UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

JAKE Z. SCHRUM; RUBY E. SCHRUM;
DANNIE L. SCHRUM; JEANETTE V.
SCHRUM; DONALD L. MOORE; JUDITH
A. MOORE,
                                                                      No. 95-2909
Petitioners-Appellants,

v.

COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.

Appeal from the United States Tax Court.
(Tax Ct. No. 91-4859)

Argued: November 1, 1996

Decided: June 6, 1997

Before WILKINSON, Chief Judge, and RUSSELL and
WIDENER, Circuit Judges.

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Affirmed in part, vacated in part, and remanded by unpublished per
curiam opinion.

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COUNSEL

ARGUED: Donald L. Moore, Hampton, Virginia, for Appellants.
Ernest Joseph Brown, Tax Division, UNITED STATES DEPART-
MENT OF JUSTICE, Washington, D.C., for Appellee. ON BRIEF:
Loretta C. Argrett, Assistant Attorney General, Gary R. Allen, Ken-
neth L. Greene, Randolph C. Hutter, Tax Division, UNITED
STATES DEPARTMENT OF JUSTICE, Washington, D.C., for
Appellee.

_________________________________________________________________

Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).

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OPINION

PER CURIAM:

Appellants-taxpayers Jake Schrum, Dannie Schrum and Donald
Moore were the general partners of Peninsula Enterprises, a Virginia
partnership. During the tax years 1984 to 1987, Peninsula constructed
or acquired eight carwashes and operated them as its primary busi-
ness. The general partners each filed joint tax returns with their
respective wives, who are also parties to this action. The taxpayers
claimed investment tax credits and accelerated depreciation deduc-
tions in connection with the carwashes. The Commissioner of the
I.R.S. disallowed portions of these claimed credits and deductions. In
addition, the Commissioner assessed negligence and overstatement
penalties against the Schrums. The taxpayers filed a joint petition in
tax court challenging the Commissioner's determinations. Following
a trial, the tax court upheld the Commissioner's determinations and
the taxpayers appealed.

In our first opinion involving these parties, Schrum v. Commis-
sioner ("Schrum I"), this court found in favor of the taxpayers on two
issues.1 First, we vacated the Commissioner's allocation of certain
equipment costs and remanded the case for a new examination of
these and other allocations.2 Second, we remanded the case for further
_________________________________________________________________

1 33 F.3d 426 (4th Cir. 1994).

2 Id. at 435-37.

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proceedings concerning the negligence penalties assessed against the
Schrums.3

On remand, the tax court issued a supplemental memorandum
opinion implementing our holding in Schrum I. The Commissioner
then recalculated the income tax deficiencies and additions to tax
owed by the taxpayers. The tax court adopted the Commissioner's
computation over the objections of the taxpayers.

The taxpayers again appeal the tax court's judgment, contending
that the tax court did not properly re-allocate the cost of the car-
washes' plumbing and electrical systems. They also allege the tax
court erred in upholding certain aspects of the Commissioner's defi-
ciency computations and the imposition of negligence penalties
against the Schrums.

The only issue that requires exposition is whether the tax court
properly re-allocated the cost of the plumbing and electrical systems.
The reasoning of our original decision is fully explicated in Schrum
I.4 In brief, during the years in question, property defined as "Section
38 property" could be used to take an investment tax credit.5 Any tan-
gible personal property, including non-structural property classifiable
as equipment, qualified as Section 38 property. The Commissioner
originally allocated what it described as 60% of the cost of the plumb-
ing systems and 50% of the cost of the electrical systems in the con-
structed carwashes to the category of carwash equipment. The
remainder of the costs in these two categories, plus associated costs
for engineering, meters, connection fees and part of the installation of
the systems, were allocated as structural property. The taxpayers
argued that the plumbing and electrical systems should be allocated
as non-structural property. Based on our decision in A.C. Monk & Co.
v. United States,6 we agreed, finding that the costs could not be
_________________________________________________________________
3 Id. at 437-38.
4 Id. at 435-37.
5 But see id. at 429 n.4 (investment tax credit repealed in 1986 but
Commissioner failed to challenge the taxpayers' claims to credits for
property placed in service after Dec. 31, 1985).

6 686 F.2d 1058 (4th Cir. 1982).

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divided and "the tax court should allocate the components in question
entirely as non-structural."7 We also instructed the tax court to re-
examine any similar allocations for the purchased carwashes.

There are two possible interpretations of our opinion in Schrum I.
The more unlikely one, embraced by the tax court and the Commis-
sioner, is that on remand the tax court was to re-allocate as non-
structural only those costs originally labeled by the Commissioner as
plumbing and electrical. This interpretation, however, is far too lim-
ited. Although Schrum I initially discussed the Commissioner's split-
ting of the costs for plumbing and electrical equipment, our final
holding encompassed the entire plumbing and electrical systems. The
following key sentences illustrate the breadth of our decision:

          The allocation of expenses adopted by the Commissioner
          and endorsed by the tax court necessarily assigns portions
          of the various components of the carwash facilities to the car
          wash structures [which are] inherently permanent in nature.
          We see no reason why our proscription against allocating an
          electrical system in part to a building would not extend to
          barring allocations which assign portions of various systems
          to inherently permanent structures.8

We suspect that the tax court and the Commissioner are deliberately
staring at trees in order to lose sight of the forest. Schrum I held that
the entire plumbing and electrical systems must be allocated as non-
structural property, even though it did not examine the individual
allocation of any associated costs.

It is undisputed that the overall cost of the plumbing and electrical
systems included the associated costs for engineering, meters, connec-
tion fees, and part of the installation. Although these associated costs
were properly assigned to one category, they were assigned to the
wrong category. Based on our determination in Schrum I that the elec-
trical and plumbing systems are, in their entirety, non-structural prop-
erty, the tax court should have re-allocated the overall cost of the
_________________________________________________________________
7 Schrum, 33 F.3d at 436.

8 Id.

                     4
plumbing and electrical systems, including the associated costs, as
non-structural. Accordingly, we remand this case to the tax court for
a re-allocation of the cost of the plumbing and electrical systems and
a recalculation of the appellants' tax liability. Schrum I also instructed
the tax court to re-examine the allocation of costs in regard to both
the constructed and purchased carwashes. We agree with the tax
court's subsequent finding that the taxpayers are entitled to allocate
the costs of the purchased carwashes based on the same percentages
as the constructed carwashes.

The taxpayers also contend that certain aspects of the Commission-
er's deficiency computations, and the imposition of negligence penal-
ties against the Schrums, were erroneously upheld by the tax court.
Having carefully reviewed the record, considered the submissions of
the parties, and heard oral argument, we find these claims meritless.

For the foregoing reasons, the judgment of the tax court is affirmed
in part and vacated in part. The case is remanded to the tax court for
further proceedings consistent with this opinion.

AFFIRMED IN PART, VACATED IN PART, AND REMANDED

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