lowed an investment credit computed reorganizations. Therefore, section 381 1.1017-1.) in accordance with the provisions of was not applicable to the foregoing Investment credit recapture; section 46. transactions. Thus, the exception to gain from discharge of indebtedThe question is whether the invest the application of the recapture of ness. Investment credit must be ment credit previously computed on investment credit provisions of sec- recomputed to reflect the reducthe section 38 property transferred by tion 47(a)(1) for a transaction in Lion in the basis of section 38 X to Y and Z, respectively, must be which section 381(a) applies is not property resulting from the taxadjusted in the year of transfer to re- applicable in the instant case. payer's election to exclude gain flect the early disposition of such prop arising from discharge of an inerty pursuant to section 47(a) (1) ture of the investment credit under debtedness even though the inof the Code. section 47(b)(2) of the Code relating debtedness was incurred before Section 47 (a)(1) of the Code pro- to a mere change in form of conduct the enactment of section 38 of vides, in part, that if any property is ing the trade or business (provided the Code and the proceeds were disposed of or otherwise ceases to be the section 38 property is retained as not used to acquire the property; section 38 property with respect to the section 38 property in the same trade income tax liability will increase taxpayer before the close of the use or business), section 1.47-3(f) of the for the year of the basis reduction; ful life on which the credit under sec- regulations provides, in effect, that Rev. Rul. 72-248 amplified. tion 38 was computed, the Federal this exception to recapture investment Rev. Rul. 74-184 income tax shall be adjusted accord credit will not apply unless certain ingly for the taxable year in which the conditions are met including the con Advice has been requested concern"cessation” took place. dition that the transferor of the sec- ing the “recapture" of investment Section 47(b) (2) of the Code pro- tion 38 property retain a “substantial credit allowed to a taxpayer on "propvides for exceptions to the recapture" interest” in such trade or business. erty" defined in section 38 of the provisions of section 47(a) insofar as In the instant case, X, immediately Internal Revenue Code of 1954 is pertinent here, (1) if the transaction after the transfer of a portion of X's where such taxpayer adjusted the is one to which section 381(a) ap- property to Y and Z, respectively, in basis of such property under section plies or (2) if the transaction involves lieu of retaining a substantial interest 1017 as a result of excluding from a mere change in form of conducting therein, distributed the Y and Z stock gross income, gain arising from dis lating debtedness even these of an in vides, id of or oth with respecthe use vides, in part, thaterwise ceases to be the tion 38 property in 199-3(4) of the the pr of thoss inco, ge of sode by reewedness. She disch a to the ust be disposea 38 PP charge of indebtedness, pursuant to amount excluded from gross income The principle set out in Rev. Rul. section 108 of the Code. under section 108(a) of the Code by 72-248, that investment credit on secThe taxpayer, a domestic corpora- reason of the discharge of such in- tion 38 property must be recomputed tion, incurred bond indebtedness be- debtedness. Section 1.1017-1(a) of the to reflect a reduction in the basis of fore the enactment of section 38 of the regulations also provides, in effect, the property as a result of excluding Code. The bond indebtedness was that the basis of other property of the gain from the discharge of indebtedincurred for purposes other than the taxpayer at the time of discharge of ness incurred to acquire section 38 acquisition of section 38 property. the indebtedness shall be reduced by property, before the close of the useLater, the taxpayer reacquired the the excess of gain excluded from gross ful life of the property, is equally bond indebtedness at a gain. The tax income under section 108(a) over and applicable to a situation where the payer excluded the gain from its above the basis of the specific prop- indebtedness discharged was incurred gross income and decreased the basis erty purchased. If, however, the in- prior to the enactment of section 38 of section your property pursuance coins of section 38 property pursuant to the debtedness is not incurred to pur- of the Code and the bond proceeds election provided for under sections chase specific property, the basis of were used for purposes other than the 108(a) and 1017. The decrease in any property of the taxpayer may be purchase of section 38 property. d before the end of the adjusted in the manner and order pre. Since the effect of reducing the section 38 property. scribed by section 1.101/01(a) of the basis of section 38 property in the The specific question is whether the regulations. instant case is to reduce the amount investment credit allowed to the tax Section 47(a)(1) of the Code pro of section 38 property with respect to payer on section 38 property must be vides, in part, that if any property is the taxpayer before the close of its recomputed where the basis of such disposed of or otherwise ceases to be useful life which was taken into acproperty is adjusted pursuant to sec- section 38 property with respect to count in computing the investment tions 1017 and 108 of the Code, if the taxpayer before the close of the credit allowed, such investment credit the bond indebtedness reacquired at useful life on which the credit under must be recomputed in order to make a gain was incurred before the enact section 38 was computed, the Federal the adjustments in taxable income rement of section 38 or the bond pro- income tax shall be adjusted accord- quired by section 47(a) of the Code. ceeds were used for purposes other ingly for the taxable year in which the The fact that the proceeds of the than the purchase of section 38 prop- "cessation” took place. indebtedness were not used to purerty. Section 1.47-2(c) of the regulations chase section 38 property does not Section 108(a) of the Code pro- provides, in part, that if the basis of affect the requirement that the investvides, in part, that no amount shall section 38 property is reduced, then ment credit be recomputed. be included in gross income by reason such section 38 property shall be Accordingly, it is held that the inof the discharge in whole or in part treated as having ceased to be section vestment credit previously computed within the taxable year of any in- 38 property with respect to the tax must be recomputed to reflect the debtedness for which the taxpayer is payer to the extent of the amount of reduction in the basis (cost) of the liable or subject to which the taxpayer such reduction in basis. section 38 property. The entire holds property, if such taxpayer makes amount of the reduction of the inand files a consent in accordance with 16, the taxpayer incurred indebted- vestment credit previously allowed to the Income Tax Regulations pre ness to acquire section 38 property. the taxpayer will increase the taxscribed under section 1017. It was held that the investment credit payer's Federal income tax liability Section 1017 of the Code provides, previously computed on such prop for the taxable year for which the in part, that where an amount is ex- erty must be recomputed under sec basis of section 38 property was recluded from gross income under sec tion 1017 of the Code to reflect the duced under section 1017 of the Code. tion 108(a) the whole, or any part reduction in basis of the section 38 reduction in basis of the section 38 Rev. Rul. 72-248 is hereby ampliexcluded, shall be applied in reduction property as a result of excluding from fied. of the basis of any property held. gross income gain from discharge of Section 1.1017-1(a) of the regula- the indebtedness, pursuant to section tions provides, with respect to in- 108. Further, the entire amount of 26 CFR 1.47-6: Partnerships. debtedness incurred to purchase spe- the reduction in the investment credit cific property (which includes section was held to increase the taxpayer's Whether an unrelated taxpayer acquiring 38 property), that the cost or other Federal income tax liability for the an interest in an oil lease and related equip basis of such specific property shall be taxable year for which the basis of ment from a member of a joint venture ac quires "used section 38 property." See Rev. decreased by an amount equal to the the section 38 property was reduced. Rul. 74-64, page 12. sted. ac property (which includamase spent the reduction in the investment need ment ample, structureze term includes. items are ind product. Thompleted Section 48.-Definitions; Special Investment credit; canopies over tions, tion 1.48.10 38 properto, not Advice has been requested whether canopies attached to buildings qualify as "section 38 property” for investment credit purposes. The taxpayer is engaged in manufacturing and has canopies that are attached to buildings to protect inven toried parts, used in the manufactured product, from the elements. The cano. pies are overhanging shelters attached permanently to the walls of buildings and they ordinarily extend from the walls over loading or storage docks. The canopies are either concrete slab or steel frame construction and are integral parts of the walls of the buildings. Section 38 of the Internal Revenue Code of 1954 allows a credit against Federal income tax for qualified in vestment in "section 38 property.” The determination of what property qualifies as "section 38 property'' is made in accordance with rules provided in section 48 of the Code. 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 specified activities including manufacturing. Section 1.48-1(e)(1) of the Income Tax Regulations defines the term "building” to mean any structure or edifice enclosing a space within its walls and usually covered by a roof, the purpose of which is, for example, ditioners, essential to the completed to provide shelter or housing, or to manufactured product. The stored provide working, office, parking, dis- items are individually identified and play, or sales space. The term includes, are not fungible in character. The for example, structures such as apart material used in constructing the enment houses, factory and office build. closures generally consists of metal or ings, warehouses, barns, garages, rail. wooden walls and ceilings. The encloway and bus stations, and stores. sures are depreciable and have useful Section 1.48-1(e) (2) of the regula- lives of three years or more. tions, in pertinent part, defines the Section 38 of the Internal Revenue term "structural components” to mean Code of 1954 allows a credit against such parts of a building as walls, par. Federal income tax for qualified intitions, floors, as well as any perma- vestment in "section 38 property.” nent coverings therefor such as panel. The determination of what property ing or tiling; windows and doors; and qualifies as "section 38 property” is other components relating to the made in accordance with rules prooperation or maintenance of a build- vided in section 48 of the Code. ing. Section 48(a)(1) of the Code proThe canopies in the instant case are vides, in part, that the term "section appendages of the building that relate 38 property” means tangible personal to the ordinary function and operation property, or other tangible property of the building. They are therefore (not including a building and its “structural components” of the build. structural components), but only if ing within the meaning of section such property is used as an integral 1.48-1(e) (2) of the regulations. part of specified part of specified activities including Accordingly, the canopies in the in manufacturing stant case do not qualify as "section Section 1.48-1(a) of the Income 38 property” for investment credit Tax Regulations states, in part, that purposes. the term “section 38 property" means property (1) with respect to which depreciation (or amortization in lieu 26 CFR 1.48-1: Definition of section 38 of depreciation) is allowable to property. the taxpayer, (2) which has an estiInvestment credit; storage en mated useful life of 3 years or more, closures within building. Enclosures and (3) which is either tangible perconstructed as structural com- sonal property or other tangible propponents for the purpose of ware- erty (not including a building and its housing inventoried parts and as structural components), but only if sembly elements that are not fun- such other property is used as an integible in character do not qualify as gral part of specified activities includ. "section 38 property." ing manufacturing. Rev. Rul. 74-3 Section 1.48-1(d)(1) of the regula. tions states, in part, that in addition Advice has been requested whether, to tangible personal property, any under the circumstances described be other tangible property (but not in. low, certain enclosures qualify as "sec- cluding a building and its structural tion 38 property" for investment components) used as an integral part credit purposes. of manufacturing may qualify as "secThe enclosures are portions of the tion 38 property." inside of a building partitioned off to Section 1.48-1(d) (5) (ii) of the regform areas devoted to the warehous. ulations states, in part, that property ing of inventoried parts and assembly will constitute a storage facility only if elements such as radios and air con. the facility is used principally for the |