598 288 15 1 1 56 1 840 Taxpayer Docket No. Volume Page Thomson, Adelaide L., The Connecticut Bank & Trust Co. & A. Lindsay Thomson, co-executors? 3539-71) Thomson, James L., Hartford National Bank & Trust Co. & A. Lindsay 880 Thomson, co-executors 7482-70) Thriftmart, Inc., a California Corp. 3079-69 Tidmore, Catherine --- 3659-70) 996 Tidmore, Max ----- 3660-70) Todd, James S., Jr.? -- 3953-70 United Salt Corp. --- 82621 359 Utilities & Industries Corp.10 - 88306 888 Vaccaro, Louis C. --------- 6377-69 721 Valentine, Charles C. ----- 2979-68 Vermilya, George H., executor, estate of James Mead Vermilya? 1341-62 226 Vermilya, James Mead, estate of + ---Wiles, Jack ------------------------- 146-71 289 Wiles, Richard E. -------------------- 6186-71 Wiles Trust, Karen D., Jack Wiles, Trustee 148-71) Wiles Trust, Michael A., Jack Wiles, Trustee 147-71) 289 Wiles Trust, Philip B., Jack Wiles, Trustee - 149-71) Zenith Dredge Co. - 3998-68 The Commissioner does NOT ACQUIESCE in the following decisions: Report Docket No. Page Aspegren, Oliver R., Jr.11 7142-65 945 Coke, Agnes Pynel2 -- 25822 Dean, J. Simpson ---- 75523 1083 Gustafson, Charles G.18 - 1769 Hamelsky, Abraham, estate of1 -- 741 Hamelsky, Samuel, executor, estate of Abraham Hamelsky? -Houg, Clifford M.14 -- 2393-67 792 Lumpkin, James H., Jr., Christine T. Hamilton, executrix 1715-68 815 Moradian, Edward A. 3228-67 207 Prather, John V. -------- 2340-67 Rensenhouse, Proctor D., The Michigan Trust Co., executori 15 - 57683 818 1 Estate Tax decision. Acquiescence in result with respect to issues relating to whether estimated retrospective rate credit reserves for policies expiring beyond the current taxable year are prop. erly includible in "unearned premiums" and whether unpaid premium discount on the unexpired portion of policies are allowable as deductions or includible in unearned premiums. See Rev. Rul. 73-302, page 220. 3 See Rev. Rul. 73.493, page 294. & Acquiescence in the issues relating to (1) whether receipt of the proceeds of a life insurance policy constitutes income to petitioners and (2) whether discount income was realized by petitioners. Acquiescence in result in the issue relating to whether wholly owned corporation had an insurance contract "interest" to assign in return or valuable consideration. Nonacquiescence published in 1970-2 C.B. xxii, is withdrawn and acquiescence is substituted therefor. This acquiescence should be accepted as authority only for similar cases involving Massachusetts fiduciary law. 7 See Rev. Rul. 73-611, page 312. See Rev. Rul. 73-529, page 37. 10 Acquiescence published in 1965.1 C.B. 5, in issue 1, relating to whether the South Bay Corp. realized additional ordinary income in the amount of $605,577.85 in 1951, us the result of a discharge of indebtedness by the cancellation of a demand note with accrued interest deducted in prior years, is withdrawn and acquiescence in result is substi. tuted therefor. See Rev. Rul. 73.432, page 17. 11 Acquiescence published in 1969-2 C.B. xxiii, is withdrawn and nonacquiesconce is substituted therefore, 15 Nonacquiescence published in 1964-2 C.B. 8, is republished to include the following footnote: The issue of the eligibility of the Michigan Widow's allowance for a deduction under section 2056 of the Internal Revenue Code of 1954 will be conceded unless and until the Michigan state courts hold that the Michigan widow's allowance is not an inter. est which indefeasibly vests in the widow at her husband's death. 403 998 37511-70 445 Part I. Rulings and Decisions Under the Internal Revenue Code of 1954, Except Those Pertaining to Alcohol, Tobacco, and Firearms Subtitle A.-Income Taxes tred com and reture are visions Section 1.-Tax Imposed Part II.-Tax on Corporations Section 11.–Tax Imposed 26 CFR 1.11-1: Tax on corporations. Whether the unrelated business income tax shown by a corporate taxpayer on Form 990-T can be used in determining the amount of a deficiency, when an extension of the period of limitations for assessment and collection has been obtained, of a corporate taxpayer when no longer recognized as tax exempt. See Rev. Rul. 73-577, page 405. new or used material qualify as "new or groups of individual items of ties, Section 104(g) and 104(h) of the applicable in computing or recomput- Section 48(a)(9) of the Code pro- structure exclusive of removal costs, vides that in the case of a railroad qualify as "new section 38 property" using the retirement-replacement for taxable years ending after Decemmethod of accounting for deprecia. ber 31, 1961. Since section 102(d) (2) tion, replacement track material is of the Act amended section 47(a) of "section 38 property" if (1) the re- the Code with respect to periods of placement is made pursuant to a time for computing or recomputing scheduled program for replacement, qualified investment, and the addi(2) the replacement is made pursuant tions to and replacements of the railto observations by maintenance-of- road track structure are "mass assets," way personnel of specific track mate- the provisions of section 1.47-1(e) (2) rial needing replacement, (3) the re- of the regulations are applicable in placement is made pursuant to the computing or recomputing the qualidetection by a rail-test car of specific fied investment credit for the purposes track material needing replacement of section 46(c)(2) of the Code for or (4) the replacement is made as a both new and used material. result of a casualty. Replacements However, see section 107(a) of the made as a result of a casualty are Act which repeals section 46(c)(4) "section 38 property” only to the ex- and section 47(a) (4) of the Code and tent that, in the case of each casualty, eliminates the exceptions to the recapthe qualified investment with respect ture rules for casualties, theft, and to replacement track material (ties, other dispositions occurring after rail, other track material, and ballast) August 15, 1971. exceeds $50,000. Rev. Rul. 67-285 is modified reThe depreciable part of the railroad garding the qualification of replacetrack structure is made up of a group ments of railroad track structure as Part IV.-Credits Against Tax Section 38.-Investment in Certain Replacements of railroad track In view of the Revenue Act of 1971, Pub. L. 92-178, 1972-1 C.B. 443, 446, further consideration has been given to Rev. Rul. 67-285, 1967-2 C.B. 7. That Revenue Ruling provides that: (1) new additions to the track structures constructed by the taxpayer with "new section 38 property" and also which the repayment was actually re- payment of tax resulting from the regarding the computing or recom- ceived, in this case 1972. application of section 1482(a) shall be puting of the investment credit, for The specific question presented is treated as if it were an overpayment the purposes of section 47 of the Code. the extent to which the investment or underpayment for the taxable year credit is allowable for 1972 as a in which the repayment is made. credit against the Federal income tax The purpose of the "as if” proviSubpart B.-Rules for Computing Credit for determined under section 1482 of the sion in section 1482(d) of the Code Investment in Certain Depreciable Property Code. is to utilize the year in which the pay Section 38 of the Code provides ments are received for the purpose of Section 46.—Amount of Credit that there shall be allowed, as a credit assessing and collecting the recom against the tax imposed by chapter 1 puted tax without running afoul of 26 CFR 1.46-1: Determination of amount. of the Code, the amount determined the statute of limitations. See S. Re(Also Section 1482). under the rules contained in sections port No. 1983, 85th Cong. 2d Sess. Investment credit; limitation; ef- 46, 47, 48, 49, and 50. (1958), 1958-3 C.B. 922, 1006, which fect of repayment made pursuant Section 46(a) (2) of the Code, in provides, in part, as follows: to price redetermination. The limi- general, limits the amount of invest * * * In this provision, your committee tation on investment credit allowed ment credit allowed under section 38 provides that, where there is a repayment for a taxable year during which a to the amount of the tax liability of from one party to another under a sub contract subject to statutory renegotiation, taxpayer received a repayment the taxpayer. the tax of the party making the repayment from his subcontractor resulting Section 46(a)(3) of the Code states is to be reduced and the tax of the party from a price redetermination of a receiving the repayment is to be increased that, for the purpose of limiting the for the year with respect to which the paygovernment contract is determined amount of investment credit allowed, ment was originally made. The amount of without taking into account the adthe liability for tax for the taxable the decrease and increase in tax in these ditional tax attributable to the re two cases is to be determined by making a year shall be the tax imposed by recomputation of tax for the prior year or computation of tax liability for a chapter 1 of the Code for such year, years. However, for purposes of determinprior year under section 1482 of reduced by the sum of the credits ing when the statute of limitations expires with respect to this repayment (and also the Code. allowed under sections 33, 35, and 37. with respect to other provisions of the inRev. Rul. 73-527 Furthermore, any tax imposed by sec- ternal-revenue laws), this amount is to be tions 56, 531, 541, 1378, and addi 279 and addi. considered an overpayment or underpay ment in the year in which the repayment Advice has been requested regard- tional tax imposed by section 1351(d) is made. **** ing the extent to which the investment (1) shall not be considered tax im- In H. B. Zachen Company v. The credit may be applied against the posed by chapter 1 for such year. United States. 471 F.2d 1392 (Ct. Cl. income taxes computed under section Section 1482(a) (2) of the Code 1973) the court after quoting the 1482 of the Internal Revenue Code provides that if, pursuant to a price pertinent part of the Senate Report of 1954 under the circumstances de redetermination provision in a con- referred to above stated as follows: scribed below. tract to which section 1482 applies, a Section 1482 was designed to maintain During 1972 the taxpayer purchased repayment with respect to an amount the integrity of the annual accounting conassets which qualified as section 38 paid under the subcontract is made by cept and at the same time to permit an property for the purpose of the invest- one party to the subcontract (payor) equitable redetermination of taxes due for prior years. The prior years are reopened ment credit. During the same year the to another party to the subcontract and the tax is recomputed in accordance taxpayer received a repayment from (payee) then the tax of the payee for with the repayments made with respect to its subcontractor resulting from a prior taxable years shall be recom such prior years. However, since the statute of limitations might otherwise prevent the price redetermination of a govern- puted as if the amount paid or in reopening of the prior years, section 1482 ment contract, as a result of which curred by him with respect to which (d) provides that an underpayment of the a recomputation of the taxpayer's the repayment is made did not include tax as recomputed is treated as if it were an underpayment for the year in which the 1967 Federal income tax was made an amount equal to the amount of rebate or repayment under a subcontract is under section 1482 of the Code. Pur- the repayment. made. Thus, the function of the statute is suant to such section, the taxpayer Section 1482(d) of the Code pro to provide that the repayments shall have no effect on any taxable year other than included the repayment in income for vides that the amount of any repay the prior year or years in which payments the year with respect to which the ment to which section 1482 (a) applies were made or received under the contracts repayment was made (1967) and the shall not be taken into account by the as initially priced. underpayment of tax resulting there. payor or payee for the taxable year Based on the above, the investment from was treated as if it were an in which the repayment is made. credit is limited by reference to the underpayment for the taxable year in However, any overpayment or under Federal income tax for the year of repayment determined under chapter 1 of the Code which does not take into account the underpayment of tax for prior years determined under section 1482, since section 1482 comes within the ambit of chapter 4. Such underpayment of tax is not part of the "liability for tax” for the taxable year within the meaning of section 46(a)(3). Accordingly, the limitation on the amount of investment credit allowed may not be determined with reference to the total Federal income taxes com puted under section 1482 of the Code. In the instant case, the limitation on the investment credit for 1972 is determined by reference to the Federal income tax for the year of repayment determined without taking into account the upward adjustment to Fed. eral income tax under section 1482. 26 CFR 1.46-3: Qualified investment. Qualification of repacements of railroad track structure for investment credit pur. poses under the retirement method of accounting for depreciation. See Rev. Rul. 73-295, page 5. section 333(a) of the Code must tain conditions that must be satisfied recapture investment credit, pur- in order that a mere change in the suant to the provisions of section form of conducting the trade or busi47(a), on section 38 property dis- ness will not result in the recapture tributed to its sole noncorporate of the investment credit. Section 1.47shareholder who continues to use 3(f) (1) (ü) (d) of the regulations prothe property in the same business vides that the basis of the section 38 in which the corporation was en property in the hands of the transgaged. feree must be determined in whole or in part by reference to the basis of Rev. Rui, 13-515 such property in the hands of the Advice has been requested as to the transferor for the transaction to be application of the investment credit treated as though no disposition took treat recapture provisions set forth in sec place. tion 47(a) of the Internal Revenue Under section 334(c) of the Code Code of 1954 under the circumstances the basis of assets (other than money) described below. acquired by stockholders in a liquidaM, the taxpayer, was a domestic tion upon which the amount of gain corporation wholly owned by B, an · recognized was limited under section 333 is the basis of the shares of stock individual. M owned apartment buildings and hotels, and, in connection redeemed or cancelled, decreased in the amount of money received and therewith, owned various items of sec increased in the amount of gain rection 38 property which had, in 1968, ognized and the amount of unsecured not been in service long enough to liabilities assumed by the stockholders. preclude recapture under section 47 (a) of the Code. In 1968, M adopted See section 1.334-2 of the regulations. a plan of complete liquidation and Accordingly, since the basis of secdistributed all of its assets to B in tion 38 property in B's hands is detercomplete cancellation and redemption mined without regard to the basis of of all of its shares in a transaction such property in M's hands, the transqualifying under section 333(a). action does not meet the condition B continued to use the assets dis set forth in section 1.47-3(f) (1) (ii) tributed in the same business in which (d) of the regulations and, therefore, is not a mere change in form of conM had been engaged, namely, the rental of apartment and hotel units. ducting a trade or business within the Section 47(a) of the Code provides meaning of section 47(b) of the Code. for the recapture of investment credit The normal recapture of investment credit provisions of section 47(a) are as a result of certain dispositions of section 38 property. Section 47(b) to be applied to the return of M for provides for the nonapplication of the the year of its liquidation. recapture provisions in certain cases. Insofar as is pertinent here, section Section 48.-Definitions: Special 47(b) provides that property shall not Rules be treated as ceasing to be section 38 26 CFR 1.48-1: Definition of section 38 property with respect to the taxpayer property. Enclosures for electrical substaness so long as the property is retained tions. Electrical substation enin such trade or business as section 38 closures constructed in commerproperty and the taxpayer retains a cial and residential locations to substantial interest in such trade or resemble the commercial and business. neighborhood structures as reSection 1.47-3(1) (1) (ii) of the In- quired by local zoning authorities come Tax Regulations sets forth cer- are "buildings” as defined in sec Section 47.–Certain Dispositions, Qualification of replacements of railroad track structure for investment credit purposes under the retirement method of accounting for depreciation. See Rev. Rul. 73-295, page 5. 26 CFR 1.47-1: Recomputation of credit allowed by section 38. Whether recomputation of investment credit results to a corporation that is liquidated in a transaction governed by section 334 (b) (2) of the Code. See Rev. Rul. 73. 461, page 10. 26 CFR 1.47-3: Exceptions to the appli- Investment credit; recapture; section 333 liquidation. A domes tic corporation engaged in a complete liquidation qualifying under In thens to the stored without tion 1.48-1(e) of the regulations vestment in "section 38 property.” The in that Revenue Ruling could be reand do not qualify as "section 38 determination of what property quali- moved and replaced without major property." fies as "section 38 property” is made alterations to the structure. in accordance with the rules provided in the instant case, the enclosures Rev. Rul. 73-281 in section 48 of the Code. are neither essentially items of equipAdvice has been requested whether Section 48(a)(1) of the Code pro- ment nor so closely related to the the electrical substation enclosures vides, in pertinent part, that the term vides, in pertinent part, that the term property they house that they clearly described below qualify as "section "section 38 property” means tangible can be expected to be replaced when 38 property" for investment credit personal property, or other tangible the property they initially house is repurposes. property (not including a building and placed. Instead, the enclosures are The taxpayer, an electric utility its structural components) but only structures so constructed that they if such property is used as an integral resemble, depending on the location, company, constructs structures at various substation locations to enclose its part of specific activities including the either commercial buildings or resisubstation equipment. The enclosures furnishing of electrical energy. dences in the neighborhood. Notwith The term “building” is defined genare required by local zoning authori standing the fact that the enclosures erally and in pertinent part in section ties to be constructed in such a man have certain design features necessi1.48-1(e) of the Income Tax Regula- tated by the business activity of the ner that they do not substantially impair or prove detrimental to neigh tions to include any structure or edifice taxpayer, the enclosures are struc enclosing space within its walls the tures, enclosing space within their boring properties. In “Commercial purpose of which is, for example, to walls, that provide the ordinary funcZones” the enclosures are constructed provide working, office, parking, dis- tions of a building. having an exterior appearance similar play, or sales space. The term includes architecturally to commercial buildings Accordingly, in the present case the structures such as apartment houses, in the area. In “Residential Zones” taxpayer's electrical substation enclofactory and office buildings, warethe enclosures are designed to blend sures are "buildings," within the in with the surrounding residences in houses, barns, garages, railway or bus definition of that term in section stations, and stores. compliance with local zoning laws. 1.48-1(e) of the regulations and, This section of the regulations also Some similarly constructed “trans therefore, do not qualify as “section provides, in part, that the term former" enclosures built in various 38 property" for investment credit “building” does not include (i) a residential areas by the taxpayer have purposes. structure which is essentially an item been sold to a builder who has con of machinery or equipment, or (ii) a verted them into residences. structure which houses property used 26 CFR 1.48-1: Definition of section 38 However, the enclosures contain as an integral part of an activity property. certain features that differ from those specified in section 48(a)(1)(B)(i) Investment credit; aircraft; in residences in the surrounding neigh of the Code if the use of the structure leased to foreign carrier; "some deborhood. The floors are reinforced is so closely related to the use of such gree of frequency" test. An aircraft concrete thick enough to support the property that the structure clearly can leased to a foreign commercial airsubstation equipment. In addition, the be expected to be replaced when the line that registered the aircraft with substation enclosures do not contain property it initially houses is replaced. the Federal Aviation Agency and the usual interior walls, hallways, etc., Rev. Rul. 72-398, 1972-2 C.B. 9, scheduled it to operate to and from found in residential housing. Further holds, in part, that a concrete block the U.S. on a regular basis so that more, the enclosures contain remov structure with one door and no win- it would return to the U.S. approxiable panels and over-sized doors to dows that houses automated relay and mately once in every two weeks facilitate the removal and replacement booster equipment and automated satisfied the "some degree of freof equipment without the contempora weather scanner and broadcaster quency" requirement contained in neous replacement of the enclosures equipment does not qualify for the section 1.48-1(g)(2)(i) of the reguthemselves. investment credit. Under the facts of lations and qualified as "section 38 The taxpayer builds other substa that case, personnel did not work property." tions without enclosures in areas in within the structure other than to which the zoning laws do not require make minor repairs to equipment and Rev. Rul. 73-367 the construction of such enclosures. there was little space within the struc- Advice has been requested whether, Section 38 of the Internal Revenue ture other than space for the equip under the circumstances described beCode of 1954 allows a credit against ment itself. However, the equipment low, an aircraft used predominantly Federal income tax for qualified in contained in the structure described outside of the United States qualified |