When is a building not a building.

• Author: Bakale, Anthony
• Position: Building components as assets

After Hospital Corp. of America, 109 TC 21 (1997), tax practitioners have been looking for ways to reclassify building components as assets with much shorter useful lives than the building itself. Generally, they try to classify nonstructural components of the building as either tangible personal property or other tangible property that is an integral part of the manufacturing or production process. In many cases, the line between asset classes is not clear. The majority of the case law on classifying assets involves an investment tax credit (ITC). If an asset was classified as tangible personal property or other tangible property, it would have been eligible for the credit. Today, the ITC is gone, but the case law is the best guidance for classifying assets into their respective class lives for depreciation purposes.

"Freezer" Burn

In Munford, Inc., 849 F2d 1398 (11th Cir. 1988), Munford was in the business of distributing frozen foods. Munford constructed an addition to its building that would store frozen foods and maintain the inside temperature at or below freezing. When Munford filed its Federal return, it claimed an ITC on the full cost of constructing the addition. It argued that the addition was essentially a giant freezer, and was therefore "property in the nature of machinery." Also, Munford depreciated the remaining basis over an eight-year life (which was acceptable at that time for tangible personal property). The IRS took one look at the addition and denied the ITC, asserting that the addition had to be a building. The Service allowed Munford to take the ITC only for the actual refrigeration units and related equipment.

For property to qualify for the ITC, it must qualify as "Sec. 38 property," defined in Sec. 48(a)(1) as:

1. Tangible personal property or

2. Other tangible property (not including a building or its structural components), but only if such property "is used as an integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electrical energy, gas, water, or sewage disposal services."

The regulations under Sec. 48 further define tangible personal property to include "all property which is in the nature of machinery (other than structural components of a building or other inheritantly permanent structure)."

To solve the dispute, the Tax Court had to decide first if the addition was a building. Buildings and their structural components are defined in Regs. Sec...