Rev. Rul. 77-8

Advice has been requested whether, under the circumstances described below, trailers used as offices qualify as "section 38 property" for investment credit purposes.

The taxpayer is a construction company that owns office trailers of various sizes. The trailers generally are 20-36 feet in length, 8-12 feet in width, and 7 feet in inside height. They are usually fitted with a desk, plans table, plans rack, and similar items. The door or doors are wider and the frame heavier than similar features of a house trailer. Heating is standard and air conditioning is generally optional. The larger trailers are divided into two or more offices.

The trailers are used as offices at the site of highway construction jobs. They are generally set upon blocks with their wheels removed. They are not affixed to the ground and can be moved at any time. One trailer is used by company personnel and another trailer by the state inspector. The office trailer used by company personnel is moved to different locations on the job as the work progresses. The office trailer used by the state inspector remains at one location for the duration of the job. It is then moved to the site of another project. The average time the trailers remain in any location is about 1 year.

The trailers are depreciable property and have a useful life of 3 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.

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 3 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 permanent structures including their structural components.

In the case of Joseph Henry Moore, 58 T.C. 1045 (1972), aff'd per curiam, 489 F. 2d 285 (5th Cir. 1973), the United States Tax Court held that rental mobile homes in a trailer park that were never affixed to the land and remained at all times movable were tangible personal property and not improvements to the land. In the Moore case, however, the mobile homes did not qualify as section 38 property because they were used primarily to furnish lodging. See Section 48(a)(3) of the Code.

Rev. Rul. 75-178, 1975-1 C.B. 9, holds that the classification of property as "personal" or "inherently permanent" should be made on the basis of the manner of attachment to the land or the structure and how permanently the property is designed to remain in place. It is stated therein that the use of a functional or equivalency test to classify property (1) as inherently permanent when it is not itself physically attached to the land, or (2) as a structural component when it is not an integral part of (and therefore a permanent part of) a building, is no longer the criteria to be used to classify property.

In the instant case, the functional use of the trailers as offices does not automatically classify them as buildings. It must be determined whether the trailers are permanent improvements to the land.

The trailers are neither affixed to the land nor designed to remain in place, but remain easily movable and, in fact, are moved on the average once a year. Therefore, the trailers are not permanent improvements to the land.

Accordingly, in the instant case, the office trailers are tangible personal property within the meaning of section 1.48-1(c) of the regulations, and qualify as section 38 property for investment credit purposes.