CREDITS DENIED; INSTALLATIONS WERE STRUCTURAL COMPONENTS, NOT TANGIBLE PROPERTY.

                       FILED: November 4, 1996

[1] This case comes before the court for decision following a five day trial. In its complaint, the plaintiff, Boddie-Noell Enterprises, Inc. (Boddie-Noell), stated that it seeks a refund of federal taxes paid for the taxable years 1978 and 1979, pursuant to 28 U.S.C. section 1491 (1988) and the investment tax credit provisions in the Internal Revenue Code (I.R.C.), ¹ "particularly sections 36 ² and 46-48. . . ."

[2] The undisputed basic facts of the case follow, although additional factual findings of the court on relevant details concerning individual restaurant units will be addressed below during the DISCUSSION section of this opinion. Boddie-Noell is a corporation with its principal place of business in Rocky Mount, North Carolina. Boddie-Noell filed its federal income tax returns on the basis of a fiscal year ending September 30 for the years 1978 and 1979. During the fiscal years ending September 30, 1978 (FYE 1978) and September 30, 1979 (FYE 1979), the two years at issue in the instant case, plaintiff owned and operated approximately two-hundred and forty (240) Hardee's restaurants in Virginia and North Carolina, pursuant to franchise agreements with Hardee's Food Systems, Inc. During the years at issue, Boddie-Noell constructed a number of new restaurant units and remodeled others.

[3] Plaintiff filed federal income tax returns for FYE 1978 in June 1979, and for FYE 1979 in June 1980. On its returns, plaintiff claimed investment tax credits for the cost of a variety of assets, including items it alleges were constructed or installed at its restaurants. After an audit, by letter dated April 20, 1982, the Internal Revenue Service (IRS) proposed the disallowance of investment tax credits for some of the assets plaintiff claimed at its restaurants. In September, 1982, plaintiff filed a formal "Protest" to dispute the IRS audit determinations, including those which disallowed investment tax credit claims. The IRS denied Boddie- Noel's [sic] protest. Plaintiff, thereafter, paid all of the assessed disputed tax and filed timely claims for refund for FYE 1978 and FYE 1979 with the IRS in August 1986.

[4] In its claim for refund for FYE 1978, plaintiff sought a refund of $58,235.68, based on $582,356.75 in claimed investment tax credit eligible expenditures at its restaurants for that year. In its claim for refund for FYE 1979, plaintiff sought a refund of $60,547.15, based on $605,471.54 in claimed investment tax credit eligible expenditures at its restaurants for that year. The IRS disallowed plaintiff's claims for refund for FYE 1978 and FYE 1979 by letters dated October 31, 1986, and October 8, 1986, respectively. Thereafter, plaintiff filed a timely complaint in this court on October 4, 1988.

[5] Before the court are claims for investment tax credits for FYE 1978 at the following nine, then newly constructed, restaurant units:

     Gastonia -- Unit 1051

[6] Furthermore, plaintiff advances claims for investment tax credits for FYE 1978 at the following 14 remodeled restaurant units:

     Kinston -- Unit 1031

[7] For FYE 1979, before the court are claims for investment tax credits at the following seven newly constructed restaurant units:

     Red Springs -- Unit 1571

     Fayetteville -- Unit 1461

[8] The amounts claimed by plaintiff for investment tax credits in the above properties were for installations including interior marlite paneling, equipment, carousel or track window units at the drive-thru area, a mirror, reverse mansard roofs (including orange porcelain panels), and for a portion of its HVAC, electrical, plumbing, and suspended ceiling systems. The amounts claimed were derived in three ways: (1) from determinations made by the plaintiff of the percentage of eligible property within electrical, plumbing, HVAC and ceiling tile categories; (2) from studies performed by plaintiff's expert in 1990 on two newly constructed units and five remodeled units, estimating the costs incurred during the years at issue of specific assets based on available documentation; and (3) from plaintiff's extrapolation of the results of its expert's studies to the remaining unstudied units.

[9] According to the joint stipulations, in addition to the above claims, plaintiff asserts specific investment tax credit claims for "equipment" expenditures, as follows:

                                FYE 78

           UNIT                   ITEM                AMOUNT

[11] The parties further stipulated that the following new units were placed in service in FYE 1978: ³

     Gastonia -- Unit 1051

     Lexington -- Unit 1090

     Red Springs -- Unit 1571

     Fayetteville -- Unit 1461

DISCUSSION

VARIANCE

[14] It has long been an established principle of federal law that "courts which are created by written law, and whose jurisdiction is defined by written law, cannot transcend that jurisdiction." Ex Parte Bollman, 8 U.S. (4 Cranch) 75, 93 (1807) (Marshall, C.J.); see also UNR Indus., Inc. v. United States, 962 F.2d 1013, 1025 (Fed. Cir. 1992), aff'd sub nom., Keene Corp. v. United States, 508 U.S. 200 (1993). Thus, "[c]ourts created by statute can have no jurisdiction but such as the statute confers." Sheldon v. Sill, 49 U.S. (8 How.) 441, 449 (1849). The United States Supreme Court reiterated this cardinal principle, when it referred to: "[t]he age- old rule that a court may not in any case, even in the interest of justice, extend its jurisdiction where none exists. . . ." Cristianson v. Colt Indus. Operating Corp., 486 U.S. 800, 818 (1988) (citing Sheldon v. Sill, 49 U.S. (8 How.) 441, 449 (1849); see also Firestone Tire & Rubber Co. v. Risjord, 449 U.S. 368, 379-80 (1981)) (vacating the judgment of the Court of Appeals for the Federal Circuit because of a defect in circuit court jurisdiction).

[15] The jurisdiction of this federal court, like any other, is created by statute and, therefore, is subject to the jurisdictional limitations and conditions included in such statutory language. One such provision, defines in part the jurisdictional boundaries of this court. It provides in pertinent part:

SECTION 7422. CIVIL ACTIONS FOR REFUND

(a) No suit prior to filing claim for refund

No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Secretary, according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof.

I.R.C. section 7422(a) (1976). The regulations referenced in the above statutory provision, as promulgated by the Secretary, unequivocally require that a claim specify in detail both a factual and legal basis sufficient to apprise the IRS Commissioner of the exact nature of the request:

SECTION 301.6402-2 CLAIMS FOR CREDIT OR REFUND.

* * *

(b) Grounds set forth in claim. (1) No refund or credit will be allowed after the expiration of the statutory period of limitation applicable to the filing of a claim therefor except upon one or more of the grounds set forth in a claim filed before the expiration of such period. The claim must set forth in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof. The statement of the grounds and facts must be verified by a written declaration that it is made under the penalties of perjury. A claim which does not comply with this paragraph will not be considered for any purpose as a claim for refund or credit.

Treas. Reg. section 301.6402-2(b)(1) (1978 & 1979). Both I.R.C. section 7422 and Treas. Reg. section 301.6402-2 limit the government's waiver of sovereign immunity with respect to the tax refund jurisdiction of this court. Although formalistic, these conditions, upon which consent to suit is predicated, "'mark the conditions of the claimant's right.'" United States v. Felt & Tarrant Mfg., 283 U.S. 269, 273 (1931) (quoting Rock Island, A. & L. R.R. v. United States, 254 U.S. 141, 143 (1920)); Ottawa Silica Co. v. United States, 699 F.2d 1124, 1137 (Fed. Cir. 1983). Thus, to the extent the taxpayer fails to meet the conditions specified in either I.R.C. section 7422 or Treasury Reg. section 301.6402-2, the United States, as sovereign, remains immune from suit. United States v. Sherwood, 312 U.S. 584, 586 (1941) (citing United States v. Thompson, 98 U.S. 486 (1878); United States v. Lee, 106 U.S. 196 (1882); Kansas v. United States, 204 U.S. 331 (1907); Minnesota v. United States, 305 U.S. 382 (1939); Keifer & Keifer v. Reconstruction Finance Corp., 306 U.S. 381 (1939); United States v. Shaw, 309 U.S. 495 (1940)). Indeed, "[t]he filing of a claim or demand as a prerequisite to a suit to recover taxes paid is a familiar provision of the revenue laws, compliance with which may be insisted upon by the defendant, whether the collector or the United States." Felt & Tarrant, 283 U.S. at 272 (citing Tucker v. Alexander, 275 U.S. 228 (1927); Maryland Casualty Co. v. United States, 251 U.S. 342 (1920); Kings County Savings Institution v. Blair, 116 U.S. 200 (1886; Nichols v. United States, 74 U.S. (7 Wall.) 122 (1868)).

[16] The statute and the regulation, which require that a claim for refund set forth in detail each ground upon which a credit or a refund is based, including sufficient facts to apprise the IRS Commissioner of the exact basis of the claim, "preclude a taxpayer plaintiff from substantially varying at trial the factual bases of its arguments from those raised in the refund claims it presented to the IRS.)" Ottawa Silica Co. v. United States, 699 F.2d 1124, 1138 (Fed. Cir. 1983); Union Carbide Corp. v. United States, 222 Ct. Cl. 75, 90, 612 F.2d 558, 566 (1979); Cook v. United States, 220 Ct. Cl. 76, 86-97, 599 F.2d 400, 406 (1979); Southwestern Life Ins. Co. v. United States, 560 F.2d 627, 63l (5th Cir. 1977), cert. denied, 435 U.S. 995 (1978); Union Pacific R.R. v. United States, 182 Ct. Cl. 103, 108-09, 389 F.2d 437, 442 (1968); Davis v. United States, 21 Cl. Ct. 84, 86 (1990); Brookes v. United States, 20 Cl. Ct. 733, 738 (1990); North Carolina Citizens for Business & Indus. v. United States, 18 Cl. Ct. 106, 117 (1989). The rule prohibiting variance between a claim for refund and subsequent claims raised in litigation is designed both "'to prevent surprise and to give adequate notice to the [Internal Revenue) Service of the nature of the claim and the specific facts upon which it is predicated, thereby permitting an administrative investigation and determination.'" Ottawa Silica Co., 699 F.2d at 1138 (quoting Union Pacific R.R. v. United States, 182 Ct. Cl. at 109, 389 F.2d at 442 (1968)); Southwestern Life Ins. Co. v. United States, 560 F.2d 627, 631 (1977); see also Davis v. United States, 21 C1. Ct. at 86; Brookes v. United States, 20 Cl. Ct. at 738; North Carolina Citizens for Business & Indus. v. United States, 18 Cl. Ct. at 117. Furthermore, the mere availability of the facts to set forth a claim is not sufficient. The Service need not anticipate or deduce the taxpayer's arguments, for the plaintiff bears the burden of notifying the IRS of its intentions with respect to such facts. Commercial Solvents Corp. v. United States, 192 Ct. Cl. 339, 349-50 427 F.2d 749, 755, cert. denied, 400 U.S. 943 (1970); Brookes v. United States, 20 Cl. Ct. at 738.

[17] If, however, a claim for refund states only general grounds for relief, an item raised in litigation but not specifically adverted to in the refund claim might be considered sufficient, but only "if it is found that the taxpayer adequately alerted the Service to the fact that the item is a ground for refund, or that the Commissioner considered that unspecified ground in reaching his decision on the items for which a refund was requested." Union Pacific R.R. v. United States, 182 Ct. Cl. at 109, 389 F.2d at 442; Davis v. United States, 21 Cl. Ct. at 86; North Carolina Citizens for Business & Indus. v. United States, 18 Cl. Ct. at 117-18. Moreover, any communications by which the IRS might be provided "actual notice" of a refund claim, Davis, 2l Cl. Ct. at 86, must be in writing, for undocumented statements are insufficient, Furst v. United States, 230 Ct. Cl. 375, 380-81, 678 F.2d 147, 151-52 (1982); Disabled American Veterans v. United States, 227 Ct. Cl. 474, 476-77, 650 F.2d 1178, 1179-80 (1981); Pinckes v; United States, 7 Cl. Ct. 570, 571 (1985). The rationale for the requirement that a claim must be clearly articulated in writing was stated by the court in Wrightsman Petroleum Co. v. United States, 92 Ct. Cl. 217 (1940), cert. denied, 313 U.S. 578 (1941), as follows:

There is a good reason for the requirement that the claim be in writing. It is common knowledge that the personnel in governmental departments is constantly changing. Many times several different employees work on a single case. Some of them have before them only such information as is contained in the files. For this reason, and because of the shortness of the memory of man, and for many other reasons, only a written claim is sufficient to meet the requirements of the statute and the need it intended to fill. Ritter v. United States, 28 F.2d 265.

Id. at 238.

[18] Prior to trial in the above-captioned case, and in its post-trial briefing, defendant moved to dismiss the following claims:

      Finishes

[19] Defendant moved to dismiss plaintiff's claims for refund to the extent such claims were predicated on plaintiff's assertion that its claims for "Marlite -- Interior Paneling" are eligible for the investment tax credit. The record before this court reflects that the plaintiff asserted no claim for Marlite -- Interior paneling -- either in its 1978, or 1979, 1120X Amended U.S. Corporation Income Tax Returns or in the eighteen-page document attached to both. Indeed, there is no mention of Marlite -- Interior Paneling in plaintiff's 1978, or 1979, claims for refund. Furthermore, the trial transcript reflects no communications by which the plaintiff provided the IRS with actual or written notice sufficient to properly incorporate "Marlite -- Interior Paneling" in -- its refund claim. Plaintiff's claim for refund for Marlite -- Interior Paneling for 1978 and 1979, as filed in this court, therefore, is dismissed.

HVAC -- TOILET EXHAUST

[20] Defendant requested dismissal of this claim in its post- trial brief. In its post-trial brief, however, plaintiff noted that this claim was already conceded as barred by the doctrine of variance by plaintiff at trial. This claim, therefore, is dismissed by agreement of the parties.

HVAC -- KITCHEN EXHAUST -- INSTALL FANS

[21] Defendant moved to dismiss plaintiff's claims for refund to the extent such claims were based on plaintiff's claim that the item entitled "Kitchen Exhaust -- Install Fans" is eligible for the investment tax credit. The record before this court reflects that plaintiff asserted no claim for "Kitchen Exhaust -- Install Fans" either in its 1978, or 1979, 1120X Amended U.S. Corporation Income Tax Returns or in the eighteen-page document attached to both. Indeed, there is no mention of "Kitchen Exhaust -- Install Fans" in plaintiff's 1978 or 1979 claims for refund. Furthermore, although counsel for the plaintiff stated that kitchen exhaust should be considered as a component of the HVAC claim, ⁶ the trial transcript reflects no communications by which the plaintiff provided the IRS with the requisite actual or written notice sufficient to properly incorporate "Kitchen Exhaust -- Install Fans" in its refund claim. Plaintiff's claim for refund for this item for 1978 and 1979, as filed in this court, therefore, is dismissed.

ELECTRICAL -- VEHICULAR DETECTOR SYSTEM

[22] Defendant moved to dismiss plaintiff's claims for refund to the extent such claims were based on plaintiff's claim that the item entitled "Vehicular Detector System" is eligible for the investment tax credit. The record before this court reflects that plaintiff asserted no claim for the electrical wiring and installation of a vehicular detection system either in its 1978, or 1979, 1120X Amended U.S. Corporation Income Tax Returns, or in the eighteen-page document attached to both. Indeed, there is no mention of such a system in plaintiff's 1978 or 1979 claims for refund filed with the IRS. Furthermore, although this item was presented at trial, ⁷ the trial transcript and attached exhibits reflect no communications by which the plaintiff provided the IRS with the requisite actual or written notice sufficient to properly incorporate wiring and installation of a vehicular detector system in its refund claim. Plaintiff's claim for refund for this item for 1978 and 1979, as filed in this court, therefore, is dismissed.

ELECTRICAL -- PARKING LOT LIGHTING

[23] Defendant requested dismissal of this claim in its post- trial brief. In its post-trial brief, plaintiff notes that the claim for "Parking Lot Lighting" was already conceded by plaintiff at trial. It, therefore, is dismissed by agreement of the parties.

ELECTRICAL -- INTERIOR AND EXTERIOR SIGNS

[24] In its post-trial brief, defendant moved to dismiss plaintiff's claims for refund to the extent such claims were based on plaintiff's claim that the item entitled "Signs -- Interior and Exterior" was eligible for the investment tax credit. The record before this court, however, reflects that defendant withdrew its objection to this claim upon clarification that it was the intention of plaintiff to claim, not signs, but rather the wiring to signs. Indeed, government counsel stated in his closing argument:

          [MR. FRAHM]

               [MR. POWER]

ELECTRICAL DECORATIVE LIGHTING -- EXTERIOR

[26] Defendant moved to dismiss plaintiff's claims for refund to the extent that such claims were based on plaintiff's claim that the item entitled "Decorative Lighting -- Exterior" is eligible for the investment tax credit. The record before the court reflects, however, that plaintiff in its memoranda attached to its 1978, and 1979, 1120X Amended U.S. Corporation Income Tax Returns, references "decorative lights," one of the devices for which wiring and installation was the subject of a claim for refund. Further corroboration occurred during the testimony of plaintiff's witness, William Robert Jones, on direct examination:

               [MR. POWER]

ELECTRICAL -- EXIT LIGHTS

[27] Defendant requested dismissal of this claim in its post- trial brief. Plaintiff, in its post-trial brief, notes that the claim for "Exit Lights/Signs" was already conceded by plaintiff at trial. It, therefore, is dismissed by agreement of the parties.

ELECTRICAL -- SECURITY LIGHTS

[28] Defendant requested dismissal of this claim in its post- trial brief. Plaintiff, in its post-trial brief, notes that the claim for "Security Lights" was already conceded by plaintiff at trial. It, therefore, is dismissed by agreement of the parties.

ELECTRICAL -- EMERGENCY LIGHTS

[29] Defendant moved to dismiss plaintiff's claims for refund based on plaintiff's claim that the item entitled "Emergency Lights" is eligible for the investment tax credit. The record before this court reflects that plaintiff asserted no claim for the electrical wiring and installation of emergency lights or for wiring for such a purpose either in its 1978, or 1979, 1120X Amended U.S. Corporation Income Tax Returns, or in the eighteen-page document attached to both. Further, there is no mention of such a system in plaintiff's 1978 or 1979 claims for refund. Moreover, the trial transcript reflects uncertainty by the plaintiff as to whether such a claim was made in the refund claims or not. Indeed, counsel for the plaintiff, Mr. Powers, conceded that emergency lights were not included in the original claim:

          [MR. POWER]

               [MR. POWER]

               [MR. FRAHM]

               [MS. POWER]

          [MS. POWER]

PLUMBING -- HOT WATER HEATER

[33] Defendant in its post-trial brief stated that "[a]t the conclusion of trial, defendant conceded that variance did not apply to plaintiff's claims for hot water heaters, finding plaintiff's testimony on the matter convincing." The transcript bears this out:

     [MR. FRAHM]

LIABILITY

[35] In a tax refund case, there is a strong presumption of the correctness of the findings of the Commissioner of Internal Revenue. Lima Surgical Assocs. Inc. v. United States, 944 F.2d 885, 888 (Fed. Cir. 1991). The taxpayer not only has the burden of rebutting that presumption, but also of establishing entitlement to the specific amount of the deduction claimed. United States v. Janis, 428 U.S. 433, 440-441 (1976); Helvering v. Taylor, 293 U.S. 507, 514 (1935); Welch v. Helvering, 290 U.S. 111, 115 (1933); Danville Plywood Corp. v. United States, 899 F.2d 3, 7-8 (Fed. Cir. 1990); Barenholtz v. United States, 784 F.2d 375, 381 (Fed. Cir. 1986); Young & Rubicam, Inc. v. United States, 187 Ct. Cl. 635, 654-55, 410 F.2d 1233, 1244- 45 (1969); L.W. Hardy Co. v. United States, 1 Cl. Ct. 465, 470 (1982). In order to overcome the presumption, the taxpayer has the burden of presenting "substantial evidence as to the wrongfulness of the Commissioner's determination." KFOX, Inc. v. United States, 206 Ct. Cl. 143, 151-152, 510 F.2d 1365, 1369 (1975); Arrington v. United States, 34 Fed. Cl. 144, 147 (1995). The burden imposed on a plaintiff is both the burden of going forward and the burden of persuasion. A plaintiff first must come forward with enough evidence to support a finding contrary to the Commissioner's determination. Transamerica Corp. v. United States, 902 F.2d 1540, 1543 (Fed. Cir. 1990); Danville Plywood Corp. v. United States, 899 F.2d at 7-8; Arrington v. United States, 34 Fed. Cl. at 147. Even after satisfying the burden of going forward, a plaintiff must still carry the ultimate burden of proof. Transamerica Corp. v. United States, 902 F.2d at 1543; Danville Plywood Corp. v. United States, 899 F.2d at 8.

[36] In the above captioned case, plaintiff has cited sections of the Internal Revenue Code of 1954, as amended and in effect during FYE 1978 and 1979, which it argues provided a tax credit for investments for certain types of property. The pertinent provisions of I.R.C. section 48 define section 38 property ⁸ as follows:

     SECTION 48. DEFINITIONS; SPECIAL RULES

     The propriety of a deduction does not turn upon general

          Again, a Scott Paper analysis supports Plaintiff's claim

[40] In Illinois Cereal Mills, Inc. v. Commissioner, 789 F.2d 1234 (7th Cir. 1986), the Seventh Circuit adopted the "function" test established in Scott Paper and held that the test for a structural component should be whether the item relates "'to the operation and maintenance of a building.'" Illinois Cereal Mills, Inc., 789 F.2d at 1244 (citing Treas. Reg. section 1.48-1(e)(2)). The Fourth Circuit in A.C. Monk & Co. v. United States, however, adopted a different approach and set out another standard, "whether . . . [the item] can be reasonably adapted in the present building to more general uses," and concluded, "[i]f so, they are structural components of the building." Id. at 1066. The item, however, "need not be adaptable to all conceivable uses, but only flexible enough that it is not inextricably linked to the present, specific machinery." Id. at 1066.

[41] Subsequently, in Commissioner v. Illinois Cereal Mills, 479 U.S. 995 (1986), the Supreme Court denied certiorari. In a published dissent, Justice White stated that because there was a conflict on the issue of 28 U.S.C. section 38 credits between the United States Court of Appeals for the Seventh Circuit, in Commissioner v. Illinois Cereal Mills, and the United States Court of Appeals for the Fourth Circuit, in A.C. Monk & Co. v. United States, 686 F.2d 1058 (4th Cir. 1982), certiorari should be granted. In commenting on the conflicting decisions, Justice White stated:

     The Fourth Circuit in A.C. Monk & Co. v. United States, 686 F.2d

SUBSTANTIATION

[43] When claiming an alleged overpayment of taxes by virtue of disallowed investment tax credits, the plaintiff taxpayer bears the burden of establishing both the date the property was "placed in service" as well as "the amount of the credit claimed." Sartin v. United States, 5 Cl. Ct. 172, 179 (1984); see I.R.C. section 46(c)(1); Visser v. Commissioner, 65 T.C.M. (CCH) 1734, 1738 (1993). "It is not enough for him [the taxpayer] to demonstrate that the assessment of the tax for which refund is sought was erroneous in some respects." Janis v. United States, 428 U.S. at 440. A taxpayer's evidence must also be sufficient to show that the amount at issue in the refund action was improperly charged by the Commissioner. See Helvering v. Taylor, 293 U.S. at 514. Plaintiff must substantiate its claim with evidence sufficient to establish entitlement to the investment tax credit claims, including all evidence leading to a reasonably accurate valuation of the property during the tax years in question. See Sartin v. United States, 5 Cl. Ct. at 177; L.W. Hardy v. United States, 1 Cl. Ct. at 465-66, 471. The consequence of lack of evidence on a material element of the tax credit claimed is that the taxpayer's claim is to be rejected. Sartin v. United States, at 177 (citing Burnet v. Houston. 283 U.S. 223, 228 (1931)). ¹⁰

[44] Moreover, testimony based on documents which allegedly once existed, but which were subsequently destroyed, is insufficient to establish the plaintiff's claim. Liddy v. Commissioner Of Internal Revenue, 808 F.2d 312, 315, reh'g denied, 815 F.2d 1007 (4th Cir. 1986); see also Jupiter Corp. v. United States, 2 Cl. Ct. at 71. Similarly, summary appraisals based on non-contemporaneous records, or data reconstructed from accidentally lost or destroyed documents, are unpersuasive when the value of the property cannot be reliably ascertained. See Jupiter Corp. v. United States, 2 Cl. Ct. at 71. Nor can taxpayer's estimate[d] assumptions, based on guesses without supporting records, form the basis for acknowledgement of a plaintiff's claim. L.W. Hardy v. United States, 1 Cl. Ct. at 470-71.

[45] The methodology employed by plaintiff, in the instant case, for presenting and substantiating the costs of allegedly creditable section 38 property was, at best, unusual. On direct examination by plaintiff's counsel Mr. Power, the witness, William Robert Jones, Property and State Income Tax Manager for Boddie-Noell Enterprises, described the system by which plaintiff initially made its claim for investment tax credit:

               [MR. POWER]

[47] The percentage of creditable expenditures for the tax years in question in the instant case was also derived in part from responses obtained by selected contractors to questionnaires developed by plaintiff, none of which were in the possession of plaintiff:

               [MR. FRAHM]

               [MR. FRAHM]

               [MR. FRAHM]

[51] Defendant, in its post-trial brief, has raised several objections to the accuracy of the results of the above described methodology. First, defendant asserts that it is simply impossible for Mr. Hamilton, in 1990, to accurately reconstruct costs incurred by plaintiff in FYE 1978 and 1979. In support of this, on cross- examination, defendant elicited testimony from Mr. Hamilton that by 1990, none of the units was in the same condition as during the years at issue, and that Mr. Hamilton did not visit any of the studied units. Defendant elicited further testimony from Mr. Hamilton to the effect that Mr. Hamilton had worked primarily with Ms. Tracy Power, one of plaintiff's counsel, and that his only direct contact with Boddie-Noell was with Dennis Bost, who was not employed by plaintiff until six years after the construction or renovation of the units at issue. Thus, defendant contends that the study conducted by Mr. Hamilton was removed by both time and distance from the environment in which the restaurants were constructed.

[52] In addition, defendant contends that the cost of the vast majority of takeoffs was estimated utilizing the Means Estimating Book. Furthermore, Mr. Hamilton, in his testimony, acknowledged that the Means books he used for these studies frequently did not list a cost for the particular takeoff that he was attempting to estimate, requiring that he use an entry for a similar property item, and adjust the cost. This process added yet greater uncertainty to a methodology that was already based on estimates and extrapolation.

[53] Defendant's expert witness, Lawrence F. Gaffney, also testified credibly as to several weaknesses in plaintiff's study which raise doubts as to the sufficiency and accuracy of such results as a basis for substantiating plaintiff's claims. Mr. Gaffney first noted that the preparation of an accurate study so long after the completion of construction is simply impossible. For example, the bidding climate in North Carolina and Virginia during the construction period at the time could not have been taken into account using plaintiff's methodology. The state of the construction market at the time of the bidding for the units in question is an important element of price that simply was not contemplated in plaintiff's study and thus makes it less reliable as a basis for the substantiation of plaintiff's claims. ¹⁵ Furthermore, Mr. Gaffney testified as to his finding that the study conducted by Mr. Hamilton improperly allocated indirect costs to estimated takeoffs. For example Mr. Gaffney testified that general contractor labor, a significant cost item, constitutes work a general contractor is specifically obligated to perform, and is not properly attributable to other categories of expenses. Nevertheless, Mr. Gaffney testified that Mr. Hamilton's study improperly attributed excavation or other site work to HVAC, electrical, and other categories of allegedly creditable expenses.

[54] Defendant contends, and this court agrees, that the studies of the seven units and, thus, the extrapolation of these results to remaining units, are based on the questionable assumption that costs may be reconstructed twelve years after construction by reference to Means Estimating Books and documents that make no reference to the items of expenditure which plaintiff alleges were incurred and should be credited for section 38 credit. For this court to make an award based upon the methodology by which plaintiff seeks to substantiate its claims, and without books and records sufficient to allow calculation of the multiple deductions claimed, would constitute approbation of speculation, without forcing the plaintiff to rebut the presumption of correctness of the Commissioner's findings, and presents no basis on which this court could determine whether plaintiff was entitled to the credits claimed. As discussed above, the consequences of a lack of contemporaneous evidence on material elements of plaintiff's instant claims for tax credit is that the taxpayer's claims should be rejected. The evidence adduced by plaintiff, by means of the estimates generated by Mr. Hamilton's study, is far too unreliable. The results of the study appear to be based primarily on after the fact speculations by Mr. Hamilton and Mr. Jones.

SUSPENDED CEILINGS

[55] Plaintiff asserts that the suspended ceilings installed in the kitchen food processing and servicing areas of its restaurants are creditable section 38 property. However, based on the applicable regulations and case law, this court concludes otherwise. Treas. Reg. section 1.48-1(e)(2) explicitly states: "[t]he term 'structural components' includes such parts of a building as walls, partitions, floors, and ceilings. . ." Furthermore, this rule has been applied explicitly to exclude suspended ceilings from eligibility for section 38 credit. Texas Instruments Inc. v. Commissioner, 63 T.C.M. 3070, 3073-75 (1992); Metro National Corp. v. Commissioner, 52 T.C.M. 1440, 1447 (1987).

[56] In effect, the plaintiff's argument attempts to persuade the court to follow the test adopted in the Scott Paper Co. and related cases discussed above. The suspended ceiling was the topic of substantial trial testimony offered by Dennis Bost on behalf of the plaintiff. Mr. Bost, who was the Vice-President of Design and Construction of Boddie-Noell, stated:

               [MR. FRAHM]

EXTERIOR MANSARD-MARLITE ROOF PANELS

[58] The parties have agreed that the orange mansard panels clipped to the restaurant building are identity symbols designed to distinguish plaintiff's Hardee's restaurants. From this, plaintiff, however, has drawn the conclusion that the panels are not structural components of the restaurant building and are, therefore, creditable section 38 property. In support of this characterization, plaintiff contends that the panels are identical to false balconies, exterior ornamentation or other identity symbols which have no more than an incidental relationship to the operation or maintenance of the building. Based upon a review of the applicable regulations and the testimony at trial, however, this court disagrees. Treas. Reg. section 1.48-1(e)(1) explicitly states:

     The term "building" generally means any structure or edifice

ELECTRICAL AND PLUMBING

[60] There appears to be no factual dispute that the claimed electrical and plumbing items remaining before the court for adjudication are limited to those "connected directly to equipment" and "portions of its panel boards (circuit breaker boxes), circuit breakers electric wiring, conduit, junction boxes, and outlets that serve its equipment." The question, therefore, is whether the items claimed are non-structural components, and, furthermore, if not structural in character, whether the claimed items are creditable section 38 property. Plaintiff contends that all of the items subsumed under the these two categories are non-structural in character and, therefore, are properly characterized as tangible property subject to the tax credit provisions of section 38. The unambiguous language of the applicable statute and regulation requires this court to conclude otherwise. Treas. Reg. section 1.48- 1(e)(2) explicitly states:

          (2) The term "structural components" includes such parts of

HVAC

[62] Plaintiff claims that the portion of its heating ventilating and air conditioning (HVAC) system that serves the kitchen area ¹⁶ in its restaurants is eligible for the investment tax credit as section 38 property. In support, plaintiff argues that the HVAC systems, which otherwise would be considered structural components of a building, and, thus, not eligible for the tax credit, should be considered eligible under the sole justification exception in Treas. Reg. section 1.48-1(e)(2), which excludes such machinery from the definition of structural component if the sole justification for its installation is to assist in the operation of the taxpayer's equipment, they qualify as credit eligible.

[63] In Publix Supermarkets, Inc. v. United States, 26 Cl. Ct. 161 (1992), this court has previously addressed a claim for investment tax credits for installation of an HVAC system, pursuant to the applicable statutory and regulatory framework. In Publix, this court analyzed earlier cases, including Piggly Wiggly Southern, Inc. v. Commissioner, 84 T.C. 739, 750 (1985), aff'd, 803 F.2d 1572, 1574 (11th Cir. 1986); Fort Walton Square. Inc. v. Commissioner, 54 T.C. 653 (1970)); and Morrison Inc. v. Commissioner, 51 T.C.M. (CCH) 748 (1986), aff'd, 891 F.2d 857 (11th Cir. 1990). The Publix case dealt specifically with the issue of whether the "sole justification" for the installation of an HVAC system in plaintiff's food stores was to meet the temperature and humidity requirements of items of machinery, refrigerated food cases, located in the Publix stores. In reaching its decision, this court examined the scope of the regulations' exception to the general definition of "structural components," set forth in Treas. Reg. 1.48-1(e)(2), as follows:

     However, the term "structural components" does not include

               [MR. POWER]

               [MR. POWER]

               [MS. POWER]

[68] In contrast, defendant, on direct examination, presented the far more cogent testimony of Lawrence Gaffney. Mr. Gaffney, who appeared as an expert for the defendant, testified that the purpose of the HVAC systems in the instant case was to provide for comfort and temperature maintenance for the benefit of employees in the kitchen area:

               [MR. FRAHM]

DECORATIVE MIRROR FYE 1978

[70] Plaintiff also asserts an investment tax credit claim for FYE 1978 for a Decorative Mirror in the Mercury Blvd. -- Unit 2611 in the amount of $59.12. The parties have stipulated to plaintiff's possession of invoices to substantiate the cost of this item. The invoice is in the record and the item was identified in the memoranda attached to plaintiff's Amended United States Corporation Income Tax Return for FYE 1978. Although the IRS was provided actual notice regarding this claim, and the invoice is in the record, the plaintiff failed to introduce evidence at trial or to discuss the item in its post-trial brief in order to establish when the mirror was "placed in service." Therefore, the plaintiff has not met its burden of rebutting the prescription of correctness accorded to the Commissioner. Plaintiff's claim for refund with respect to its asserted investment tax credit for FYE 1978 for a Decorative Mirror at Mercury Boulevard -- Unit 2611 must be denied.

CAROUSEL WINDOW UNITS

[71] In addition, plaintiff claims entitlement to a refund for the 1979 tax year based upon expenditures for carousel units, which plaintiff contends constituted section 38 property eligible for the investment tax credit, and includes the following:

 FYE 79

               [MR. FRAHM]

CONCLUSION

[74] For the reasons discussed more fully above, this court finds that based on the plaintiff's failure to present sufficient documentary evidence and testimony during the trial, and after applying the relevant statutory, regulatory, and case law, the plaintiff has not proven that it is eligible for investment tax credits as claimed. Plaintiff also has failed to properly substantiate the amounts claimed. Consequently, the plaintiff's request for a tax refund is DENIED. Judgment is entered for the defendant.

[75] IT IS SO ORDERED.

                                   Marian Blank Horn

² Although plaintiff partially relies on I.R.C. section 36 in its complaint, the court notes that I.R.C. section 36 was repealed by Pub. L. No. 95-30, Title I, section 202(d)(3), 91 Stat. 133 (1977). The repeal was effective to taxable years beginning after December 31, 1976.

³ The parties further stipulated that although included in the initial claim, South Hill -- Unit 2401 was not placed in service in FYE 78 and, thus, was dropped from plaintiff's claim.

⁴ The parties agreed, however, by stipulation that due to insufficient documentation to establish whether the following remodeled unit was placed in service in FYE 78, the claim for remodeled unit Yadkin road -- Unit 1281 was dropped.

⁵ The parties further specified that the available documentation is insufficient to establish that the Tidewater -- Unit 2361 unit was placed in service in FYE 79. Therefore, this claim also was dropped by stipulation of the parties.

⁶ In her closing argument, one of plaintiff's counsel stated:

[MS. POWER]

As to the kitchen exhaust system, Defendant's own witness has testified that Plaintiff's heating ventilating and air conditioning systems contain exhaust as a part thereof.

Again, we believe it is clearly encompassed within the broad language of that section of the claim for a refund.

The court notes, however, that any concession by defendant during trial, either explicit or implied, does not relieve this court from addressing the variance issue. To the extent this question gives rise to a jurisdictional defect, this court must dismiss the claim regardless of any waiver by defendant.

⁷ One of plaintiff's counsels in his opening argument referred to the original tax return filed with the IRS and stated:

[MR. POWER]

That tax return was audited by IRS, and the portion of the ITC credit claims were held to be components of restaurant buildings by the IRS engineer, who will be a witness in this case on behalf of the Defendant.

That entire claim was rejected by the engineer at [sic] the original tax return, notwithstanding the fact the engineer found that certain assets were eligible for the credit, such as the drive-through windows, the french fry fans, the griddle fan, the exhaust fan, a hole in the roof for certain exhaust equipment, and wiring to vehicle detector systems, and to the speaker system, for the drive-through window, and the water line to the hood, and I don't know, several others he held would qualify for the credit.

On direct examination of George T. Hamilton, vehicular detector systems were addressed as follows:

[MR. HAMILTON]

Going back to the question and the blueprints, we have Asset 5322, 1141, and 1140 marked on the drawing.

What we find here going down on this specific page, we find Asset 1140 is the vehicular detector system which is the order station.

So that when a vehicle drives up, it sounds a little bell inside of the restaurant so that somebody can take an order.

Included within those costs, is to install only the drive up order station with pneumatic line, a three quarter inch conduit drive up, and a 20 amp single pull circuit breaker.

So what we have there, is that we have a cost for installing the pneumatic line, which is a detection system by the pad, that car drives over and sets the bell off on. We have a three quarter inch conduit, which is the conduit size that goes from the order station into the structure.

And you have a 20 amp single pull circuit breaker. That 20 amp single pull circuit breaker is shown further back in one of the electrical drawings. It provides the power specifically to the order station.

Although both the argument of plaintiff's counsel and the testimony of Mr. Hamilton address the design and operation of the system, they fail to indicate with any specificity how the vehicular detector system was part of plaintiff's monetary claim for refund filed with the IRS.

⁸ I.R.C. section 38 states:

SECTION 38. INVESTMENT IN CERTAIN DEPRECIABLE PROPERTY.

(a) GENERAL RULE

There shall be allowed, as a credit against the tax imposed by this chapter, the amount determined under subpart B of this part.

(b) REGULATIONS

The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section and subpart B.

I.R.C. section 38 (1976).

⁹ The court notes that the Internal Revenue Service subsequently announced on October 22, 1991, a Revised Action on Decision that, in appropriate circumstances, it would no longer challenge using the allocation approach. However, this occurred well after the 1978 and 1979 tax years at issue and the 1982 disallowance of plaintiff's claim in 1982.

¹⁰ In general, there should be some direct evidence from which reliable estimates of property value may be made; absent such, testimony based on this evidence is unpersuasive. In Sartin v. United States, 5 Cl. Ct. at 178, a general ledger, without cash receipts and disbursement journal, paid bill files or unpaid bill files to trace the monthly postings, and some check stubs were found insufficient when a taxpayer should have kept a daily record. In Rosenberg v. United States, 3 Cl. Ct. at 437, plaintiff's valuation of property based solely on his imperfect, personal recollection was found insufficient. In L.W. Hardy v. United States, 1 Cl. Ct. at 470-71, estimates based on what an accountant believed was reasonable and not based on supporting contemporaneous records were found unreliable.

¹¹ [MR. FRAHM]

Q You have them both. That's the cost documentation that Plaintiff is relying on in this case?

[MR. JONES]

A That's correct.

Q And you provided the documents within those Exhibits, 1013 and 1014, to Mr. Hamilton for the seven specific units he studied?

A That's correct.

Q He relied on those documents in his analysis?

A Yes, sir, he did.

Q Mr. Hamilton had no other cost documentation of Plaintiffs did he?

A No, sir, to my knowledge he did not.

Q He did not. When you apply the results of Mr. Hamilton's studies to unstudied units you used this same cost information in 1013 and 1014 didn't you?

A Yes, sir.

Q No other document, no other cost documentation?

A To my knowledge, no.

Q Let's talk about contents of Exhibits 1013 and 1014 a little bit. For each restaurant the documentation can be thought of as being in two parts. The first part being a handwritten sheet or sheets and the second part being some invoices or other substantiating or supporting documents. Is that correct?

A That's correct.

Q Is that accurate. And you contend, I believe, that the handwritten sheets set forth costs incurred based on other documents that are attached?

A Yes, sir, that's correct.

Q So anywhere there is a number on the handwritten sheet there should be support for it in the supporting documentation. Is that what you were saying?

A There are instances within the documentation that reference journal entries, that reference back to our general ledger entries that follow through to the depreciation schedules, that these specific invoices are not included.

Q Let me ask the question very precisely so that we are all clear on it. If there is a number in the handwritten sheet would one find support for that handwritten number, that number on the handwritten sheet in some form in the supporting documents attached?

A Not in the supporting documents attached. But, in the, if you say attached, not in this exhibit. But, they can be referenced back to the depreciation schedules.

Q Everyone of them?

A Maybe in summary. Maybe not specific line item journal entry invoices. They would not be -- but in summary the items for construction costs should be able to be referenced back to the depreciation schedules.

Q But not to the supporting document.

A When you say supporting documents --

Q The supporting documents in Exhibits 1013 and 1014.

A Not in every instance. They would not reference in journal entries or things of that nature. No, sir.

Q So there would be instances where if one were looking through Exhibits 1013 and 1014 for any particular restaurant where one would look at the handwritten sheet and find a number and then look at the supporting documents and not find support for that number?

A That's correct.

Q You would acknowledge that that happens?

A I would.

Q Would you acknowledge that that happens frequently?

A Yes, I would in the summary, yes.

¹² [MR. FRAHM]

Q And they were all prepared at about the same time, weren't they?

[MR. JONES]

A Yes, sir.

Q They were all prepared after the tax year was over but before the return for that year was filed?

A They were prepared before the return were filed.

Q They were not prepared as construction progressed in each particular unit then?

A No, they were not.

Q That seems to follow since they were prepared after the tax year had ended that they were not being prepared as the units were being constructed or immediately after the --

A Because all were placed in service prior to the year end.

¹³ [MR. FRAHM]

Q So the handwritten sheets didn't simply recite cost information that was found elsewhere but, instead it also expressed your point of view as to what was eligible for the investment tax credit?

[MR. JONES]

A That's correct.

Q So you were expressing your claim, if you will, in these handwritten sheets? You were advocating a particular claim in these handwritten sheets?

A Yes, sir.

¹⁴ [MR. FRAHM]

Q All right. Now as an accountant you are familiar with ledgers?

[MR. JONES]

A Yes, sir.

Q For an example a ledger would be prepared by a bookkeeper or an accountant in a generally contemporaneously manner as expense are incurred?

A That's correct.

Q And cost would simply be mechanically recorded as they come in? A bill would come in, it would be put into the ledger, correct?

A It depends on the particular type of bills that you are talking about. If you are talking about a restaurant expense bill related to the restaurant operation, that's correct. If you are talking about a construction bill that would be assembled in a construction and progress account which is not a fixed asset account.

Q But it would be recorded in some manner as the cost, as the bill came in?

A That's correct.

Q That would be done as a routine and regular manner?

A Yes, it would.

Q And that routine, regular manner is what makes ledgers and similar routine accounting records reliable?

A Yes.

Q They are just done on a routine, regular basis.

A That's correct.

Q But, in contrast, your handwritten sheets were simply prepared after the year ended and after construction had ended or pretty much at the same point of time?

A It was after the year end. That is correct. And all tax return schedules are not prepared on a go along basis and you accumulate the data you put them down --

Q I wasn't suggesting it was. I'm contrasting the handwritten sheets you prepared with a ledger that is prepared as cost generally are incurred and what you prepared with your handwritten sheets after costs were incurred. And that's correct?

A That's correct.

Q And the handwritten sheet, again, was prepared in order to express your point of view as to what was eligible for the investment tax credit?

A That's correct.

¹⁵ A period of strong demand for construction materials and services and limited supply would have a upward influence on cost whereas, weak demand and abundant supply would tend to depress prices. These are important variables for determining cost, which were not dealt with in plaintiff's study.

¹⁶ In its post trial brief, plaintiff further clarifies that its claim, entitled "HVAC" includes the "cost associated with restaurant exhaust fans, can wash exhaust fans, make-up air fans, french fry exhaust fans, breakfast grill exhaust fans, main exhaust fans for the charbroiler, roof exhaust, and exhaust for the hood over the cooking elements in the restaurant." Plaintiff, however, limits its claim to the "separate and distinct HVAC components and related duct work serving the kitchen areas."