products qualifies for the investment credit; Revenue Ruling 68-132 modified and Revenue Rulings 67220, 68-122, 68-282 revoked. Rev. Rul. 71-359 Advice has been requested whether, under the circumstances described below, certain structures used by a taxpayer for the storage of peanuts qualify as "section 38 property" for investment credit purposes. The structures in question are onestory, clear-span, rectangular shaped, aluminum-clad, steel-framed structures. They have relatively low side walls and unusually high-pitched Atype roofs. The structures have reinforced concrete foundations and floors. Ingress and egress are provided through several aluminum-clad doors. The unusually high-pitched roof was designed for the storage of peanuts in bulk; that is, the pitch conforms to the slope of a free standing pile of peanuts. Ventilation is provided at the peak of the roof. A conveyor belt at the top of the peak, from one end of the structure to the other, is used to load the peanuts into the structure. The peanuts are allowed to drop in a free fall from the conveyor belt. The taxpayer buys raw peanuts from growers and resells them to various manufacturers who make consumer products. After harvest by the farmer (grower) the peanuts are processed by the taxpayer through an initial series of precleaning operations performed on a fee basis. These operations include removal of dirt, trash, and other foreign materials; loading and identification; drying, and sampling, grading, and inspection. After these operations the farmer is paid for his peanuts and they become inventory of the taxpayer. The peanuts are then transferred to the storage structures of the taxpayer to await further processing by the taxpayer at his main plant. The further processing includes cleaning, shelling, grading, and bagging. The structures under consideration were constructed and placed in service after December 31, 1961, and prior to April 18, 1969, and are depreciable property with a useful life of four 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 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, in pertinent part, that the term "section 38 property" means tangible personal property, or other tangible property (not including a building and its structural components). In order to qualify as "section 38 property," the property must also be depreciable property and have a useful life of four years or more. Section 1.48-1 (d) (1) of the Income Tax Regulations provides in part that in addition to "tangible personal property," any other tangible property (but not including a building or its structural components) which constitutes a research or a storage facility, used in connection with any of the activities specified therein, may qualify as "section 38 property." Included within the activities specified is that of production which, under section 1.48-1(d)(2) of the regulations, includes cultivation of the soil and other farming activities. Section 1.48-1(d) (5) of the regulations, in pertinent part, provides that a storage facility even though not used as an integral part of the specified activities may qualify as "section 38 property" if it is "used in connection with" such activities. The taxpayerowner of the facility need not be engaged in the activity. In Schuyler Grain Co., Inc. v. Commissioner, 50 T.C. 265 (1968), affirmed, 411 F. 2d 649 (7th Cir. 1969), the United States Tax Court held, under facts similar to those in the instant case, that aerating, drying, and blending of grain were manufacturing and production activities, that the taxpayer's grain storage facilities were "used in connection with" those activities, and that the taxpayer was entitled to the investment tax credit on its storage facilities. The United States Court of Appeals for the Seventh Circuit agreed with the Tax Court that aerating, drying, and blending of grain were production activities but did not agree that the same activities constituted manufacturing. The appellate court concluded "that the storage facilities in question were used in connection with *** production *** as that word is used in section 48." The holding of the Court of Appeals in Schuyler Grain Co., Inc., supra, has been followed in other cases, most recently in United States v. Loami Grain Co., Inc., 318 F. Supp. 349 (S.D. Ill. 1969); Sherley-Anderson-Rhea Elevator, Inc. v. United States, 315 F. Supp. 1055 (N.D. Tex. 1970); and F. P. Wood and Son of Elizabeth City, Inc. v. United States, 314 F. Supp. 1205 (E.D. N.C. 1970). Consequently, the Service will no longer litigate the issue presented in the cited cases. See Schuy ler Grain Co., Inc., supra; acquiscence, page 6. Accordingly, the structures described above which the taxpayer uses for storage of raw peanuts in the course of its business activities qualify as "section 38 property" for purposes of the investment credit. Revenue Ruling 67-220, C.B. 1967-2, 46, Revenue Ruling 68-122, C.B. 1968-1, 10, and Revenue Ruling 68-282, C.B. 1968-1, 25, are hereby revoked. Revenue Ruling 67-220 held that grain storage facilities used and owned by a taxpayer, not a farmer, who bought, stored, and sold grain for his own account did not qualify for the investment credit because they were not used in connection with manufacturing, production, or extraction activities. Revenue Ruling 68-122 held that grain storage facilities used and owned by a taxpayer, not a farmer, were "other tangible property" and qualified as "section 38 property" if the preponderant use of the facilities was for storing grain for farmers on a fee basis. Revenue Ruling 68-282 held that storage facilities that were owned and used by a taxpayer in the course of its business of buying and selling peanuts did not qualify as "section 38 property" based on the taxpayer's activities of cleaning, drying, grading, sizing, bagging, and shelling of peanuts not being an integral part of "manufacturing or production" since the taxpayer stored peanuts solely on its own behalf. Revenue Ruling 68-132, C.B. 1968-1, 14, which holds that a potato storage facility leased to farmers for bulk storage of potatoes was used in connection with production and qualifies as "section 38 property" since farmers themselves store potatoes in the leased space is hereby modified to delete therefrom the portion of the last sentence of the Revenue Ruling which states "in that farmers themselves store potatoes in the leased space" thus eliminating any suggestion that the facility qualified as "section 38 property" only because farmers themselves were the actual parties who stored their potatoes in a subleased portion of the facility and continued to own the potatoes during storage. 26 CFR 1.48-1: Definition of section 38 property. Giant amusement slides do not qualify as "section 38 property" for investment credit purposes. Rev. Rul. 71-377 Advice has been requested whether giant amusement slides are "section 38 property" for investment credit purposes. The taxpayer owns and operates giant amusement slides. The slides are constructed on a steel framework erected at the site and supported by steel poles either bolted to or embedded in concrete foundations. The slides are not enclosed and no housing is involved. The giant slides were constructed and placed in service after December 31, 1961, and prior to April 18, 1969, and are depreciable property having a useful life of four 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, 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 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 four years or more. Section 1.48-1 (c) of the Income Tax Regulations provides, in part, that the term "tangible personal property" means any tangible property except land and improvements thereto, such as buildings or other inherently per manent structures including their structural components. It further provides that local law shall not be controlling for purposes of determining whether property is "tangible" or "personal." Section 1.48-1(d) (1) of the regulations provides, in general, that in addition to tangible personal property, any other tangible property (but not including a building and its structural components) used as an ir.tegral part of manufacturing, production, or extraction, or as an integral part of furnishing transportation, communications, electrical energy, gas, water, or sewage disposal services by a person engaged in the trade or business of furnishing any such services, or that constitutes a research or storage facility used in connection with any of the foregoing activities, may qualify as "section 38 property.' Section 1.48-1 (d) (4) of the regulations, in part, defines property used as an "integral part" of one of the specified activities as property used directly in the activity and essential to the completeness of the activity. The property in question is not "tangible personal property" under section 1.48-1(c) of the regulations because, although capable of being moved, it is an inherently permanent type structure. On the other hand while the property is "other tangible property" it is not used as an integral part of any of the specified activities in section 1.48-1(d)(1) of the regulations under which "other tangible property" would qualify as "section 38 property." Accordingly, it is held in the instant case that the giant amusement slides do not qualify as "section 38 property" for investment credit purposes. 26 CFR 1.48-1: Definitions of section 38 property. (Also Section 38, 1.38–1.) Certain machines placed by an owner manufacturer with taxexempt organizations and governmental units for a monthly charge plus an agreed amount for each unit produced do not qualify as section 38 property; Revenue Ruling 68-109 distinguished. Rev. Rul. 71-397 Advice has been requested whether, under the circumstances described below, certain machines used by certain tax-exempt organizations and/or governmental units qualify as section. 38 property for investment credit purposes. The taxpayer, a machinery manufacturer, contracted with various departments, agencies, or instrumentalities of the United States and tax exempt organizations (other than a cooperative described in section 521 of the Internal Revenue Code of 1954) to place some of its machines with the governmental units and organizations for their use. The machines are not used by the taxexempt organizations predominantly in an unrelated trade or business the in come of which is subject to tax under section 511 of the Code. The agreements provide that the users pay a monthly charge for each machine, plus an agreed amount for each unit produced by the machine. The agreements also provide that the users will install adequate electric wiring for proper operation of the machines; make a key operator available for training in the operation of the machines; refrain from altering the machines or moving them without the consent of the manufacturer; and pay for servicing the machines outside regular service hours and for repairs necessitated by the willful acts of the users. The agreements can be canceled by the users upon 15 days notice to the manufacturer. Under the agreements, the manufacturer can supply either new or reconditioned machines at its sole option. However, the user of the machines can specify the model desired. The machines remain the property of the manufacturer. The manufacturer agrees to train the user's personnel to operate the machines; service the machines during regular service hours; and assume all responsibility for loss or damage to the machines. The specific questions presented are (1) whether the machines qualify as section 38 property under the rationale of Revenue Ruling 68-109, C.B. 1968-1, 10, or (2) in the alternative, whether the machines may be considered as being leased on a casual or short-term basis, thus qualifying as section 38 property within the exception stated in section 1.48-1 (j) and section 1.48-1(k) of the Income Tax Regulations. Section 48 (a) (4) and section 48 (a) (5) of the Code provide, in pertinent parts, that property used by an organization (other than a cooperative described in section 521 of the Code) which is exempt from Federal income tax, unless such property is used predominantly in an unrelated trade or business the income of which is subject to tax under section 511 of the Code, or by a governmental unit, shall not be treated as section 38 property. Section 1.48-1 (j) and section 1.48–1 (k) of the regulations provide, respectively, in pertinent parts, that the term "property used by an organization” and "property used by the United States, etc.," includes property leased to the organization or to a department, agency, or instrumentality of the United States, or any State or political subdivision thereof, or of any international organization. Thus, for example, a data processing or copying machine which is leased to an organization exempt from tax or to any governmental unit will be considered as property used by such governmental unit. Property leased by another person to an exempt organization, or a governmental unit, is not section 38 property to the lessor and the lessor may not elect under section 1.48-4 of the regulations to treat the lessee of such property as having purchased such property for purposes of the credit allowed by section 38 of the Code. These paragraphs of the regulations do not apply to property leased on a casual or short-term basis to any such organization or governmental unit. In the instant case, the manufacturer gives up possession and use of the machines on a month to month term while retaining title and all other incidents of ownership. The placing of the machines with the user for payment of a monthly charge plus an amount for each unit produced enables the user to provide services for himself. Hence the agreement under which the machines are placed with the user is a lease. The fact that the lessee may terminate the lease on 15 days notice does not raise the inference that the lease is a short term or casual one within the exception set forth in the regulations. Rather, the fact that the lessee will install adequate wiring for the proper operation of the machines and will have employees trained to operate them raises the opposite inference. Revenue Ruling 68–109, relating to a contract to provide communication services, is distinguishable. In that case, the placing of communication equipment with the purchaser of communication services is inherent in the sale of such services for which the parties contracted. Accordingly, it is held that the machines in the instant case do not qualify as section 38 property for investment credit purposes. 26 CFR 1.48-1: Definition of section 38 property. Refrigerator and freezer structures used in the final processing and storage of milk, milk products, and ice cream qualify as "section 38 property" for investment credit purposes. Rev. Rul. 71-489 Advice has been requested whether certain refrigeration structures in which milk, ice cream, and other milk products are cooled qualify as "section 38 property" under the Internal Revenue Code of 1954 for investment credit purposes. A taxpayer, engaged in the processing and distribution of milk, ice cream, and other milk products at several locations, has two types of refrigeration structures that are used in its business. The first type is used to freeze semiliquid ice cream into solid products during the final stage of the processing and retain the products at a temperature below zero degrees Fahrenheit. The second type is used to lower the temperature of milk and other milk products to approximately 35 degrees Fahrenheit during the final stage of the processing and retain them at this temperature until they are shipped. The refrigeration structures were constructed and placed in service by the taxpayer after December 31, 1961, and prior to April 18, 1969. Each of these refrigeration structures is subject to depreciation and has a useful life of four years or more. One refrigeration structure is a permanent type and another is portable. The term "portable" does not mean the structure can be moved, completely constructed, to another location but is used to distinguish between structures permanently emplaced and those which are designed to be disassembled and moved. The portable refrigeration structure is constructed as a separate unit but is completely contained within a building of the taxpayer's ice cream processing plant. The permanent refrigeration structure is installed adjacent to the taxpayer's milk processing plant but is separate from it. Both types of refrigeration structures are especially designed to maintain the temperatures necessary for the final processing of the products, and to prevent spoilage. The portable refrigeration structure for ice cream has styrofoam insulation paneling on the walls, ceiling, and floor. The ice cream is moved by overhead conveyors from the processing plant into the refrigeration structure for rapid freezing. Because of the extremely low temperatures maintained within the structure, stacking and unstacking are the only work activities that take place inside. The permanent structure used for milk and other milk products has styrofoam paneling in the walls and ceiling and the floor is concrete. This structure has conveyors built into the floor for the purpose of moving the milk and other milk products into the structure to reduce their temperature as part of their processing. The work activity inside this structure is also limited to stacking and unstacking. The insulation in the "portable" refrigeration structure is contained in prefabricated panels that are installed on a steel framework to form the structure within the processing plant. The insulation in the permanent refrigeration structure is applied to the inside of a structure having concrete block walls, an insulated suspended ceiling, and an uninsulated concrete floor. The conveying of the milk, ice cream, and milk products into either type of refrigeration structure and the cooling therein is a continuation of the manufacturing operation performed in the processing plants. The cooling of the milk and milk products, and the freez ing of the ice cream, are the concluding processes. After being cooled to the desired temperatures, the milk, milk products, and ice cream remain in the refrigeration structures until shipped to customers. Section 38 of the Internal Revenue Code of 1954 allows a credit against Federal income tax for qualified investment in "section 38 property." Section 48(a) (1) of the Code includes other tangible property (not including a building and its structural components) as section 38 property. In order to qualify as "section 38 property," the property must also be depreciable and have a useful life of four years or more. 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, to provide shelter or housing, or to provide working, office, parking, display, or sales space. The term includes, for example, structures such as apartment houses, factory and office buildings, warehouses, garages, and other mentioned types of structures. However, such term does not include a structure which is essentially an item of machinery or equipment. The structures in the instant case provide the final processing of the milk, milk products, and ice cream and also low temperature spoilage prevention. They are in effect large refrigeratorfreezers that are essentially items of machinery or equipment as referred to in section 1.48-1(e) (1) of the regulations. Accordingly, the structures in this case qualify as "section 38 property" for investment credit purposes. 26 CFR 1.48-1: Definition of section 38 property. Roadways within a manufacturing complex used by trucks transporting raw materials, supplies, and finished and semi-finished products qualify as "section 38 property"; those used solely for employee and visitor vehicle traffic do not qualify. Rev. Rul. 71-555 Advice has been requested whether certain roadways qualify as "section 38 property" for investment credit purposes under the circumstances described below. A taxpayer operates a manufacturing complex requiring roadways for both automotive and truck traffic. Certain roadways or portions thereof are devoted solely to truck traffic, some roadways are used solely for employee and visitor vehicles, and other roadways are used regularly by both trucks and employee and visitor vehicles. The taxpayer's manufacturing complex also has roadways within it which provide access to areas surrounding the plant or connect hard surface storage pads and outlying buildings with the main plant. The truck traffic on roadways within the manufacturing complex is necessary for the purpose of transporting raw materials, supplies, and finished and semi-finished products. The employee and visitor vehicle traffic on roadways within the complex is for convenience of individual transportation. Generally, the roadways carrying truck traffic are constructed of reinforced concrete, often more than eight inches thick. All of the roadways are generally equipped with a number of appurtenances, such as marking devices, guardrails and lighting. All of these roadways are depreciable property having useful lives of four years or more and were constructed and placed in service after December 31, 1961, and prior to April 18, 1969. 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 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, in pertinent 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 property is used as an integral part of certain specified activities (including manufacturing and production). In order to qualify as "section 38 property," it must also be depreciable property and have a useful life of four years or more. Section 1.48-1 (d) (4) of the Income Tax Regulations provides, in pertinent part, that property is used as an integral part of one of the specified activities, including manufacturing and production, if it is used directly in the activity and is essential to the completeness of the activity. The roadways that are devoted solely to truck traffic and those used regularly by trucks in transporting raw materials, supplies, and finished and semi-finished products, are used directly in, and are essential to, the completeness of the taxpayer's manufacturing activity. Accordingly, such roadways qualify as "section 38 property" for investment credit purposes. However, the roadways that provide solely for employee and visitor vehicle traffic are not an integral part of the taxpayer's manufacturing activity. Therefore, these roadways do not qualify as "section 38 property" for investment credit purposes. Section 49.-Termination of Credit 26 CFR 1.49: Statutory provisions; termination of credit. (Also Sections 46, 47; 1.46, 1.47.) TITLE 26-INTERNAL REVENUE.— 'The publication of this Treasury Decision in 36 F.R. 11190, dated June 10, 1971, contains (1) instructions for modifying the notice of proposed rulemaking published in 35 F.R. 18120, dated November 27, 1970, and (2) the full context of the regulations with such modifications. As here published, the Treasury Decision reflects the full context of such regulations, with modifications. The individual instructions have been omitted. Termination of investment credit INTERNAL REVENUE, To Officers and Employees of the Internal Revenue Service and Others Concerned: On November 26, 1970, notice of proposed rule making with respect to the amendment of the Income Tax Regulations (26 CFR Part 1) to conform the regulations to section 703 of the Tax Reform Act of 1969 (83 Stat. 660) [P.L. 91-172, C.B. 1969-3, 10], relating to termination of the investment credit, was published in the Federal Register (35 F.R. 18120). After consideration of all such relevant matter as was presented by interested persons regarding the rules proposed, the following amendments are adopted: PARAGRAPH 1. Section 1.46 is amended by adding new paragraphs (5) and (6) to section 46(b) and by revising the historical note. These revised and added provisions read as follows: § 1.46 Statutory provisions; amount of credit. Sec. 46. Amount of credit. * * * (b) Carryback and carryover of unused credits. *** (5) Taxable years beginning after December 31, 1968, and ending after April 18, 1969. The amount which may be added under this subsection for any taxable year beginning after December 31, 1968, and ending after April 18, 1969, shall not exceed 20 percent of the higher of (A) The aggregate of the investment credit carrybacks and investment credit carryovers to the taxable year, or (B) The highest amount computed under subparagraph (A) for any preceding taxable year which began after December 31, 1968, and ended after April 18, 1969. (6) Additional 3-year carryover period in certain cases. Any portion of an investment credit carryback or carryover to any taxable year beginning after December 31, 1968, and ending after April 18, 1969, which— (A) May be added under this subsection under the limitation provided by paragraph (2), and (B) May not be added under the limitation provided by paragraph (5), shall be an investment credit carryover to each of the 3 taxable years following the last taxable year for which such portion may be added under paragraph (1), and shall (subject to the provisions of paragraphs (1), (2), and (5)) be added to the amount allowable as a credit by section 38 for such years. [Sec. 46 as added by sec. 2(b), Rev. Act 1962 (76 Stat. 963) [P.L. 87-834, C.B. 1962-3, 111]; as amended by sec. 201 (d) (4), Rev. Act 1964 (78 Stat. 32) [P.L. 88272, C.B. 1964-1 (Part 2), 6]; sec. 3, Act of Nov. 8, 1966 (Pub. Law 89-800, 80 Stat. 1514) [C.B. 1966-2, 649]; sec. 2(a), Act of Dec. 27, 1967 (Pub. Law 90-225, 81 Stat. 731) [C.B. 1968-1, 640]; sec. 703 (b), Tax Reform Act 1969 (83 Stat. 666 [P.L. 91-172, C.B. 1969-3, 10]] PAR. 2. Section 1.46-2 is amended by revising subparagraphs (1) and (2) of, and adding a new subparagraph (5) to, paragraph (a), by revising paragraph (b), and by adding new examples (3) and (4) to paragraph (g). These revised and added provisions read as follows: § 1.46-2 Carryback and carryover of unused credit. (a) Allowance of unused credit as carryback or carryover (1) In general. Section 46(b)(1) provides for carrybacks and carryovers of any unused credit. An unused credit is the excess of the credit earned for the taxable year (as defined in paragraph (a) of § 1.46-1) over the limitation based on amount of tax for such taxable year (as determined under paragraph (b) of § 1.46-1). Subject to the limitations contained in paragraph (b) of this section, an unused credit shall be added to the amount allowable as a credit urder section 38 for the years to which the unused credit can be carried. The year with respect to which an unused credit arises shall be referred to in this section as the "unused credit year". |