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Rev. Rul. 77-291


Rev. Rul. 77-291; 1977-2 C.B. 7

DATED
DOCUMENT ATTRIBUTES
  • Cross-Reference

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

    (Also Section 179; 1.179-3.)

  • Code Sections
  • Language
    English
  • Tax Analysts Electronic Citation
    not available
Citations: Rev. Rul. 77-291; 1977-2 C.B. 7
Rev. Rul. 77-291

Advice has been requested whether, under the circumstances described below, a trailer located in a trailer park and used as a launderette qualifies as "section 38 property" for purposes of the investment credit allowed under section 38 of the Internal Revenue Code of 1954, and as "section 179 property" for purposes of qualifying for the additional first year depreciation allowance permitted under section 179.

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

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

Section 38 of the Internal Revenue Code of 1954 allows a credit against Federal income tax for qualified investment in section 38 property. The determination of what property qualifies as section 38 property is made in accordance with the rules provided in section 48.

Section 48(a)(1) of the Code provides that the term "section 38 property" means tangible personal property, or other tangible property (not including a building and its structural components) but only if the other tangible property is used as an integral part of manufacturing, production, or extraction, or furnishing transportation, communications, electrical energy, gas, water, or sewage disposal services, or constitutes a research or storage facility used in connection with any of the foregoing activities. To qualify as section 38 property, the property must also be property with respect to which depreciation is allowable and must have a useful life of 3 years or more.

Section 1.48-1(c) of the Income Tax Regulations provides that the term "tangible personal property" means any tangible property except land and improvements thereto, such as buildings or other inherently permanent structures including their structural components.

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

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

Under section 179 of the Code, a taxpayer may elect, for the first taxable year in which a deduction for depreciation is allowable on tangible personal property, an additional depreciation allowance deduction of 20 percent of the cost of the property subject to certain limitations. Only depreciable tangible personal property that has a useful life of 6 years or more qualifies.

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

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

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

Rev. Rul. 77-8, 1977-1 C.B. 3, holds that certain movable trailers that remain on location for use as on-site offices by a construction company for an average of one year qualify as section 38 property for investment credit purposes. It is stated therein that the functional use test of trailers as offices does not automatically classify them as buildings. It must first be determined whether the trailers are permanent improvements to the land.

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

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

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

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

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

DOCUMENT ATTRIBUTES
  • Cross-Reference

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

    (Also Section 179; 1.179-3.)

  • Code Sections
  • Language
    English
  • Tax Analysts Electronic Citation
    not available
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