                       T.C. Memo. 1997-175



                     UNITED STATES TAX COURT



                 L.L. BEAN, INC., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


 L.L. BEAN, INC., LEON GORMAN, TAX MATTERS PERSON, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 16379-94, 16380-94.           Filed April 9, 1997.


     John S. Brown, Joseph L. Kociubes, George P. Mair, Donald-

Bruce Abrams, and Matthew D. Schnall, for petitioners.


     Maureen T. O'Brien, Melanie M. Garger, and Barry J.

Laterman, for respondent.
                                 - 2 -


             MEMORANDUM FINDINGS OF FACT AND OPINION


     RUWE, Judge:     In docket No. 16379-94, respondent determined

a deficiency in L.L. Bean, Inc.'s (hereinafter petitioner) 1986

Federal income tax of $649,428.     In docket No. 16380-94,

respondent issued a notice of final S corporation administrative

adjustment (FSAA) to Leon Gorman, petitioner's president and tax

matters person, setting forth the following disputed adjustments

with respect to petitioner's 1987 taxable year:1


      Item                  FSAA Adjustment      Amount in Dispute

Depreciation deduction       $1,375,273              $608,037
General business credit          22,523                19,622


     The sole issue for decision is whether petitioner is

entitled to an investment tax credit (ITC) under section 382 with

respect to certain property petitioner placed in service during

the years in issue.


                           FINDINGS OF FACT


     Some of the facts have been stipulated and are so found.

The stipulation of facts, first, second, and third supplemental


     1
      Other adjustments set forth in the notice of final S
corporation administrative adjustment are not in dispute.
     2
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable years in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
                               - 3 -

stipulations of facts, and stipulation of exhibits are

incorporated herein by this reference.   Petitioner is a Maine

corporation with its principal place of business in Freeport,

Maine.   Petitioner is an accrual basis, calendar year taxpayer.

For its taxable year ended December 31, 1987, petitioner elected

under section 1362(a) to be taxed as an S corporation.

     Petitioner is a retailer of outdoor sporting specialty

goods, including both apparel and sporting equipment.    Petitioner

purchases merchandise from various vendors and manufacturers and

sells merchandise principally through a nationwide and

international catalog distribution system.   Petitioner requires a

substantial reserve inventory of merchandise, which is shipped to

petitioner's distribution center located in Freeport, Maine.

     As part of the expansion of its distribution center in 1986,

petitioner placed in service a storage facility (the Reserve

Facility) and a shipping building (the 1986 Shipping Building),

which contains a mezzanine (the Mezzanine System).3


Reserve Facility


     The Reserve Facility is a large storage facility which

houses quantities of bulk merchandise in long rows of floor-to-

ceiling racks.   Petitioner began construction of the Reserve



     3
      Only the Mezzanine System and the Reserve Facility are in
issue here.
                               - 4 -

Facility in 1985 and placed it in service when construction was

substantially completed in 1986.4

     The Reserve Facility is approximately 500 feet long by 190

feet wide by 52 feet high.   It is located immediately adjacent to

the east side of two existing buildings (the Receiving Building

and the 1979 Shipping Building) and is connected to both

buildings at a mezzanine level 20 feet above the main floor of

the Reserve Facility.   This mezzanine extends along the north

face of the Reserve Facility for a depth of 26 feet and continues

along the west face of the Reserve Facility at a depth of 11 feet

8 inches.   A concrete block boiler room is located on the main

floor of the Reserve Facility below the north mezzanine level.

In addition, there is a 25-foot-wide floor-level clear area at

the south end of the Reserve Facility.

     The Reserve Facility does not have a standard column grid

that is typically used to support the roof and walls in a free-

standing building.   Instead, the structural system supporting

most of the roof and walls of the Reserve Facility is the rack

system.   Frazier Industrial Co. (Frazier), a storage rack system

manufacturer, participated in the design of, and provided the

necessary engineering and materials for, the rack system and

structural framework for most of the Reserve Facility.   In order

to save costs on structural steel, reduce labor costs, and

     4
      Additional components of the Reserve Facility were placed
in service in 1987.
                                 - 5 -

increase storage efficiencies by eliminating interferences with

dual structural systems, Frazier provided petitioner a storage

rack system with increased structural capabilities.     This

enhanced structural rack system provides the support for the roof

over the racks and for the east wall adjacent to the racks.

These increased structural capabilities were accomplished by

increasing the size of the vertical columns, increasing the

amount of diagonal bracing on the end panels of the racks, and

providing rigid connections where the shelves meet the support

posts.   Frazier also provided additional cross members at the

roof to support the metal roof panels and additional supports to

connect with the other structural elements.

     Approximately 80 percent of the ground floor of the Reserve

Facility is occupied by 19 rows of floor-to-ceiling storage

racks, which are 446 feet long by 176 feet wide by 50 feet high,

running north to south.5    A typical rack row has vertical columns

or posts 4 feet 8 inches from front to back (width) and 10 feet 2

inches apart (length).     Each row of racks is separated from the

next by an aisle which is 5 feet wide.     The rack posts consist of

steel channel posts with a C-shaped cross section.     In some

locations, at the lower end of a rack post, the channel section

is made stronger by welding two channels together to form a

rectangular cylinder.    The upper and lower portions of each rack


     5
      Eighteen of the rows of racks are double-loaded.
                                - 6 -

post are spliced at approximately mid-height with a bolted

connection, and each rack post is anchored to the floor of the

Reserve Facility with anchor bolts.     The front and back vertical

rack posts are connected by L-shaped steel angles, which were

welded to the rack posts prior to being delivered to the site.

Diagonal angles welded between the two posts in an X-pattern

prior to shipping create a rigid truss that provides lateral

stability to the racks in the east-west direction.

     The rack posts in each row are connected by horizontal

beams, which span the 10-foot 2-inch distance between rack posts

and also support the rack shelves and the roof deck.    A typical

shelf beam is 3 inches deep and 30 feet 6 inches long and

connects to three rack posts.   The shelf beams are connected to

the rack posts with high strength steel bolts, creating a rigid

connection that maintains a 90-degree angle between the rack

posts and the beams and provides lateral stability to the racks

in the north-south direction.   While most of the rack shelves

consist of wire mesh installed over the shelf beams, the bottom

shelf consists of plywood with a metal skirt.

     Petitioner's employees reach the rack shelves by using

transtackers, which are customized vehicles that carry an

operator and a load of merchandise at horizontal speeds up to 6.5

miles per hour both up and down the aisles and at vertical speeds

up to 60 feet per minute from the bottom to the top of the
                                - 7 -

racks.6   Petitioner currently uses 10 transtackers in the Reserve

Facility.

     Each transtacker has a mast approximately 50 feet high,

which guides the portion of the transtacker that carries the

operator and load as it moves up and down from the bottom to the

top of the racks.   At the top of the mast, two wheels follow a

guide tube, which is mounted on a tie that spans the aisle and

that is attached to the racks on each side of the aisle.    At the

bottom, the transtacker is guided by a steel channel or track

that is anchored to the floor by bolts in the center of the

aisle.    The transtacker has lateral wheels that engage a flared

steel guide to lead the transtacker onto the track when the

operator directs it into an aisle from the south clear area.     The

transtackers automatically slow down near the ends of the aisles

and must be at ground level before a transtacker leaves an aisle.

The transtackers can operate in the south clear area only when

the cab is at floor level, since the mast is unstable without the

guide rails.

     The transtackers are powered by a dedicated electrical

system installed at the top of each aisle.   The top of the

transtacker mast carries four trolleylike "bus bar" contacts that

draw electrical power from conductors mounted adjacent to the

guide tube.    Outside of the aisles, in the clear area at the

     6
      Respondent has allowed petitioner an ITC for the
transtackers, and those credits are not in issue in this case.
                                - 8 -

south end of the Reserve Facility, the transtackers are powered

by self-contained batteries, which are charged with power drawn

from the bus bar while the transtackers are in the aisles.

     The concrete slab floor below the rack system is a minimum

of 12.5 inches thick with two layers of reinforcing steel bars

encased in the concrete.    The slab at the north and south end

clear areas of the Reserve Facility is 8 inches thick.    The floor

slab is extra thick under the racks to accommodate the load of

the rack system.   A typical heavy duty warehouse floor slab is 5

to 6 inches thick.    However, a floor slab for a conventional

building would require footings under the individual supporting

structural columns.    These footings would be thicker than the

floor slab, and the size and thickness of these conventional

footings are determined by the column loads and soil

characteristics of the site.

     The top surface of the concrete floor slab under the racks

was constructed with an F100 or "superflat" finish, which is

smoother and more level than a conventional concrete floor.      The

superflat surface is required for the efficient operation of the

transtackers.   With a conventional concrete floor, variations in

elevation in the floor under the transtacker wheels could cause a

transtacker operating with the cab in an elevated position to
                               - 9 -

buck from side to side or from front to back, forcing the

operator to run the transtacker at much lower speeds.7

     Along the west wall of the Reserve Facility, there are two

30-foot-high masonry walls constructed of 12-inch-thick concrete

blocks.   This double masonry firewall separates the Reserve

Facility from the distribution center along the northernmost 400

feet of the western side of the Reserve Facility.   These walls

are separated by a 7-inch air space, which would provide fire

protection if either the Reserve Facility or the distribution

center were to be consumed by fire.    The remaining 100 feet of

the west wall of the Reserve Facility, as well as the north,

east, and south walls, are enclosed in a system of insulated

metal wall panels.   The wall panels are factory fabricated by a

wall panel manufacturer and have a layer of sheet metal on either

side of a foam insulation core.   On the east and west sides of

the Reserve Facility, the exterior wall panels are supported by

horizontal I-beams, or girts, mounted on brackets that are

attached directly to the racks.   At the north and south end areas

of the Reserve Facility, the wall panels and girts are partially

supported by columns, varying from about 30 feet to 45 feet in

height.   Roof header beams at the top of these columns support

part of the framing over the north and south end areas.     The tops


     7
      The transtacker manufacturer has modified its floor
requirements for transtackers since petitioner completed the
Reserve Facility.
                               - 10 -

of the columns and the header beams are connected to the racks by

open web bar joists that stabilize the tops of the columns

against wind loads and maintain rigidity.    These columns are

supported at the bottom by foundation walls, which vary in height

to conform to the outside grade.    The foundation walls of the

Reserve Facility are poured-in-place, reinforced concrete,

consisting of continuous footings and retaining walls.    The wall

panels are assembled from one end of the Reserve Facility to the

other.    Each panel is screwed to the girts with a reinforcing

clip.    All the joints are caulked between the panels and on the

top and bottom girts.    The ends and exposed edges of panels are

finished with a preformed metal trim.    Within the wall system are

metal ventilation louvers, a 12-foot-wide by 14-foot-high rollup

door, and several hollow metal swing doors and frames.

     The Reserve Facility is covered by a roof that is directly

connected to and supported by the racks.    The Reserve Facility's

roof consists of a 1.5-inch-deep corrugated metal deck supporting

rigid insulation and a waterproof membrane roof.    The roof

membrane and the rigid insulation are held in place with stone

ballast.    Special flashing and trim pieces are used to terminate

the membrane at mechanical equipment penetrations and around the

perimeter of the roof.    The metal deck is supported by beams that

run across the top of the supporting rack posts.    At the north

and south ends of the Reserve Facility, the roof, which includes

the deck, insulation, and membrane, is supported by open web bar
                               - 11 -

joists, which continue the line of the roof beams and span the

distance from the last rack post to a header beam at the outside

wall.   Additionally, some of the Reserve Facility's mechanical

and electrical systems are also supported by the rack system.

Because of the structural support provided by the rack system, if

it were removed, the roof would collapse and most, if not all, of

the walls would fall.

     An oil-fired boiler provides the heating source for the

Reserve Facility.   Water is heated in the boiler and circulated

to various heating coils in the Reserve Facility.   Eight

customized rooftop ventilators, located throughout the rack area

of the Reserve Facility, provide both heating and ventilation.

In the summer, the ventilators draw air out, pulling air through

the ventilation louvers, which are located on the north and south

sides of the Reserve Facility, exhausting the warm air near the

top of the Reserve Facility.   In the colder months, the fan in

the ventilator changes direction, drawing outside air from the

top of the Reserve Facility through the ventilator cap and mixing

it with return air from the top of the Reserve Facility in a

plenum box.   The return air is heated as it passes over the

heating coils, and the mixed air is forced down a vertical plenum

and distributed to the Reserve Facility at various levels through

a series of diffusers in the plenum.    Supplemental heating units

are also located below the mezzanine floor.   Six "upblast"

rooftop ventilators provide additional ventilation capability, as
                               - 12 -

well as emergency smoke relief in the event of a fire.

Thermostats in the Reserve Facility register temperatures in the

50 degrees Fahrenheit to 85 degrees Fahrenheit range.      The

Reserve Facility is not air-conditioned.

     The Reserve Facility's electrical systems include lighting,

power, alarm, and control systems.      These systems are also

integrated into the rack system.    Conduits, fixtures, and

junction boxes are supported by the racks and other structural

elements of the Reserve Facility.    The Reserve Facility uses a

task-lighting approach, providing illumination only where

required.    The two open areas and the west mezzanine of the

Reserve Facility have general illumination, while the rack system

area is lighted with only minimal safety lighting, since the

transtackers have their own lighting on the work platform.

     The Reserve Facility also contains a fire protection system

that conforms to National Fire Protection Association code

requirements.    The fire protection system is a wet, water-based,

sprinkler system, which provides protection for the contents of

the racks.    The sprinkler system includes sprinklers at roof

level, supported by the roof, and at two other intermediate

levels supported by the racks.    One intermediate level is located

at approximately 18.5 feet above the floor, and the other is

located at approximately 39.5 feet above the floor.      These

intermediate sprinkler levels are integrated into the racks, and

there are plywood shelves immediately above those sprinkler
                                - 13 -

levels which act as fire baffles to trap the heat and activate

the sprinkler heads.

     The Reserve Facility was designed, and is used, for the

storage and retrieval of merchandise in boxes.    Merchandise

arrives at petitioner's distribution center at the Receiving

Building adjacent to the Reserve Facility.    The merchandise is

unloaded at the receiving staging area of the Receiving Building

where petitioner's employees sort the boxes according to size.

All boxes are tagged with a bar code for identification of the

inventory therein and are banded and sent by conveyor to a pallet

loading station in the 1979 Shipping Building.    There, workers

load the boxes onto pallets where they are delivered to the

Reserve Facility or to other locations by forklift operators.

     The boxes that are stored in the Reserve Facility are

standard-sized boxes holding reserve merchandise inventory that

is not required in petitioner's daily order picking, packing, and

shipment operation.    The boxes are stored in the Reserve Facility

on the shelves of the storage rack system.    Pallets holding boxes

to be stored in the Reserve Facility are placed on "loading"

conveyors located at the end of every other rack aisle on the

Reserve Facility's mezzanine.    Each pallet is then loaded by a

transtacker operator onto the platform of a transtacker using a

mechanical device that is built into the transtacker.

     To store boxes on the Reserve Facility's shelves, the

transtacker operator visually searches the racks for empty
                              - 14 -

spaces, drives the transtacker to that location, and manually

transfers one box at a time from the transtacker onto the empty

rack shelf.   The operator then uses a hand-held scanner to scan

the bar code on the box and the bar code at the rack location

where the box is being stored.   This information is recorded in a

computer so the location of the box and the merchandise therein

is recorded and available for later retrieval.

     When the merchandise stored in the Reserve Facility is

needed in the picking and shipping area, it is retrieved from the

racks by the transtacker operators and distributed to other areas

of the distribution center.   To accomplish this, a transtacker

operator is given a list of boxes of merchandise to be removed

from the Reserve Facility and their locations on the shelves.

The transtacker operator drives the transtacker to each box's

location, manually retrieves the box of merchandise from the

shelf, and places the box on a pallet located on the transtacker

platform.   When the operator has retrieved the designated boxes,

the operator drives the transtacker to the Reserve Facility's

mezzanine where the pallet holding the retrieved boxes is

transferred onto one of the "unloading" conveyors located at the

end of every other rack aisle.   A forklift operator then

retrieves the pallet of boxes from the "unloading" conveyors and

transports the pallet to one of the distribution center's

shipping buildings.
                               - 15 -

     On its 1986 return, petitioner claimed an ITC for the costs

of the entire Reserve Facility.   The ITC, totaling $698,068, was

based upon $6,980,676 in costs.   Respondent disallowed $513,179

of the ITC with respect to $5,131,785.28 of these costs.

Petitioner also claimed an ITC of $26,710 with respect to

$267,102.37 in additional costs associated with the Reserve

Facility on its 1987 return.   Respondent disallowed $19,622 of

this ITC.   In addition, petitioner claimed a deduction on its

1986 and 1987 returns for depreciation on the entire cost of the

Reserve Facility based upon the accelerated 5-year useful life

method under section 168(b)(1).   Petitioner also claimed on its

1986 return an interest expense deduction for all interest

accrued during the construction of the Reserve Facility.    None of

this interest was capitalized under section 189 by petitioner.


Mezzanine System


     The Mezzanine System consists primarily of lower level racks

approximately 9 feet 6 inches high and a horizontal steel

structure with plywood decking on top of the racks which creates

an intermediate level between the two floors of petitioner's 1986

Shipping Building.   Petitioner began construction of the

Mezzanine System in 1985 and placed it in service in 1986 when

construction was completed.

     The design and the engineering for the 1986 Shipping

Building were prepared by the architectural firm of Symmes, Maini
                               - 16 -

and McKee Associates, Inc. (SMMA).      In its design and

construction of the 1986 Shipping Building, petitioner

anticipated the construction of the Mezzanine System.       The 1986

Shipping Building is a two-story building measuring 221 feet by

364 feet.   The general clear floor height from the first floor of

the 1986 Shipping Building to the underside of the second floor

is 17 feet 4 inches.   The Mezzanine System occupies approximately

219 feet by 290 feet of area in the 1986 Shipping Building.

     The Mezzanine System was designed for the site and consists

of a series of "off-the-shelf" items supplied by vendors and

assembled (with bolts and boltless connectors and some welded

connections) at the site.    On the first floor of the 1986

Shipping Building, cantilever shelving attached to the rack posts

of the Mezzanine System is used to hold petitioner's merchandise.

Along the periphery of the building, where the lower level racks

are not immediately adjacent to the building walls, lightweight

rolled steel frames are used to support the mezzanine level in

place of the racks.    On the mezzanine level, independent shelving

units sit on the plywood decking.    In addition to the shelving

units, there are some desks, enclosed work areas, a wire-mesh

fenced area (which is used for the storage of high value

inventory), conveyors, and other equipment located on the

mezzanine level.   Electrical cables, ducts, communications cable,

lighting fixtures, and sprinkler piping for the 1986 Shipping

Building are connected to, or suspended from, the underside of
                              - 17 -

the Mezzanine System.   The 1986 Shipping Building has a concrete

block enclosure on the first floor, which houses restroom

facilities for petitioner's employees.    An employee break area,

accessible from the mezzanine and connected by flooring, is

located on top of this concrete block enclosure.

     Four freight elevators are located near the center of the

1986 Shipping Building.   These elevators have stops at the first

floor, mezzanine level, and second floor of the 1986 Shipping

Building.   A separate elevator, or pallet lift, is located in the

southeast corner of the 1986 Shipping Building and also has stops

at the first floor, mezzanine level, and second floor.    One

stairway next to the freight elevators provides access among the

three levels of the 1986 Shipping Building.    Several other

stairways provide access between the mezzanine level and the

first floor, and there is one other stairway between the

mezzanine level and the second floor.    The mezzanine level is

also accessible from the adjacent 1979 Shipping Building through

one interior doorway and one additional wall opening at the

mezzanine level.

     Conveyors pass through the mezzanine level from the second

floor and from the 1979 Shipping Building.    These conveyors carry

customer orders that are ready for shipment.    The conveyors also

pass through openings in the masonry wall at the mezzanine level

to the shipping platform on the north end of the 1986 Shipping
                              - 18 -

Building.   Some of the conveyors rest on and are partially

supported by the mezzanine floor.

     The ground-level racks, supporting columns, and stairways of

the Mezzanine System are joined to the floor of the 1986 Shipping

Building by bolts.   Except for certain utility and flooring

connections, the sides of the Mezzanine System are not attached

to the 1986 Shipping Building.   Instead, diagonal bracing is used

to provide the required lateral support.   Consequently, the

Mezzanine System does not rely on the 1986 Shipping Building

structure (other than the floor) for support, nor does it provide

support for the 1986 Shipping Building.    Use of this integrated

storage and structural support system for the mezzanine floor

level offers petitioner cost savings in reduced structural steel,

reduced labor costs, and increased storage efficiencies.

     The Mezzanine System is used to store merchandise for ready

access and individual order picking in petitioner's distribution

center.   In the order picking process, petitioner's employees

collect or "pick" individual items of merchandise from

merchandise stored on shelves in order to fill a specific

customer order.   Merchandise is brought from other areas of

petitioner's distribution center by forklift operators where

pallets are either left on the first floor of the 1986 Shipping

Building or sent up to a staging area on the mezzanine floor.

Workers unload the pallets into carts and manually distribute the

goods to specific locations on the Mezzanine's storage shelving.
                              - 19 -

     Petitioner claimed an ITC for the cost of the Mezzanine

System on its 1986 return.   The ITC, totaling $169,706, was based

upon $1,697,061.80 in costs associated with the components of the

Mezzanine System.8   Respondent disallowed this ITC in the amount

of $60,985 with respect to $609,852.79 of these costs.   In

addition, petitioner claimed a deduction on its 1986 and 1987

returns for depreciation on the entire cost of the Mezzanine

System based upon the accelerated 5-year useful life method under

section 168(b)(1).   Petitioner also claimed on its 1986 return an

interest expense deduction for all interest accrued during the

construction of the Mezzanine System.   None of this interest was

capitalized under section 189 by petitioner.


                              OPINION


     The issue for consideration is whether petitioner is

entitled to ITC's under section 38 with respect to the costs of

the Reserve Facility and the Mezzanine System to an extent



     8
      Petitioner claimed an ITC on a Mezzanine System consisting
of the following items: (1) Ground-level storage racks and
cantilever shelving; (2) a horizontal steel structure joined to
and mounted on the top of the ground-level racks; (3) plywood
decking placed upon the horizontal structure that creates the
mezzanine level; (4) additional racks and shelving rising from
the mezzanine decking to a height of approximately 6 feet; (5)
additional columns and beams; (6) four one-piece stairway units
connecting the first floor to the mezzanine; and (7) lightweight
rolled steel frames that support the plywood decking and framing
at the northwest and southeast corners along the periphery of the
Mezzanine System where there are no ground-level racks.
                               - 20 -

greater than that allowed by respondent.9   The parties agree that

if the Reserve Facility and/or the Mezzanine System, or any part

thereof, are determined to be "section 38 property", as defined

in section 48(a)(1), then petitioner is entitled to:   (1) An ITC

with respect to such section 38 property (or part thereof); (2) a

5-year depreciation schedule under section 168(b)(1) with respect

to such section 38 property (or part thereof); and (3) a

deduction under section 163 for interest accrued during the

construction period with respect to such section 38 property (or

part thereof).   The parties also agree that if petitioner is not

entitled to the ITC's, then it is entitled to:   (1) Amortize

interest accrued during the construction period over a 10-year

period under section 189, and (2) depreciate the property (or

part thereof) using a 19-year schedule.

     Petitioner bears the burden of proving its entitlement to

the claimed credit.    See Rule 142(a); Uecker v. Commissioner, 81

T.C. 983, 998 (1983), affd. per curiam on another issue 766 F.2d

909 (5th Cir. 1985).

     To qualify for an ITC, property must qualify as section 38

property, which is defined in section 48(a)(1) as follows:




     9
      The investment tax credit was repealed by the Tax Reform
Act of 1986, Pub. L. 99-514, sec. 211(a), 100 Stat. 2085, 2166,
effective (subject to transition rules) for property placed in
service after Dec. 31, 1985. The property's status as transition
property is not in dispute.
                                   - 21 -

          (1) In general.--* * * the term "section 38
     property" means--

               (A) tangible personal property (other
          than an air conditioning or heating unit), or

               (B) other tangible property (not
          including a building and its structural
          components) but only if such property--

                        (i) is used as an integral
                   part of manufacturing, production,
                   or extraction or of furnishing
                   transportation, communications,
                   electrical energy, gas, water, or
                   sewage disposal services, or

               *       *       *     *      *      *    *

                        (iii) constitutes a facility
                   used in connection with any of the
                   activities referred to in clause
                   (i) for the bulk storage of
                   fungible commodities (including
                   commodities in a liquid or gaseous
                   state), or


     Thus, section 48(a)(1) creates two distinct categories of

section 38 property:       (1) Tangible personal property; and (2)

other tangible property, other than a building and its structural

components, but only if the property is used as an integral part,

or used in connection with, one of the qualifying activities

described in section 48(a)(1)(B)(i).            Munford, Inc. v.

Commissioner, 87 T.C. 463, 475 (1986), affd. 849 F.2d 1398 (11th

Cir. 1988).    Petitioner does not argue that the property in

question constitutes other tangible property described in section

48(a)(1)(B).    Rather, petitioner asks us to hold that the Reserve
                             - 22 -

Facility and the Mezzanine System constitute tangible personal

property within the meaning of section 48(a)(1)(A).

     The term "tangible personal property" is defined in section

1.48-1(c), Income Tax Regs., as follows:


     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. Thus, such property as
     production machinery, printing presses, transportation
     and office equipment, refrigerators, grocery counters,
     testing equipment, display racks and shelves, and neon
     and other signs, which is contained in or attached to a
     building, constitutes tangible personal property for
     purposes of the credit allowed by section 38. Further,
     all property which is in the nature of machinery (other
     than structural components of a building or other
     inherently permanent structure) shall be considered
     tangible personal property even though located outside
     a building. * * *


Therefore, section 48(a)(1)(A), unlike section 48(a)(1)(B),

generally excludes from its scope not only buildings, but also

other inherently permanent structures and their structural

components.

     To determine whether property is tangible personal property,

we must first determine whether that property is a "building"

within the meaning of section 1.48-1(e)(1), Income Tax Regs.

Loda Poultry Co. v. Commissioner, 88 T.C. 816, 824 (1987);

Munford, Inc. v. Commissioner, supra at 477.   The term "building"

is generally defined as:
                              - 23 -


      any structure or edifice 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. The term includes, for example,
      structures such as apartment houses, factory and office
      buildings, warehouses, barns, garages, railway or bus
      stations, and stores. * * * [Sec. 1.48-1(e)(1),
      Income Tax Regs.]


In determining whether a structure is a building for purposes of

the ITC, the regulations and the case law examine both the

appearance and the function of the structure.   Munford, Inc. v.

Commissioner, supra at 479.   The appearance test, whether the

structure looks like a building, generally requires a structure

enclosing a space within its walls and covered by a roof.    Sec.

1.48-1(e)(1), Income Tax Regs.


A.   Reserve Facility


      We have examined photographs, blueprints, and videotapes of

the Reserve Facility and have considered the testimony of the

witnesses.   The Reserve Facility is a structure of substantial

dimensions that encloses space10 surrounded by walls and covered

by a roof.   See Yellow Freight Sys., Inc. v. United States, 538

F.2d 790, 796 (8th Cir. 1976); Munford, Inc. v. Commissioner,


      10
      Petitioner argues that the Reserve Facility does not
enclose space, but, rather, encloses almost nothing except for
the storage rack system. This argument ignores the obvious
purpose for the racks; i.e., to allow petitioner to use the space
within the Reserve Facility for the storage of its merchandise.
                              - 24 -

supra at 477; sec. 1.48-1(e)(1), Income Tax Regs.   Thus, we

conclude that the Reserve Facility resembles a building.

     We must next consider whether the Reserve Facility functions

as a building.   The function test requires a determination as to

"whether the purpose of the structure at issue is a purpose

ejusdem generis to the purposes described by example in section

1.48-1(e)(1), Income Tax Regs."   Munford, Inc. v. Commissioner,

supra at 480 (citing Consolidated Freightways, Inc. & Affiliates

v. Commissioner, 74 T.C. 768, 795 (1980), affd. in part and revd.

in part on other grounds 708 F.2d 1385 (9th Cir. 1983)).   In

Illinois Cereal Mills, Inc. v. Commissioner, T.C. Memo. 1983-469,

affd. 789 F.2d 1234 (7th Cir. 1986), we stated that


     The definition in section 1.48-1(e)(1), Income Tax
     Regs., expressly includes as "buildings" factory and
     office buildings where human activity may normally be
     expected to be of great importance; it also expressly
     includes as "buildings" warehouses, barns, and
     structures providing parking spaces, where human
     activity may be of little or no importance. The courts
     have considered the matter of human activity, sometimes
     in terms of the nature of the human activity and
     sometimes in terms of the quantity and quality of human
     activity in the structure. * * *


Therefore, in applying this test, a major focus of inquiry has

been whether the structure provides working space for employees

that is more than merely incidental to the primary function of

the structure.   This requires consideration of both the quantity

and quality of the human activity within the structure.    Id.
                              - 25 -

     Petitioner asserts that the primary function of the Reserve

Facility is the efficient storage and retrieval of its inventory.

Petitioner contends that the activities of its employees in the

Reserve Facility are merely ancillary to this function.   Relying

on Munford, Inc. v. Commissioner, supra at 484-485, and cases

cited therein, petitioner argues that this Court has repeatedly

held that the storage and removal of goods by employees is not

the type of work or activity that is necessary to categorize a

facility as a building.   We disagree.

     Contrary to petitioner's interpretation, we do not examine

the type of employee activity in a vacuum.   Rather, the activity

must be examined in relation to the "nature of the business

venture housed within that structure."   Valmont Indus., Inc. v.

Commissioner, 73 T.C. 1059, 1073 (1980); see also Sunnyside

Nurseries v. Commissioner, 59 T.C. 113 (1972).   The primary

function of the refrigerated structure at issue in Munford was to

"[maintain] sub-zero temperatures to prevent the spoilage of

frozen foods."   Munford, Inc. v. Commissioner, 849 F.2d at 1404.

The activities of the employees in Munford were limited in both

scope and duration due to the cold temperature of the

refrigerated structure.   Munford, Inc. v. Commissioner, 87 T.C.

at 483.   Therefore, despite the fact that employees routinely

moved goods into and out of the structure, we held that this

activity was merely incidental to the specialized purpose of the
                              - 26 -

structure at issue and, thus, the structure was not a building.

Id. at 484-485.

     Moreover, the cases cited in Munford involved specialized

structures that are distinguishable from the Reserve Facility in

this case.   In those cases, the Court's ultimate inquiry was what

functions the particular structures served. Merchants

Refrigerating Co. v. Commissioner, 60 T.C. 856 (1973); Central

Citrus Co. v. Commissioner, 58 T.C. 365 (1972); Catron v.

Commissioner, 50 T.C. 306 (1968).   In all of those cases, we

found that the buildinglike structures functioned as more than

mere storage facilities.   See, for example, Catron v.

Commissioner, supra, where the refrigerated area of a large

Quonset-like structure was used for the cold storage of apples;

Merchants Refrigerating Co. v. Commissioner, supra, where a large

freezer room was used for the storage of frozen foods; and

Central Citrus Co. v. Commissioner, supra, where atmospherically

controlled "sweet rooms" were used to ripen fruit.

     We find that, unlike the structures in Munford and the cases

cited therein, human activity is essential, rather than merely

incidental, to the function of the Reserve Facility.     Petitioner

agrees that the function of the Reserve Facility is to facilitate

the storage and retrieval of merchandise.   Similarly, the primary

function of a typical warehouse is also the storage and retrieval

of merchandise.   However, petitioner attempts to avoid

characterizing the Reserve Facility as a warehouse based on its
                             - 27 -

innovative design and construction.   While we recognize that the

design and the construction of the Reserve Facility may be

innovative, the primary function of the Reserve Facility is not

different from the quintessential function of any other

warehouse; it is simply more efficient at that function.    Like

any typical warehouse, the Reserve Facility's function is

accomplished primarily by the efforts of petitioner's employees

who work in the facility since the merchandise is not stored and

retrieved by the structure itself.    See Yellow Freight Sys., Inc.

v. United States, 538 F.2d at 796.    Therefore, we find the

activities of petitioner's employees to be of sufficient

magnitude to compel a finding that the human activity inside the

Reserve Facility is not merely incidental to its primary purpose.

     Moreover, section 1.48-1(e)(1), Income Tax Regs., states

that the term "building" includes, for example, warehouses.    The

House report accompanying the Revenue Act of 1962, Pub. L. 87-

834, 76 Stat. 960, also lists a warehouse as an example of a

building.


          Buildings and structural components thereof are
     not eligible for the credit. The term "building" is to
     be given its commonly accepted meaning, that is, a
     structure or edifice enclosing a space within its
     walls, and usually covered by a roof. It is the basic
     structure of an improvement to land the purpose of
     which is, for example, to provide shelter or housing or
     to provide working, office, display, or sales space.
     The term would include, for example, the basic
     structure used as a factory, office building,
     warehouse, theater, railway or bus station, gymnasium,
                              - 28 -

     or clubhouse. * * * [H. Rept. 1447, 87th Cong., 2d
     Sess. (1962), 1962-3 C.B. 405, 516; emphasis added.]


     In light of Congress' expressed intentions, and because we

find that the Reserve Facility functions essentially as a

warehouse and the human activity involved therein is not merely

incidental, we hold that the Reserve Facility is a building.

     Petitioner contends that even if the Reserve Facility

resembles a building and functions as a building, it is not an

improvement to land because it is movable.    In cases involving

the issue of movability, we have approached the question of

whether the property was tangible personal property by

determining whether the structure was "inherently permanent".

Moore v. Commissioner, 58 T.C. 1045, 1052 (1972), affd. 489 F.2d

285 (5th Cir. 1973); Fox Photo, Inc. v. Commissioner, T.C. Memo.

1990-348.   Whether property is inherently permanent depends upon

the fashion in which it is affixed to the land and whether it is

designed to remain permanently in place.     Everhart v.

Commissioner, 61 T.C. 328, 330 (1973).     In making our

determination as to whether the Reserve Facility is inherently

permanent, we shall consider the six-part test articulated in

Whiteco Industries, Inc. v. Commissioner, 65 T.C. 664, 672-673

(1975):


          (1) Is the property capable of being moved, and
     has it in fact been moved? * * *
                              - 29 -

          (2) Is the property designed or constructed to
     remain permanently in place? * * *

          (3) Are there circumstances which tend to show
     the expected or intended length of affixation, i.e.,
     are there circumstances which show that the property
     may or will have to be moved? * * *

          (4) How substantial a job is removal of the
     property and how time-consuming is it? Is it "readily
     removable"? * * *

          (5) How much damage will the property sustain
     upon its removal? * * *

          (6) What is the manner of affixation of the
     property to the land? * * *


     Petitioner's argument that the Reserve Facility is not

inherently permanent rests primarily on evidence that a similar

structure has been moved.   Petitioner presented evidence that

R.R. Donnelley & Sons Co. (Donnelley) moved a structure with a

design similar to the Reserve Facility.    The evidence shows that

this structure was disassembled, moved approximately 350 feet,

and reassembled.   This entire process took approximately 3

months.   The relocation of the Donnelley facility did not include

the concrete foundation.

     The proper application of the Whiteco factors, however,

rests on the premise that movability itself is not the key

determinant of lack of permanence.     See Everhart v. Commissioner,

supra at 331 (holding that movability per se is not determinative

as to whether property is personal or not).    Almost any building

or structure can be moved given ample time and manpower.    See
                                - 30 -

Mallinckrodt, Inc. v. Commissioner, T.C. Memo. 1984-532, affd.

778 F.2d 402 (8th Cir. 1985).    Therefore, the mere fact that the

Reserve Facility is theoretically capable of being moved does not

conclusively establish that it is not inherently permanent.

     In the instant case, petitioner has failed to establish that

either the design or the construction of the Reserve Facility

indicates a lack of permanence.    The Reserve Facility was

specifically designed for the site as an addition to petitioner's

distribution center.   Construction of the Reserve Facility

required extensive site work.    The foundation for the Reserve

Facility, which petitioner concedes cannot be moved, also

involved considerable effort and expense.    Moreover the materials

used and the method of construction further indicate the

permanent nature of the Reserve Facility.    Finally, petitioner

concedes that it has no plans to move the Reserve Facility and

that the time and effort involved, if it were to move the

structure, would be substantial.    In light of the evidence

presented, we find that the Reserve Facility is inherently

permanent and thus an improvement to petitioner's land.

     Relying on section 1.48-1(c), Income Tax Regs., petitioner

nevertheless contends that the Reserve Facility is in the nature

of machinery and qualifies as tangible personal property,

notwithstanding the fact that it is an inherently permanent

structure.   See Munford, Inc. v. Commissioner, 87 T.C. 463

(1986); Weirick v. Commissioner, 62 T.C. 446, 451-452 (1974);
                               - 31 -

sec. 1.48-1(c), Income Tax Regs.   Petitioner argues that the

structural elements of the Reserve Facility are so closely

related in design, construction, and function to the transtackers

that they cannot realistically be treated as two separate groups

of assets.

     Petitioner's reliance upon section 1.48-1(c), Income Tax

Regs., is based, in large part, on Weirick v. Commissioner,

supra, in which we considered whether certain line towers and

passenger ramps used in the operation of a ski lift were section

38 property.   In Weirick, we held that the line towers were so

affixed to the ground as to be considered inherently permanent

structures.    We also held that certain equipment attached to the

line towers was property in the nature of machinery and that the

line towers had no function other than supporting that equipment.

The towers and the equipment were physically connected, and when

it was necessary to replace the equipment, it was often as

economical to replace the inherently permanent tower as well.

Therefore, we decided that the line towers and the equipment were

so closely related that they formed an integral mechanism which

was property in the nature of machinery.   Consequently, we held

that the line towers were eligible for an ITC.   However, we did

not hold that the line towers were property in the nature of

machinery merely because they were part of the ski lift.   Rather,

we based our holding upon the close relationship of the line

towers to the attached equipment, which was itself property in
                                - 32 -

the nature of machinery.   With regard to the earthen passenger

ramps in Weirick, we found that even if the entire ski lift were

removed, the ramps would normally remain in place and thus were

inherently permanent and did not qualify for an ITC.   Therefore,

we declined to hold that the entire ski lift was property in the

nature of machinery.   Weirick v. Commissioner, supra at 456.

     A more revealing comparison may be drawn with the facts of

Munford, Inc. v. Commissioner, 87 T.C. 463 (1986), in which the

Commissioner allowed an ITC for certain refrigeration components,

such as pipes and pipe insulation, valves, and motors, but

disallowed an ITC for the structural elements of the refrigerated

area including the foundation, footings, walls, floor, roofing

and supports, vapor barrier, insulation, and electrical

components allocable thereto.    The taxpayer in Munford argued

that although the property in issue was an inherently permanent

structure, it qualified as tangible personal property because it

was in the nature of machinery, similar to the line towers in

Weirick v. Commissioner, supra.    The taxpayer asserted that the

structural elements of the refrigerated area operated together

with the refrigeration system to make the refrigerated area

function like one large refrigerator or freezer.

     However, we held that the proper application of Weirick

required us to focus on the individual structural elements of the

refrigerated area rather than the facility as a whole.    In

Munford, we found that the individual structural elements of the
                                - 33 -

refrigeration facility were not property in the nature of

machinery, because those elements were fixed in place and did not

serve a machinerylike function, and were not so closely related

to other property as to be considered property in the nature of

machinery.    We recognized that if, when it became necessary to

replace the equipment, it would have been as economical to

replace the whole refrigeration facility, including the

structural elements, as it would have been to replace only the

equipment, we would have considered that fact an indication that

the structural components and the refrigeration equipment were so

closely related as to be considered property in the nature of

machinery.    The taxpayer in Munford, however, made no such

showing.     Munford, Inc. v. Commissioner, 87 T.C. at 495.

     Moreover, we stated that if the purpose of the structural

elements had been simply to support and assist the functioning of

other property in the nature of machinery, we would have

considered that fact as a further indication that the structural

components and the machinery were so closely related that the

structural components should be considered property in the nature

of machinery.     The structural elements in Munford however, served

a function independent of the machinery, such as keeping out

humidity, reducing temperature migration, and providing an

enclosed, protected space in which frozen foods might be stored.

Id. at 492-493.
                                - 34 -

     Our inquiry in the instant case is thus not to consider

whether the Reserve Facility as a whole constitutes property in

the nature of machinery.    Rather, the question presented is

whether the individual structural elements of the Reserve

Facility qualify as property in the nature of machinery which is

eligible for an ITC.   The structural elements of the Reserve

Facility are fixed in place and are similar to the structural

elements involved in Munford.     The transtackers, like the

refrigeration equipment in Munford, are the only components of

the Reserve Facility that could be considered to have a

machinerylike function.    Petitioner has not shown that if it

became necessary to replace the transtackers in the Reserve

Facility, it would be as economical to replace the entire

facility, including the structural elements, as it would be to

replace only the transtackers.    Additionally, petitioner admits

that the walls and the roof of the Reserve Facility have a

function separate and apart from merely supporting the

transtackers.   Petitioner concedes that the purpose of the

roofing and wall panels connected to the racks is merely to

protect petitioner's inventory.    Although the guide tubes and the

electrical bus bars for the transtackers are attached to the

racks, the primary purpose of the racks is not to support this

equipment but, instead, to hold petitioner's merchandise and to

support the roof and the walls that protect the merchandise.

While the floor slab provides a smooth surface for the
                                - 35 -

transtackers, its primary purpose is to support the racks and

other structural elements of the Reserve Facility.    Consequently,

as in Munford, the structural elements here have a function

independent of supporting the machinery, which indicates that the

structural elements are not so closely related to the machinery

that they should be considered in the nature of machinery

themselves.   Id. at 492-493.

     Nevertheless, petitioner contends that it is entitled to an

ITC for the separate components of the Reserve Facility

individually, which include:    (1) The storage rack system; (2)

the superflat concrete slab; (3) the roofing and the wall panels;

and (4) miscellaneous systems (consisting of heating,

ventilation, electrical, and fire protection systems).

Respondent, on the other hand, contends that these individual

items constitute inherently permanent structural components of

the Reserve Facility and, therefore, do not qualify as section 38

property.

     Section 1.48-1(e)(2), Income Tax Regs., explains the meaning

of "structural components" mainly by illustration rather than by

definition:


     The term "structural components" includes such parts of
     a building as walls, partitions, floors, and ceilings,
     as well as any permanent coverings therefor such as
     panelling or tiling; windows and doors; all components
     (whether in, on, or adjacent to the building) of a
     central air conditioning or heating system, including
     motors, compressors, pipes and ducts; plumbing and
     plumbing fixtures, such as sinks and bathtubs; electric
                              - 36 -

     wiring and lighting fixtures; chimneys; stairs,
     escalators, and elevators, including all components
     thereof; sprinkler systems; fire escapes; and other
     components relating to the operation or maintenance of
     a building. * * *


To the extent that any of the components relate to the overall

operation and maintenance of the Reserve Facility, they are

structural components of such and do not qualify as tangible

personal property.   Scott Paper Co. v. Commissioner, 74 T.C. 137,

182-183 (1980).


     1.   The Storage Rack System


     The Reserve Facility does not have a standard column grid

typically used to support the roof and the walls in a free-

standing building.   Instead, the storage rack system is the

structural support for the Reserve Facility.    Therefore, the

storage rack system not only provides shelving for the storage of

petitioner's merchandise; it also provides the primary structural

support for the walls and the roof of the Reserve Facility.

Petitioner contends, however, that the support function of the

storage rack system is secondary to that of providing racks and

shelving for storage, and, therefore, the racks are not a

structural component of the Reserve Facility.    Petitioner relies

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

C.B. 41; and Rev. Rul. 74-391, 1974-2 C.B. 9, in support of its

contention.
                               - 37 -

     In Rev. Rul. 79-181, supra, the Commissioner determined that

structural columns which were specifically designed to support

400-ton cranes and craneway structures were tangible personal

property, because they functioned as part of the specific items

of machinery with which they were associated.    The Commissioner

determined that "Any function they may have as building

components is strictly incidental to their essential function as

a part of those items of machinery or equipment."    Rev. Rul. 79-

181, supra, 1979-1 C.B. at 42.    Similarly, in Rev. Rul. 79-183,

supra, the Commissioner determined that a foundation which was

specially constructed to support several stamping presses was an

essential part of that machinery.    Although the foundation also

served as a floor, that use was "strictly incidental to the use

that necessitated its special design."    Rev. Rul. 79-183, supra,

1979-1 C.B. at 45.    Likewise, in Rev. Rul. 74-391, supra, 1974-2

C.B. at 9, the Commissioner held that a raised false floor which

was designed and constructed "only to provide access" for the

installation and operation of computer equipment was essentially

part of that equipment and not a structural component of the

building.    Respondent has thus allowed an ITC for certain

property which is essentially part of machinery or equipment,

notwithstanding the fact that it has an incidental function as a

structural component of a building or an inherently permanent

structure.
                                - 38 -

     Here, we have previously determined that the storage rack

system does not function as part of a machine.   Additionally, we

find that the storage rack system provides more than a mere

"incidental" structural support function.   Even if structural

support is not the "primary" function of the racks, it is

certainly more than "incidental" to their other functions.

     Moreover, the storage rack system is a permanent part of the

Reserve Facility.   It is the main structural support for the

Reserve Facility, a structure that we have already found to be

inherently permanent.   Without the storage rack system, the roof

and most of the walls of the Reserve Facility would collapse.

Therefore, we find that the storage rack system is an inherently

permanent structural component of the Reserve Facility and does

not qualify as section 38 property.


     2.   Concrete Slab Floor


     Petitioner maintains that the concrete slab floor is also an

item of machinery because it was specially designed to support

the storage rack system and the transtackers.    In support of this

argument, petitioner again relies upon Rev. Rul. 79-183, supra,

and Rev. Rul. 79-181, supra, in addition to our determination in

Texas Instruments, Inc. v. Commissioner, T.C. Memo. 1992-306,

where we held that a specially designed floor was essential to

the operation of the taxpayer's machinery, notwithstanding the

fact that part of the floor was used for activities that did not
                                 - 39 -

involve heavy machinery.   We stated in Texas Instruments that, to

the extent that the component also served as a floor, "this use

'[was] strictly incidental to the use that necessitated its

special design.'"   Id. (quoting Rev. Rul. 79-183, supra, 1979-1

C.B. at 45).   In addition, we held that another floor in Texas

Instruments was not tangible personal property, because "it was

not so specially designed, constructed, or used to serve other

qualifying property".   Id.

     We note that the Reserve Facility's concrete slab floor is

thicker than a conventional warehouse floor.    The thickness of

the Reserve Facility's concrete slab floor is due primarily to

petitioner's choice of structural support; i.e., the racks, which

are not qualifying property.11    However, we do not find that the

thickness of the concrete slab was essential to the operation of

petitioner's transtackers, which are qualifying property.

Consequently, the function of the concrete slab floor as a

structural component was not strictly incidental to its special

design; rather, its function as a structural component of the

Reserve Facility necessitated its special design.

     Petitioner also argues that the concrete slab's special

design is necessary for the efficient operation of the


     11
      A conventional warehouse floor would require footings
under the structural support columns. These footings would be
thicker than the rest of the conventional floor slab. The size
of the footings would depend upon the column loads and soil
characteristics of the site.
                                 - 40 -

transtackers.   The top surface of the concrete slab under the

racks is constructed with an F100 or "superflat" finish, which is

smoother and more level than a conventional concrete floor.    The

concrete slab floor, although modified for design considerations,

is still clearly a structural component of the Reserve Facility.

Petitioner has provided no meaningful method to allocate any

portion of the total expense of the concrete slab floor to the

cost of the superflat finish.     Rule 142(a).


     3.   Roof and Wall Panels


     Petitioner contends that, even if the roof and the wall

panels might otherwise constitute parts of a building, these

items still qualify for an ITC under section 1.48-1(e)(1)(ii),

Income Tax Regs., which excludes from the term "building":


     a structure which houses property used as an integral
     part of an activity specified in section 48(a)(1)(B)(i)
     if the use of the structure is so closely related to
     the use of such property that the structure clearly can
     be expected to be replaced when the property it
     initially houses is replaced. * * *


     Petitioner argues that the exception provided in section

1.48-1(e)(1)(ii), Income Tax Regs., applies here, because if the

racks were to be replaced, the roof and the walls would also have

to be replaced.   However, petitioner does not contend that it

participates in any activity specified in section 48(a)(1)(B)(i).

Rather, it argues that the same tests apply in determining
                               - 41 -

whether property is a building, regardless of whether the

ultimate issue is whether the property qualifies under section

48(a)(1)(A) or (B).   Petitioner relies upon L&B Corp. v.

Commissioner, 88 T.C. 744, 760-761 (1987), revd. on other grounds

862 F.2d 667 (8th Cir. 1988), and Munford, Inc. v. Commissioner,

87 T.C. at 478 n.9, in support of this argument.    Although these

cases hold that the general definition of the term "building" is

similar under section 48(a)(1)(A) and (B), the exception provided

by section 1.48-1(e)(1)(ii), Income Tax Regs., specifically

requires that the structure house property which is used as an

integral part of an activity specified in section 48(a)(1)(B)(i).

Neither L&B Corp. nor Munford undermines this requirement.

Therefore, because petitioner does not participate in any

activity specified in section 48(a)(1)(B)(i), this exception does

not apply to the facts in this case.    Consequently, the roof and

the walls of the Reserve Facility are structural components in

accordance with section 1.48-1(e)(2), Income Tax Regs.


     4.    Miscellaneous Systems


     The remaining components of the Reserve Facility in issue

are the electrical, heating, ventilation, and fire protection

systems.    While recognizing that these items are specifically

included as examples of items which constitute "structural

components" in section 1.48-1(e)(2), Income Tax Regs., petitioner

insists that they do not "relate to the operation or maintenance
                              - 42 -

of a building".   Scott Paper Co. v. Commissioner, 74 T.C. at 183.

In Scott Paper Co. v. Commissioner, supra at 182-183, which

involved a claimed credit for electric wiring, we stated:


     Although we give great weight to respondent's
     regulations, it would be improper to read the words
     "electric wiring" in a vacuum and conclude that those
     electric cables, therefore, must be structural
     components. Rather, the effect of the final element of
     that same subparagraph, which reads "and other
     components relating to the operation or maintenance of
     a building," must be taken into account. That final
     element functions as a descriptive phrase intended to
     present the basic test used for identifying structural
     components. The preceding elements are examples of
     items which meet that test as a general rule. Items
     which occur in an unusual circumstance and do not
     relate to the operation or maintenance of a building
     should not be structural components despite being
     listed in section 1.48-1(e)(2), Income Tax Regs. * * *
     Accordingly, the critical test * * * is whether they
     [the electric wiring and fixtures] relate to the
     overall operation and maintenance of a building.
     * * * [Fn. refs. omitted.]


See also Everhart v. Commissioner, 61 T.C. at 331; Ponderosa

Mouldings, Inc. v. Commissioner, 53 T.C. 92, 96 (1969).

     In Scott, we held that "a logical and objective measure of

electrical load exists, allowing an allocation between the

structural and process functions which are served by the

electrical components."   Scott Paper Co. v. Commissioner, supra

at 185.   Based on this objective evidence, we held that the

components of a primary electrical system were tangible personal

property to the extent they provided power for the taxpayer's

process machinery, and we disallowed ITC's only for the
                              - 43 -

percentage of the system that was deemed to be used "to provide

general building services".   Id. at 185-186.

     Here, petitioner claims that 75 percent of the cost of the

Reserve Facility's electrical system should be allocated to the

electrical bus bar system for the transtackers.   However,

petitioner has not produced evidence demonstrating the percentage

of electrical load attributable to the transtackers.

Petitioner's unsubstantiated claim that 75 percent of the cost of

the electrical system is attributable to the transtackers does

not satisfy the "logical and objective" measurement required

under Scott Paper Co. v. Commissioner, supra.

     In addition, petitioner argues that no portion of the

electrical system provides "general building services" due to the

unusual design of the Reserve Facility.   The fact that the design

of the Reserve Facility may be unusual will not, by itself,

prevent its electrical system from being defined as a structural

component.   The electrical system provides general building

services such as lighting and power and is, therefore, a

structural component of the Reserve Facility.

     Petitioner contends that the plumbing and the sprinkler

systems are not structural components, since they are built into

and integrated with the rack system and are not suitable for

providing general building services.   Respondent maintains that

the sprinkler system is listed as a structural component in the

regulations and that its placement within the storage rack system
                               - 44 -

is necessary because the water could not reach the lower levels

due to the intervening merchandise on the shelves.

     In Ponderosa Mouldings, Inc. v. Commissioner, supra, the

taxpayer argued that because of the fire hazard involved in the

manufacture of its wood moldings, its sprinkler system should be

considered as machinery necessary to its operation and not as a

structural component, which is part of the operation or

maintenance of the building.    Id. at 95.   We disagreed and held

that the entire sprinkler system was a structural component.       We

find the facts in the instant case essentially similar to those

in Ponderosa Mouldings.   The sprinkler system here relates to the

operation and the maintenance of the Reserve Facility and, thus,

is a structural component not eligible for an ITC.

     Petitioner contends that the heating system was designed to

provide for the operation and the maintenance of the Reserve

Facility's water-based sprinkler system and not for the comfort

of petitioner's employees.    Respondent argues that the heating

system for the Reserve Facility is specifically excluded from the

definition of "tangible personal property" under section

48(a)(1)(A).   Section 1.48-1(e)(2), Income Tax Regs., defines

heating systems as structural components unless the "sole

justification" test is met.


     [T]he term "structural components" does not include
     machinery the sole justification for the installation
     of which is the fact that such machinery is required to
     meet temperature or humidity requirements which are
                                - 45 -

     essential for the operation of other machinery or the
     processing of materials or foodstuffs. Machinery may
     meet the "sole justification" test provided by the
     preceding sentence even though it incidentally provides
     for the comfort of employees, or serves, to an
     insubstantial degree, areas where such temperature or
     humidity requirements are not essential." [Emphasis
     added.]


To satisfy the "sole justification" test, petitioner must

establish that the heating system is machinery, the sole

justification for the installation of which was to meet

temperature or humidity requirements which are essential for the

operation of other machinery.     Sec. 1.48-1(e)(2), Income Tax

Regs.   Petitioner has failed to present sufficient evidence

demonstrating that the sole justification of the heating system

was essential for the operation of the sprinkler system.

Furthermore, we have determined that the sprinkler system is not

machinery but rather a structural component of the Reserve

Facility.   Therefore, the Reserve Facility's heating system is

ineligible for an ITC.


B.   The Mezzanine System


      Petitioner also claimed an ITC for the costs of the

Mezzanine System located on the ground floor of its two-story

1986 Shipping Building.     The Mezzanine System occupies

approximately 290 feet by 219 feet of the 1986 Shipping Building

and consists of the following items:     (1) Ground-level storage

racks; (2) a horizontal steel structure joined to and mounted on
                             - 46 -

the top of the ground-level racks; (3) plywood decking placed

upon the horizontal structure that creates the mezzanine level;

(4) additional racks and shelving located on the mezzanine

level;12 (5) additional columns and beams; (6) four one-piece

stairway units connecting the first floor to the mezzanine level;

and (7) steel frames that support the plywood decking and the

framing where there are no ground-level racks.   Petitioner

maintains that the Mezzanine System is not physically connected

to the 1986 Shipping Building (other than the connections to the

first floor of the building) and, therefore, cannot be a

structural component of the 1986 Shipping Building.   Furthermore,

petitioner contends that the Mezzanine System's structural

support was constructed using bolts and boltless connectors with

a minimum of welded connections, which indicates that it was

designed to be easily moved and not a permanent component of the

1986 Shipping Building.

     Respondent argues that the Mezzanine System is inherently

permanent and constitutes a structural component of the 1986

Shipping Building which does not qualify as section 38 property

pursuant to section 48(a)(1)(A).   In support of this contention,

respondent maintains that the floor of the Mezzanine System

relates to the maintenance and the operation of the 1986 Shipping

     12
      The parties do not agree as to the extent, if at all, to
which the costs of the racks and the shelving located on the
mezzanine level are included in the actual costs of the Mezzanine
System.
                              - 47 -

Building, since it provides access to other parts of the 1986

Shipping Building and the 1979 Shipping Building, it is used for

the storage and picking of merchandise, and its underside

provides support for electrical and communication cables,

lighting fixtures, sprinkler piping, and ventilation ducts for

the first floor of the 1986 Shipping Building.

     In determining whether an item is a structural component of

a building, the permanency of that component has been considered

an important factor.   In Metro Natl. Corp. v. Commissioner, T.C.

Memo. 1987-38, we considered whether various items in the

taxpayer's buildings were eligible for an ITC.   We found that the

structural components listed in section 1.48-1(e)(2), Income Tax

Regs., share a common characteristic--reasonable permanency.

Furthermore, we stated that "In the ordinary case, a building is

planned, designed, and constructed with the expectation that the

items listed in the regulation will remain in place indefinitely.

They are usually integrated with the building during the

construction phase and are permanent parts of the building."

     An examination of the evidence in this case indicates that

the Mezzanine System is a fully integrated structural component

of the 1986 Shipping Building.   The 1986 Shipping Building was

planned and designed with the integration of the Mezzanine System

in mind.   On this issue, the testimony of petitioner's manager of

Facilities, Planning, and Engineering, James R. Helming, is

particularly revealing:
                              - 48 -


     Q.   Was Symmes, Maini & McKee [the architectural
     designers for the 1986 Shipping Building] involved with
     the --

     A.   They did not design the rack system or the
     mezzanine system. We gave them a drawing of the rack
     system that we were going to install into the space so
     that they knew how to place their lighting, how to
     place their sprinklers, how to place their mechanical
     systems.

     Q.   Okay. They did design the lighting for the
     mezzanine, did they? And incorporated it in the
     overall lighting plan of the building.

     A.   That's correct.

     Q.   And they did that for the electrical service.

     A.   That's correct.

     Q.   And they did that for the heating.

     A.   Right.

     Q.   And the ventilation.

     A.   And, again, they were told at the initial design
     to plan capacity for the building, for the mechanical
     systems, the heating system and for the electrical
     system and for the sprinkler system, that, in the
     future, we would be adding the mezzanine level and that
     would require an additional level of lighting, an
     additional level of sprinklers, and an additional level
     of heat and ventilation.


     Moreover, the construction and the integration of the

Mezzanine System in the 1986 Shipping Building demonstrate the

expectation that it would remain in place indefinitely.

Electrical wiring, communications cables, sprinkler systems, and

duct work for heating and ventilating are all attached to the

Mezzanine System.   In addition, the four freight elevators
                              - 49 -

located near the center of the 1986 Shipping Building serve all

building levels including a specific stop for the mezzanine

level.   Finally, openings are constructed in the masonry walls of

the 1986 Shipping Building to provide access to the mezzanine

level from the adjacent 1979 Shipping Building.     Together, these

factors indicate that the Mezzanine System is integrated with,

and relates to, the operation or maintenance of the 1986 Shipping

Building.

     Nevertheless, petitioner contends that the Mezzanine System

was designed to be flexible and that it will be removed in the

near future to allow for changes in the operation of the 1986

Shipping Building.   The evidence, however, reveals that

petitioner did not change the Mezzanine System in any significant

manner during the 10 years following its installation.

Furthermore, petitioner estimates that the removal of the

Mezzanine System components will take six to eight people a

little over 1 month to accomplish.     However, this estimate did

not account for the time and effort required to disconnect the

electrical wiring, communications cables, sprinkler systems, and

duct work connected to the Mezzanine System.     We find that the

substantial time and effort involved in both the construction and

potential removal of the Mezzanine System, as well as the degree

of integration with the 1986 Shipping Building, further reflect

the permanent nature of the Mezzanine System.
                             - 50 -

     In view of the foregoing, we hold that the Mezzanine System

is a structural component of the 1986 Shipping Building and,

thus, not eligible for the ITC's in an amount exceeding that

allowed by respondent.13



                                        Decisions will be entered

                                   under Rule 155.




     13
      Petitioner does not argue that the individual items of the
Mezzanine System are eligible for an ITC separately, and there is
no evidence in the record that would allow us to allocate any
cost to individual components of the Mezzanine System. We note,
however, that respondent's notice of deficiency allowed a
substantial portion of the ITC that petitioner claimed with
respect to the racks in the Mezzanine System.
