USCA1 Opinion

                 United States Court of Appeals

                     For the First Circuit











No.  97-2104

No.  97-2105



                     L.L. BEAN, INC., ET AL.,



                     Petitioners, Appellants,



                                v.



                COMMISSIONER OF INTERNAL REVENUE,



                      Respondent, Appellee.







      APPEAL FROM A DECISION OF THE UNITED STATES TAX COURT



                   [Hon. Robert P. Ruwe, Judge]

 





                              Before



                      Boudin, Circuit Judge,

                                

             Coffin and Cyr, Senior Circuit Judges.

                                

                                





     Martin I. Eisenstein with whom Brann & Isaacson was on

consolidated brief for petitioners.

     Bridget M. Rowan, Tax Division, Department of Justice, with

whom Loretta C. Argrett, Assistant Attorney General, and Ann B.

Durney, Tax Division, Department of Justice, were on consolidated

brief for respondent.











May 28, 1998







                                

                                



  BOUDIN, Circuit Judge.  L.L. Bean, Inc. appeals from an

adverse decision of the Tax Court.  Although the decision covers

two different tax years (1986 and 1987), the central issue in both

years is the status of certain facilities under 26 U.S.C.  38,

48, which govern the investment tax credit.  These provisions

provided certain tax advantages in the years in question, primarily

a tax credit, for qualifying facilities commonly known as "section

38 property."  

  The underlying facts are generally undisputed--many of

them stipulated--although how tax code definitions should be

applied to those facts is very much at issue.  L.L. Bean is a well-

known supplier of apparel and sporting goods based in Freeport,

Maine.  For its extensive catalogue business, the company keeps on

hand a large reserve inventory.  In 1986, L.L. Bean placed in

service a storage facility, known as the reserve facility, and a

new shipping building, known as the 1986 shipping building.

  To the extent that these facilities or elements within

them qualify as so-called "section 38 property" under section 48 of

the Internal Revenue Code, L.L. Bean is entitled to a substantial

investment tax credit for qualifying investment.  In addition,

section 38 property enjoys a shortened depreciation schedule, 26

U.S.C.  168(b)(1), and a deduction for interest accrued during the

construction period, id.  163.  In the Tax Court, the parties

stipulated as to the tax consequences that would follow from a

finding that components were or were not section 38 property.

     The rub is that section 38 property is restricted to

certain categories of property that Congress meant to favor, and

the sole category invoked by L.L. Bean is that of "tangible

personal property (other than an air conditioning or heating

unit)."   26 U.S.C.  48(a)(1)(A).  Further, the Treasury

regulations defining this statutory phrase make local law

irrelevant and provide in pertinent part:

     For purposes of this section, the term

     "tangible personal property" means any

     tangible property except land and improvements

     thereto, such as buildings or other inherently

     permanent structures (including items which

     are structural components of such buildings or

     structures). . . .  Tangible personal property

     includes all property (other than structural

     components) which is contained in or attached

     to a building.



26 C.F.R.  1.48-1(c).

     The reserve facility at issue in this case is a large

storage facility designed to house L.L. Bean's merchandise in long

rows of floor-to-ceiling racks.  It is about 500 feet long by 190

feet wide and its height is 52 feet.  Instead of the standard

columns generally used to support the roof and walls in a free-

standing building, the structural support for the roof and three of

the walls of the reserve facility is the storage rack system

itself.  The use of the rack system for this purpose was

deliberate, aimed at saving construction costs and increasing

storage space.

     The racks occupy about 80 percent of the ground floor of

the reserve facility, and a typical rack row has vertical columns

50 feet high, anchor-bolted to the floor and topped with horizontal

beams to support the roof deck.  The shelves reach virtually to the

roof, and employees access them by using "transtackers," which move

along the aisles but then raise the operator and a load-bearing

platform vertically to the appropriate racks.  The transtackers

draw power from a dedicated electrical system installed at the top

of each aisle, somewhat in the manner of an electric trolley.

     The reserve facility contains an oil-fired boiler to

provide heating.  It has an electrical system that is integrated

into the rack system, being supported by the racks and other

structural elements in the facility.  There is a water-based

sprinkler system, including sprinklers fixed to the roof and other

sprinklers at intermediate levels supported by the racks.  

     In the case of the 1986 shipping building, L.L. Bean

sought the tax credit solely for a storage facility, located within

the building, known as the "mezzanine system."  The mezzanine

system, contemplated when the 1986 shipping building was designed,

uses cantilevered shelving attached to rack posts in order to hold

merchandise; these rack posts, together with steel frames in other

places, are used to support plywood decking which comprises the

mezzanine level.  At the mezzanine level, further shelving units

and some office space and enclosed work areas sit on the plywood

deck.   

     The mezzanine system supports neither the ceiling nor the

walls of the shipping building, but it does support the mezzanine

floor, thereby reducing construction costs and increasing storage

space.  Various other elements are connected to, or suspended from

the underside of, the mezzanine system, including cable,

electricity and communications, lighting fixtures and sprinkler

piping.  The mezzanine floor is the first stop for freight

elevators located in the center of the building.  

     In the tax returns that led to the present litigation,

L.L. Bean originally claimed an investment tax credit for the

entire reserve facility, as well as the accelerated depreciation

and interest expense deduction already described.  All of these

claims depended on the classification of the reserve facility as

section 38 property.  The Commissioner disallowed over 80 percent

of the claimed tax credit.  L.L. Bean also claimed an investment

tax credit for the mezzanine system.  The Commissioner allowed an

investment tax credit for about two-thirds of the amount claimed.

     L.L. Bean then filed suit in the Tax Court to dispute the

Commissioner's adjustments.  A trial was conducted in October 1995, 

many of the facts being stipulated.  Ultimately, the Tax Court

wrote a lengthy opinion, containing a very detailed description of

the property in question, which rejected L.L. Bean's claims. L.L.

Bean, Inc. v. Commissioner, T.C. Memo 1997-175, 73 T.C.M. (CCH)

2560 (1997).  L.L. Bean's appeal to this court followed.

     On appeal, L.L. Bean argues that even if the reserve

facility is not section 38 property, the rack system so qualifies. 

The Tax Court saw the rack system as having a dual purpose "to hold

[the taxpayer's] merchandise and to support the roof and walls that

protect the merchandise."  Because the rack system provided

essential structural support for the walls and roof, the court held

that it was a "structural component[]" of a "building[] or other

inherently permanent structure[]" and was therefore not tangible

personal property.  26 C.F.R.  1.48-1(c).

     L.L. Bean does not dispute the Tax Court's bare factual

findings that the rack system is permanent and plays a structural

role in supporting the roof and walls.  Instead, L.L. Bean argues--

as propositions of law subject to de novo review--that the racks

are tangible personal property under an explicit Treasury

regulation; that a "primary function test" should be used and, if

used, would qualify the rack system as tangible personal property;

and that the Tax Court erred in applying a supposed "more than

incidental" structural function test to deny the credit.

     It is quite true that the Treasury regulations give as

examples of items qualifying for the section 38 credit (as tangible

personal property) "such property as production machinery, printing

presses, transportation and office equipment [and] . . . display

racks and shelves . . . contained in or attached to a building . .

. ."  26 C.F.R.  1.48-1(c).  Obviously, the credit is available

for such items where, as is ordinarily true, they play no

structural role in the building.  Whether this is so when "such

property" is part of the "structural components" of a building is

another matter.

     Nothing in the regulations, or the statute, indicates

that the drafters gave much thought about how to treat items that

play a dual role as structural components and in functions that, if

performed separately, would render them tangible personal property. 

Arguably, the regulation language favors the IRS since it excludes

from credit any items that are "structural components," and it then

says that "[t]angible personal property includes all property

(other than structural components) which is contained in or

attached to a building," giving racks and shelves as examples.  Id.(emphasis added).

     On the other hand, it is not easy to imagine that

Congress would have wanted a tax credit to be withheld if a hugely

expensive printing press were used to help prop up a wall that

could as easily be propped up by a 2 by 4 board.  Thus, while we

readily reject L.L. Bean's "plain language" (but out of context)

reading of the regulation's examples, we find of somewhat more

interest L.L. Bean's suggestion that where an item both is a

structural component and plays a role that would result in the 

credit if performed by a separate item, the test should be the

primary purpose.  L.L. Bean points to other areas of the code where

primary purpose tests have been adopted.  E.g., 26 U.S.C. 

165(c)(2) (governing certain losses from transactions); see Deweesv. Commissioner, 870 F.2d 21, 33 (1st Cir. 1989). 

     Yet, it is not clear why L.L. Bean's rack system would

qualify for the credit even if this test were adopted.  To be sure,

a building without the rack system (or some substitute storage

arrangements) would not serve L.L. Bean's intended purpose; but

since the building would collapse without the rack system, it is

pretty hard to describe the roof- and wall-support attributes of

the present rack system as secondary.  The Tax Court had it right

in describing the primary purpose of the rack system as bothsupport and storage.

     L.L. Bean's last general attack on the lower-court

opinion is its claim that the Tax Court misconstrued two earlier

revenue rulings in adopting a test that an item did not qualify for

a credit if its structural role was "more than incidental."  Rev.

Rul. 79-183, 1979-1 C.B. 44; Rev. Rul. 79-181, 1979-1 C.B. 41. 

Although the revenue rulings used this phrase, both rulings could

easily be distinguished as essentially decisions on particular

facts rather than as establishing any general rule of the kind that

L.L. Bean attributes to the Tax Court.

     However, the rack system in this case has as a central

function the support of the roof and walls of the building, and the

Tax Court's outcome is not dependent on whether a "more than

incidental" test is used.  If L.L. Bean wanted to show that the

result in this case should be different, it needed to supply a

persuasive basis to show why its rack system--playing a substantial

and critical role in the support of the building--is not a

structural component or otherwise deserved some form of credit,

see, e.g., Tax Ct. R. 142(a); Uecker v. Commissioner, 81 T.C. 983

(1983).  This L.L. Bean has failed to do.

     We turn now to the mezzanine system, for which a full

credit was not allowed (no explanation is provided by the parties

for the partial credit but perhaps some of the elements are

separable).  As noted, the system does not itself support the walls

or ceiling of the 1986 shipping building, but it clearly performs

a structural function--primarily that of providing and supporting

the mezzanine floor of the building.  To the extent that the system

is a dual-purpose structure, our prior discussion governs.  But

that is not the argument L.L. Bean primarily relies on here.

     L.L. Bean's main argument on appeal is that the mezzanine

system as a whole is only a temporary structure, which could be

removed at any time, an argument springing from the Treasury

Regulations' reference to "inherently permanent structures," 26

C.F.R.  1.48-1(c).  Some case law suggests that elements otherwise

structural may not fall in that category if they are designed to be

easily removable and temporary.  Obviously, a grey area must exist

between property that is easy to remove and temporary, and property

that is inherently a permanent part of the building structure.

     It is the frequent business of courts to draw lines in

such grey areas.  For example, the Eighth Circuit in Minot found

certain moveable partitions to be sufficiently temporary to qualify

as tangible personal property, 435 F.2d at 1372, while in a later

case finding certain non-load-bearing walls to be sufficiently

permanent to be classified as structural components, see 

Mallinckrodt, Inc. v. Commissioner, 778 F.2d 402, 403 (8th Cir.

1985) (noting that the walls (or partitions) were not easily

removed, and if removed at all would sustain substantial damage).

     The Tax Court weighed the various factors set forth in

the case law and determined that the mezzanine system was not

sufficiently removable and temporary to be tangible personal

property.  The court noted that by L.L. Bean's estimate it would

take six to eight workers a little over a month to remove the

system--but that this estimate did not include the time necessary

to disconnect the electrical wiring, communication cables,

sprinkler systems, and duct work connected to it.  73 T.C.M. at

2573.  This is a far cry from removable partitions that could be

packed up and carried off in a day, and we sustain the Tax Court's

ruling.

     L.L. Bean's remaining arguments concern not the rack

system or the mezzanine system as an entity but rather individual

related components for which it independently claims the credit. 

L.L. Bean first argues that the concrete slab forming the floor

supporting the rack system is essentially an item of machinery or

equipment.  It relies on a case in which the Tax Court had

previously held a specially designed and reinforced concrete floor

to be tangible personal property.  Texas Instruments, Inc. v.

Commissioner, T.C. Memo 1992-306, 63 T.C.M. (CCH) 3070, 3073-13

(1992).

     Ordinarily, a floor is part of the structure of a

building and not entitled to the credit.  In Texas Instruments, the

court deemed the floor--because of its special construction--to be

an essential part of the machinery it supported, but a key fact was

that the supported element was machinery and not itself part of the

building.  Here, we have already rejected the argument that the

rack system is a piece of machinery entitled to the credit.  And

appellants do not claim that the reinforced floor was needed to

support the transtackers.

     The next disputed component is the reserve facility's

sprinkler system.  Treasury Regulation  1.48-1(e)(2) specifies

that sprinkler systems are structural components of a building. 

L.L. Bean's argument that its reserve facility sprinkler system is

not a structural component rests on the grounds that the sprinkler

system is attached to the racks, not the building itself, and that

the system protects not the building but the inventory on the

racks.

     We do not think the location of the sprinklers is

controlling.  As for the argument that the sprinklers protect the

contents of the building rather than the building itself,

sprinklers ordinarily protect both.  Treasury Regulation  1.48-

1(e)(2) does provide an exception for components like heating and

air conditioning systems--ordinarily part of the building--where

"the sole justification" is to meet requirements of machinery or

particular materials within the building (e.g., a special cooling

system for frozen food).  But there is no proof that this sprinkler

system serves so narrow a function.

     L.L. Bean does invoke the exception just cited for a

different component, saying that the sole justification of the

reserve facility's heating system is to heat the machinery of the

sprinkler system, and that it therefore passes the test of Treasury

Regulation  1.48-1(e)(2).  The Tax Court held that L.L. Bean had

presented insufficient evidence that the heating system provides

for the comfort of employees no more than marginally and that in

any case, the sprinkler system was itself a structural component,

not the sort of "other machinery" contemplated in the regulation. 

We agree.

     Finally, L.L. Bean argues that 75 percent of the cost of

the building's electrical system should be deemed tangible personal

property as essentially dedicated to the transtackers.  To this end

it cites three cases that allocated electrical systems costs to the

investment tax credit in proportion to the percentage of the

electrical load that powered certain machines:  Morrison, Inc. v.

Commissioner, 891 F.2d 857, 863 (11th Cir. 1990); Illinois Cereal

Mills, Inc. v. Commissioner, 789 F.2d 1234, 1242 (7th Cir. 1986);

and Scott Paper Co. v. Commissioner, 74 T.C. 137, 185-86 (1980).

     The Fourth Circuit has forcefully rejected this approach. 

A. C. Monk & Co. v. United States, 686 F.2d 1058, 1065 (4th Cir.

1982); see also Schrum v. Commissioner, 33 F.3d 426, 435-36 & nn.11

& 13 (4th Cir. 1994).  The allocation regime adopted by the Seventh

and Eleventh Circuits may be in some tension with the "sole

justification" approach adopted in the regulations for air

conditioning or heating equipment discussed above.  This circuit

has not decided the issue, nor need we do so here.

     The Seventh and Eleventh Circuits' formula is not the

allocation approach that L.L. Bean urges us to adopt for this case,

despite L.L. Bean's citation of the cases and some ambiguous

language in its brief.  The company apparently introduced no

evidence as to the proportion of electricity used by the

transtackers.  Nor did it claim that 75 percent of the electrical

system, measured by cost, comprised separate components used only

to power the transtackers and so (arguably) were part of the

machinery that they powered.  See A.C. Monk, 68 F.2d at 1065-66.

     Instead, the company declared in the Tax Court, and

repeats here, that 75 percent of the cost of the electrical system

is "attributable to" the transtackers.  When we looked back into

the evidence for the source of the 75 percent figure, it turned out

that this figure is plucked from a chart appended to the report of 

one of L.L. Bean's expert witnesses.  The only further information

contained in the report is that "[t]he electrical costs were

allocated based upon discussions with professional engineers to

reflect the functions which the equipment and electrical system

serves."

     The Tax Court was apparently prepared to consider a

credit based on relative use (in line with Seventh and Eleventh

Circuit decisions) but found that the evidence did not prove that

75 percent of the electricity was used by the transtackers.  We

agree with this assessment of the evidence, given the lack of

clarity in the report and the absence of any testimony to explain

the figure.  See State Police Ass'n of Mass. v. Commissioner, 125

F.3d 1, 5 (1st Cir. 1997) (review of Tax Court findings only for 

clear error).  Thus we have no occasion to choose between circuits

on the question whether such an allocation-by-percentage-of-

electrical-use approach is proper.

     We have addressed the tax issues presented largely in a

mechanical fashion because there is no other choice.  Congress was

clear about its overall purpose to encourage certain classes of

investment.  But the statutory lines it drew--in separating favored

from ordinary investments--were in some measure artificial,

reflecting political choices and arbitrary cut-off points as well

as economic aims.  Given the gloss of the Treasury regulations, the

Tax Court fairly applied the statute as it was written.

     Affirmed.