                                           GIBSON & ASSOCIATES, INC., PETITIONER v. COMMISSIONER
                                                    OF INTERNAL REVENUE, RESPONDENT

                                                        Docket No. 5863–08.                  Filed February 24, 2011.

                                                  P is an engineering and heavy construction company that
                                               primarily erects or rehabilitates streets, bridges, airport run-
                                               ways, and other related real property (collectively, real prop-
                                               erty). P’s rehabilitation services relate mainly to real property
                                               that is substantially dilapidated or damaged from a casualty.
                                               P also repairs and maintains real property. P reported on its
                                               Federal income tax return for the taxable year ended June 30,
                                               2006, that its receipts are ‘‘domestic production gross receipts’’
                                               (DPGR) eligible for a deduction under sec. 199, I.R.C., and
                                               claimed a $63,435 deduction under that section. R determined
                                               in the notice of deficiency that none of P’s receipts qualified
                                               as DPGR. Held: P’s receipts are DPGR to the extent P erected
                                               or substantially renovated real property, and the extent to
                                               which P substantially renovated real property turns on
                                               whether P’s activities with respect to each freestanding item
                                               of real property that operated and performed a discrete func-
                                               tion in and of itself: (1) Materially increased the value of the
                                               real property, (2) substantially prolonged the useful life of the
                                               real property, and/or (3) adapted the real property to a dif-
                                               ferent or new use. Held, further, P’s activities materially
                                               increased the value of the real property, substantially pro-
                                               longed the useful life of the real property, and/or adapted the
                                               real property to a different or new use to the extent that P’s
                                               activities were not repairs (within the meaning of sec. 263(a),
                                               I.R.C.), unrelated to P’s primary business. Held, further, P’s
                                               activities did not materially increase the value of the real
                                               property, substantially prolong the useful life of the real prop-
                                               erty, and/or adapt the real property to a different or new use
                                               to the extent that P’s activities repaired or otherwise main-
                                               tained real property unrelated to P’s primary business.

                                                                                                                                      195




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                                      196                136 UNITED STATES TAX COURT REPORTS                                         (195)


                                           Charles D. Lieser, for petitioner.
                                           George E. Gasper, for respondent.
                                         PARIS, Judge: Petitioner petitioned the Court to redeter-
                                      mine respondent’s determination of a $21,568 deficiency in
                                      its Federal income tax for its taxable year ended June 30,
                                      2006 (subject year). The deficiency results from respondent’s
                                      determination that petitioner may not deduct $63,435 under
                                      section 199(a). 1 Respondent disallowed that deduction after
                                      determining that petitioner had no ‘‘domestic production
                                      gross receipts’’ (DPGR) within the meaning of section
                                      199(c)(4). Petitioner reported that its DPGR totaled
                                      $26,053,570. 2
                                         Respondent now concedes that petitioner had DPGR of
                                      $13,849,246, and petitioner concedes that it incorrectly
                                      reported $259,156 of the $26,053,570 as DPGR. 3 We decide
                                      whether the remaining $11,945,168 ($26,053,570 –
                                      $13,849,246 – $259,156) (disputed amount) is DPGR. We hold
                                      it is to the extent stated herein.

                                                                          FINDINGS OF FACT

                                         Some facts were stipulated. The stipulation of facts and
                                      the exhibits submitted therewith are incorporated herein by
                                      this reference. Petitioner is a family-owned corporation that
                                      reports its income and expenses on the basis of a fiscal year
                                      ending on June 30. Its principal place of business was in
                                      Texas when its petition was filed.
                                         Petitioner is an engineering and heavy highway construc-
                                      tion company that primarily erects or rehabilitates streets,
                                      bridges, airport runways, and other major components or
                                      substantial structural parts of real property (primarily, infra-
                                      structure) in Texas, Oklahoma, Arkansas, and Kansas. Peti-
                                         1 Unless otherwise indicated, section references are to the Internal Revenue Code of 1986

                                      (Code), as amended, and Rule references are to the Tax Court Rules of Practice and Procedure.
                                      Dollar amounts are rounded.
                                         2 As relevant here and discussed infra, the deduction under sec. 199(a) equals 3 percent of

                                      the lesser of a taxpayer’s qualified production activities income (QPAI) or the taxpayer’s taxable
                                      income (as computed without the deduction under sec. 199(a)), and a taxpayer’s QPAI equals
                                      the taxpayer’s DPGR less the sum of its cost of goods sold (allocable to the DPGR) plus certain
                                      expenses and other items. Petitioner’s reported deduction of $63,435 equals 3 percent of its re-
                                      ported taxable income (as computed without the deduction).
                                         3 Petitioner reported that its DPGR totaled $26,053,570 but now asks the Court to find that

                                      its DPGR totaled $25,794,414 (i.e., $259,156 less than reported). Petitioner concedes explicitly
                                      that $98,455 of the $259,156 is not DPGR, and we consider petitioner also to concede that the
                                      remaining $160,701 ($259,156 – $98,455) is not DPGR as well.




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                                      (195)             GIBSON & ASSOCIATES, INC. v. COMMISSIONER                                     197


                                      tioner specializes in structural rehabilitation, epoxy injection,
                                      concrete paving, bridge jacking, lead abatement, and protec-
                                      tive coatings. Petitioner also maintains and repairs infra-
                                      structure and other real property.
                                         Petitioner works through its employees. During the subject
                                      year, petitioner employed approximately 90 individuals.
                                      These employees were mainly engineers or heavy construc-
                                      tion workers, and petitioner paid them over $3 million in
                                      salary and wages. Petitioner hired and retained additional
                                      employees in subsequent years.
                                         Petitioner worked on 136 construction projects during the
                                      subject year. Petitioner realized $25,892,869 of gross receipts
                                      from these projects, including $16,324,032 of gross receipts
                                      from State or Federal projects paid for with Federal funds. 4
                                      Petitioner reported the $25,794,414 (and the now conceded
                                      $259,156) as DPGR and claimed a $63,435 deduction under
                                      section 199. 5 Respondent determined that petitioner could
                                      not deduct the $63,435 because petitioner had no DPGR.
                                         Petitioner placed its construction projects into three cat-
                                      egories. The first category, ‘‘casualty’’ projects, involved work
                                      that petitioner performed on infrastructure that was signifi-
                                      cantly damaged by an act of God or by a casualty such as a
                                      fire or an overheight or overweight vehicle hitting or trav-
                                      eling on a bridge. The second category, ‘‘new construction’’
                                      projects, involved work that petitioner performed primarily
                                      as a subcontractor on contractors’ multimillion dollar projects
                                      involving major rehabilitation of real property (primarily,
                                      infrastructure). The third category, ‘‘rehabilitation’’ projects,
                                      involved work that petitioner performed as a contractor
                                      rehabilitating dilapidated real property (primarily, infra-
                                      structure). Petitioner classified its projects into these three
                                      categories after reviewing the bid sheets and the other data
                                      in its files and after talking to individuals involved with the
                                      projects. Petitioner’s bid sheets were papers that petitioner
                                      prepared to calculate and place a bid on a project offered to
                                      contractors (or subcontractors). Each bid sheet contained an
                                        4 A project may be paid for with Federal funds if the Secretary of Transportation concludes

                                      that the project is a cost-effective means of extending the useful life of a Federal-aid highway.
                                      See 23 U.S.C. sec. 116 (2006); see also id. sec. 101(a)(31) (defining the word ‘‘Secretary’’ for pur-
                                      poses of tit. 23 as the ‘‘Secretary of Transportation’’).
                                        5 Petitioner used the percentage of completion method under sec. 460 to compute its taxable

                                      income.




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                                      estimate of the amounts and types of costs that petitioner
                                      expected to incur in performing the project.
                                         Petitioner further characterized its projects as: (1)
                                      Substantial renovation or (2) repair or maintenance. Peti-
                                      tioner characterized a project as substantial renovation if
                                      petitioner concluded that its work on the project: (1) Substan-
                                      tially prolonged the useful life of real property; (2) materially
                                      increased the value of real property; or (3) adapted real prop-
                                      erty to a new or different use. Petitioner categorized its
                                      construction projects as repair or maintenance if petitioner
                                      concluded that its work on the project: (1) Was necessary to
                                      keep real property (or a component thereof) functioning on a
                                      short-term basis or (2) included cosmetic or aesthetic work.
                                         Appendixes A, B, and C list petitioner’s projects (other
                                      than 32 projects which are the subject of the parties’ conces-
                                      sions discussed supra p. 196) as categorized by petitioner.
                                      The appendixes show for each of those 104 remaining
                                      projects (disputed projects): (1) The job number, (2) the gen-
                                      eral type of work that petitioner performed, (3) the final con-
                                      tract amount, (4) the revenue that petitioner earned for the
                                      subject year, (5) whether the project was paid for with Fed-
                                      eral funds, and (6) petitioner’s characterization of the project
                                      as repair or maintenance, substantially prolonging the useful
                                      life of real property, materially increasing the value of real
                                      property, and/or adapting real property to a different or new
                                      use. The specific work that petitioner performed on each
                                      project is as follows:
                                                                         Casualty Projects
                                                                                05–1021
                                         Petitioner performed this project for the Texas Department
                                      of Transportation (TxDOT). Petitioner strengthened a bridge
                                      at Highway 123 and McArthur Boulevard. The bridge had
                                      been critically damaged by a fire caused by an overturned
                                      fuel truck, and most of the bridge was closed. Petitioner
                                      strengthened the columns and spans of the bridge using
                                      carbon fiber reinforced polymer and structural patching. Peti-
                                      tioner concluded that this work substantially prolonged the
                                      useful life of the bridge and materially increased its value.




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                                      (195)             GIBSON & ASSOCIATES, INC. v. COMMISSIONER                                    199


                                                                                05–1023
                                        Petitioner performed this project for the North Texas Toll-
                                      way Authority (NTTA). Petitioner shored up an overhead
                                      emergency sign structure on the North Texas Tollway after
                                      the sign was damaged. Petitioner’s work allowed the NTTA to
                                      keep the sign in place. The sign would have been demolished
                                      absent petitioner’s work. Petitioner concluded that this work
                                      substantially prolonged the useful life of the sign.
                                                                                05–1025
                                         Petitioner performed this project for the TxDOT. Petitioner
                                      worked on a bridge near Pampa, Texas, on U.S. Highway 83.
                                      The work rehabilitated damaged concrete beams so that the
                                      bridge could reopen to traffic and carry its design loads. Peti-
                                      tioner concluded that this work substantially prolonged the
                                      useful life of the bridge and materially increased its value.
                                                                                05–1029
                                        Petitioner performed this project for the Oklahoma Depart-
                                      ment of Transportation (ODOT). Petitioner worked on a bridge
                                      in Oklahoma County, Oklahoma, on Interstate Highway 40
                                      over Anderson Road. The work rehabilitated damaged con-
                                      crete beams so that the bridge could reopen to traffic and
                                      carry its design loads. Petitioner concluded that this work
                                      substantially prolonged the useful life of the bridge and
                                      materially increased its value.
                                                                                05–1045
                                         Petitioner performed this project for the ODOT. Petitioner
                                      worked on a steel bridge on U.S. Highway 64 and 129 West
                                      Avenue between Tulsa and Sand Springs, Oklahoma. The
                                      work rehabilitated damaged concrete beams so that the
                                      bridge could reopen to traffic and carry its design loads. Peti-
                                      tioner concluded that this work substantially prolonged the
                                      useful life of the bridge and materially increased its value.
                                                                                05–1054
                                        Petitioner performed this project for the TxDOT. Petitioner
                                      worked on a bridge near McKinney, Texas, in Farmersville,
                                      Texas, on U.S. Highway 380 and Main Street. The work
                                      rehabilitated and/or replaced damaged concrete beams so




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                                      that the bridge could reopen to traffic and carry its design
                                      loads. Petitioner also performed some concrete work. Peti-
                                      tioner concluded that this work substantially prolonged the
                                      useful life of the bridge and materially increased its value.
                                                                                05–1056
                                         Petitioner performed this project for the TxDOT. Petitioner
                                      worked on a bridge on Farm-to-Market 157 over Interstate
                                      Highway 30 in Tarrant County, Texas. The work rehabili-
                                      tated damaged concrete beams so that the bridge could
                                      reopen to traffic and carry its design loads. Petitioner con-
                                      cluded that this work substantially prolonged the useful life
                                      of the bridge and materially increased its value.
                                                                                05–1059
                                        Petitioner performed this project for the TxDOT. Petitioner
                                      worked on a bridge on Interstate Highway 37 and U.S. High-
                                      way 181 in Corpus Christi, Texas. The work rehabilitated
                                      damaged concrete beams so that the bridge could reopen to
                                      traffic and carry its design loads. Petitioner concluded that
                                      this work substantially prolonged the useful life of the bridge
                                      and materially increased its value.
                                                                                05–1060
                                         Petitioner performed this project for the NTTA. Petitioner
                                      worked on a highway. Petitioner’s work consisted of ‘‘PGBT
                                      fire damage’’. Petitioner concluded that this work was repair
                                      or maintenance.
                                                                                05–1064
                                         Petitioner performed this project for the ODOT. Petitioner
                                      worked on a bridge on Interstate Highway 40 at Choctaw
                                      Road. The work rehabilitated damaged concrete beams so
                                      that the bridge could reopen to traffic and carry its design
                                      loads. Petitioner concluded that this work substantially pro-
                                      longed the useful life of the bridge and materially increased
                                      its value.
                                                                                05–1065
                                        Petitioner performed this project for the TxDOT. Petitioner
                                      worked on a bridge on Interstate Highway 35 at Corinth
                                      Street. The work rehabilitated damaged concrete beams so




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                                      that the bridge could reopen to traffic and carry its design
                                      loads. Petitioner concluded that this work substantially pro-
                                      longed the useful life of the bridge and materially increased
                                      its value.
                                                                                05–999
                                        Petitioner performed this project for the ODOT. Petitioner
                                      worked on a bridge at Randall Avenue and Interstate High-
                                      way 40 in Oklahoma. Petitioner sealed joints, patched the
                                      bridge deck, and retrofitted beam ends. Petitioner also
                                      removed existing lead paint (a perceived hazardous mate-
                                      rial), blasted the bridge to remove corrosion, and applied a
                                      protective paint coating designed to prevent future corrosion.
                                      Petitioner concluded that this work substantially prolonged
                                      the useful life of the bridge.
                                                                                06–1072
                                        Petitioner performed this project for the ODOT. Petitioner
                                      worked on a bridge at County Road and Interstate Highway
                                      40 in Custer County, Oklahoma. Petitioner replaced struc-
                                      tural steel portions of the bridge to return the bridge to its
                                      original load carrying capacity. Petitioner concluded that this
                                      work substantially prolonged the useful life of the bridge and
                                      materially increased its value.
                                                                                06–1073
                                        Petitioner performed this project for the ODOT. Petitioner
                                      worked on a bridge at Ladd Road and Interstate Highway 35
                                      in McClain County, Oklahoma. Petitioner’s work strength-
                                      ened the bridge and returned the bridge to its original load
                                      carrying capacity. Petitioner concluded that this work
                                      substantially prolonged the useful life of the bridge and
                                      materially increased its value.
                                                                                06–1074
                                         Petitioner performed this project for the ODOT. Petitioner
                                      worked on a bridge at Interstate Highway 244 and the 23d
                                      Street Ramp in Tulsa, Oklahoma. Petitioner strengthened
                                      the columns of the bridge to resist future impact damage
                                      from derailed train cars in a nearby railroad yard. Petitioner
                                      concluded that this work substantially prolonged the useful
                                      life of the bridge.




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                                                                                06–1078
                                        Petitioner performed this project for the ODOT. Petitioner
                                      worked on a bridge on State Highway 266 and U.S. Highway
                                      169 in Tulsa County, Oklahoma. Petitioner rehabilitated
                                      damaged concrete beams so that the bridge could reopen to
                                      traffic and carry its design loads. Petitioner concluded that
                                      this work substantially prolonged the useful life of the
                                      bridge.
                                                                                06–1084
                                         Petitioner performed this project for the TxDOT. Petitioner
                                      worked on a bridge on Interstate Highway 37 and Sundown
                                      Bridge in Texas. Petitioner rehabilitated damaged concrete
                                      beams so that the bridge could reopen to traffic and carry its
                                      design loads. Petitioner concluded that this work substan-
                                      tially prolonged the useful life of the bridge.
                                                                                06–1087
                                        Petitioner performed this project for the TxDOT. Petitioner
                                      worked on a bridge on Interstate Highway 20 at Farm-to-
                                      Market 31 in Texas. Petitioner rehabilitated damaged con-
                                      crete beams to restore the bridge’s load carrying capacity.
                                      Petitioner concluded that this work substantially prolonged
                                      the useful life of the bridge.
                                                                                06–1091
                                         Petitioner performed this project for the TxDOT. Petitioner
                                      worked on a bridge at Interstate Highway 30 and Jim Miller
                                      Road in Texas. Petitioner rehabilitated damaged concrete
                                      beams so that the bridge could reopen to traffic and carry its
                                      design loads. Petitioner concluded that this work substan-
                                      tially prolonged the useful life of the bridge.
                                                              New Construction Projects
                                                                                03–906
                                        Petitioner performed this project for the TxDOT. Petitioner
                                      worked on a bridge at U.S. Highway 287 and the Trinity
                                      River in Texas. Petitioner raised the bridge to keep it out of
                                      the flood plain and reduce the chance that the bridge could
                                      close on account of high water or drifting debris. Petitioner




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                                      concluded that this work substantially prolonged the useful
                                      life of the bridge.
                                                                                03–921
                                        Petitioner performed this project for the TxDOT. Petitioner
                                      worked on a bridge at U.S. Highways 80 and 175 in Texas.
                                      Petitioner’s work consisted of patching the deck of the bridge.
                                      Petitioner concluded that this work substantially prolonged
                                      the useful life of the bridge driving surface.
                                                                                03–926
                                         Petitioner performed this project for the TxDOT. Petitioner
                                      worked on a bridge on Loop 335 in Texas. Petitioner applied
                                      an epoxy overlay designed to protect the bridge from the
                                      environment. Petitioner concluded that this work substan-
                                      tially prolonged the useful life of the bridge deck.
                                                                                04–937
                                        Petitioner performed this project for the City of Dallas,
                                      Texas. Petitioner worked on a blast fence at two locations at
                                      Love Field Airport in Dallas. The blast fence included cat-
                                      walks and port holes and was built on an old apron to allow
                                      for maintenance run-ups and a staging area for hijacked air-
                                      craft. Petitioner concluded that this work materially
                                      increased the value of the property and adapted the property
                                      to a new or different use.
                                                                                04–954
                                         Petitioner performed this project for the TxDOT. Petitioner
                                      worked on some bridge joints on Loop 360 in Travis County,
                                      Texas. Petitioner rehabilitated pavement and joints. Peti-
                                      tioner concluded that this work substantially prolonged the
                                      useful life of the pavement.
                                                                                04–955
                                         Petitioner performed this project for the TxDOT. Petitioner
                                      worked on some bridge header joints in Williamson County,
                                      Texas. Petitioner rehabilitated pavement and joints. Peti-
                                      tioner concluded that this work substantially prolonged the
                                      useful life of the pavement.




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                                                                                04–956
                                        Petitioner performed this project for the TxDOT. Petitioner
                                      worked on a bridge on Interstate 35 in Travis County, Texas.
                                      Petitioner’s work involved structural steel, head joints, and
                                      bridge deck patches. Petitioner concluded that this work
                                      involving structural steel and head joints substantially pro-
                                      longed the useful life of an HMAC overlay. Petitioner con-
                                      cluded that this work involving the bridge deck patches
                                      substantially prolonged the useful life of the bridge deck and
                                      the HMAC overlay.
                                                                                04–959
                                         Petitioner performed this project for the TxDOT. Petitioner
                                      worked on a bridge on Interstate 35E in Texas. Petitioner
                                      rehabilitated concrete pavement so that an asphalt overlay
                                      could be installed properly. Petitioner also rehabilitated
                                      joints on the bridge. Petitioner concluded that this work
                                      substantially prolonged the useful life of the pavement on the
                                      bridge.
                                                                                04–965
                                        Petitioner performed this project for the TxDOT. Petitioner
                                      worked on State Highway 205 in Texas. Petitioner added
                                      turn lanes and driveways and patched paving. Petitioner con-
                                      cluded that the added lanes and driveways adapted the high-
                                      way to a different use. Petitioner concluded that its pave-
                                      ment work substantially prolonged the useful life of both the
                                      concrete pavement and the new HMAC overlay.
                                                                                04–967
                                         Petitioner performed this project for the TxDOT. Petitioner
                                      worked on Interstate Highway 35E in Dallas, Texas. Peti-
                                      tioner rehabilitated concrete pavement so that an asphalt
                                      overlay could be installed properly. Petitioner also rehabili-
                                      tated joints on the bridge. Petitioner concluded that this
                                      work substantially prolonged the useful life of the pavement
                                      on the bridge.
                                                                                04–968
                                        Petitioner performed this project for Eastfield College in
                                      Texas. Petitioner rehabilitated a failed column at a building




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                                      at the college. Petitioner concluded that this work substan-
                                      tially increased the useful life of the building from zero to its
                                      original design life.
                                                                                04–971
                                        Petitioner performed this project for the Dallas/Fort Worth
                                      Airport Authority. Petitioner worked on a garage ramp at the
                                      airport. The ramp had deteriorated, and petitioner rebuilt
                                      the ramp to allow for traffic to exit the garage. Petitioner
                                      concluded that this work materially increased the value of
                                      the garage ramp and adapted the ramp to a new or different
                                      use.
                                                                                04–981
                                        Petitioner performed this project for the TxDOT. Petitioner
                                      worked on U.S. Highway 67 in Texas. Petitioner rehabili-
                                      tated concrete pavement so that an asphalt overlay could be
                                      installed properly. Petitioner also rehabilitated joints on the
                                      bridge. Petitioner concluded that this work substantially pro-
                                      longed the useful life of the pavement on the bridge.
                                                                                04–982
                                         Petitioner performed this project for the TxDOT. Petitioner
                                      worked on Interstate Highway 35E in Texas. Petitioner
                                      rehabilitated concrete pavement so that an asphalt overlay
                                      could be installed properly. Petitioner also rehabilitated
                                      joints on the bridge. Petitioner concluded that this work
                                      substantially prolonged the useful life of the pavement on the
                                      bridge.
                                                                                05–1000
                                        Petitioner performed this project for the Kansas Depart-
                                      ment of Transportation. Petitioner worked on a bridge on
                                      Interstate Highway 35 over 127th Street in Wichita, Kansas.
                                      Petitioner applied an epoxy overlay designed to protect the
                                      bridge from the environment. Petitioner concluded that this
                                      work substantially prolonged the useful life of the bridge.
                                                                                05–1002
                                        Petitioner performed this project for the ODOT. Petitioner
                                      worked on a bridge on State Highway 88 over Dog Creek in
                                      Rogers County, Oklahoma. Petitioner installed a new traffic




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                                      rail that upgraded the crash-worthiness rating from the old
                                      rail. Petitioner replaced the bridge deck to allow for traffic
                                      and increase the bridge’s load rating. Petitioner concluded
                                      that this work substantially prolonged the useful life of the
                                      bridge, materially increased its value, and adapted the bridge
                                      to a new or different use.
                                                                                05–1003
                                        Petitioner performed this project for the City of Dallas,
                                      Texas. Petitioner worked on the Marsalis Avenue Bridge over
                                      the Dallas Zoo. Petitioner repainted the deteriorating sub-
                                      structure, replaced a portion of the deck (including with a
                                      new pedestrian walkway), replaced a number of beams and
                                      girders, and applied corrosive painting after removing the old
                                      paint. Petitioner concluded that this work substantially pro-
                                      longed the useful life of the bridge.
                                                                                05–1011
                                        Petitioner performed this project for the Crescent Hotel in
                                      Dallas, Texas. Petitioner modified a handrail at the hotel and
                                      removed and replaced concrete to comply with the Americans
                                      with Disabilities Act of 1990 (ADA), 42 U.S.C. secs. 12101–
                                      12213 (2006). Petitioner concluded that this work adapted
                                      the property to a new or different use.
                                                                                05–1018
                                        Petitioner performed this project for the TxDOT. Petitioner
                                      worked on a bridge at U.S. Highway 287 and Heritage Park-
                                      way in Texas. Petitioner rotated the bridge’s bearing pads.
                                      Petitioner concluded that this work was repair or mainte-
                                      nance.
                                                                                05–1019
                                        Petitioner performed this project for the TxDOT. Petitioner
                                      worked on a bridge on U.S. Highway 79 in Panola County,
                                      Texas. Petitioner rehabilitated concrete pavement so that an
                                      asphalt overlay could be installed properly. Petitioner also
                                      rehabilitated joints on the bridge. Petitioner concluded that
                                      this work substantially prolonged the useful life of the pave-
                                      ment on the bridge.




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                                                                                05–1028
                                        Petitioner performed this project for the ODOT. Petitioner
                                      worked on a steel bridge over Business Interstate Highway
                                      40 in Beckham County, Oklahoma. The contractor renovated
                                      the bridge, and petitioner applied the protective coating.
                                      Petitioner also removed existing lead paint (a perceived haz-
                                      ardous material), blasted the bridge to remove corrosion, and
                                      applied a protective paint coating designed to prevent future
                                      corrosion. Petitioner concluded that this work substantially
                                      prolonged the useful life of the bridge and materially
                                      increased its value.
                                                                                05–1032
                                        Petitioner performed this project for the TxDOT. Petitioner
                                      worked on a bridge on U.S. Highway 287 in Texas. Petitioner
                                      leveled the bearing pads. Petitioner concluded that this work
                                      was repair or maintenance.
                                                                                05–1036
                                        Petitioner performed this project for the TxDOT. Petitioner
                                      worked on a bridge on Interstate Highway 20 over the
                                      Brazos River in Texas. Petitioner adjusted the bearings of
                                      the bridge to prevent damage and rehabilitated cracks in a
                                      structural steel diaphragm to allow the bridge to carry the
                                      load for which it was originally designed. Petitioner also
                                      removed existing lead paint (a perceived hazardous mate-
                                      rial), blasted the bridge to remove corrosion, and applied a
                                      protective paint coating designed to prevent future corrosion.
                                      Petitioner concluded that this work substantially prolonged
                                      the useful life of the bridge and materially increased its
                                      value.
                                                                                05–1037
                                         Petitioner performed this project for the ODOT. Petitioner
                                      worked on a bridge on U.S. Highway 270 over Caston Creek
                                      in Le Flore County, Oklahoma. Petitioner sealed joints,
                                      patched the bridge deck, and retrofitted beam ends. Peti-
                                      tioner concluded that this work substantially prolonged the
                                      useful life of the bridge.




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                                                                                05–1038
                                        Petitioner performed this project for the TxDOT. Petitioner
                                      worked on the pavement on Interstate Highway 20 in Texas.
                                      Petitioner rehabilitated concrete pavement so that an asphalt
                                      overlay could be installed properly. Petitioner also rehabili-
                                      tated joints on the bridge. Petitioner concluded that this
                                      work substantially prolonged the useful life of the pavement
                                      on the bridge.
                                                                                05–1043
                                         Petitioner performed this project for the TxDOT. Petitioner
                                      worked on the intersections at State Highway 356. Petitioner
                                      added left and right turn lanes to the intersections to
                                      improve traffic flow. Petitioner concluded that this work
                                      materially increased the value of the property and adapted
                                      it to a new or different use.
                                                                                05–1047
                                        Petitioner performed this project for the City of Fort
                                      Worth, Texas. Petitioner worked on the Hulen Street Bridge
                                      in Fort Worth. Petitioner sealed joints, patched the bridge
                                      deck, and retrofitted beam ends. Petitioner concluded that
                                      this work substantially prolonged the useful life of the
                                      bridge.
                                                                                05–1052
                                         Petitioner performed this project for the City of Dallas,
                                      Texas. Petitioner worked on the aprons at two terminals at
                                      the Love Field Airport in Dallas. Petitioner upgraded the
                                      ramps to the aprons for heavier aircraft, by removing
                                      approximately 12,000 square yards of approximately 50-year-
                                      old, 13-inch pavement and replacing it with 16-inch pave-
                                      ment. Petitioner also replaced the existing trench drains with
                                      new drains that met applicable Federal standards. Petitioner
                                      concluded that this work substantially prolonged the useful
                                      life of the property, materially increased its value, and
                                      adapted the property to a new or different use.
                                                                                05–1057
                                       Petitioner performed this project for the TxDOT. Petitioner
                                      worked on a bridge on U.S. Highway 83 in Texas. Petitioner




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                                      modified the bearings on the bridge to prevent damage and
                                      to maintain the bridge’s load carrying capacity. Petitioner
                                      concluded that this work substantially prolonged the useful
                                      life of the bridge.
                                                                                05–995
                                        Petitioner performed this project for the City of Oklahoma
                                      City, Oklahoma. Petitioner worked on a bridge at Walnut
                                      Avenue in Oklahoma City. Petitioner removed existing lead
                                      paint (a perceived hazardous material), blasted the bridge to
                                      remove corrosion, and applied a protective paint coating
                                      designed to prevent future corrosion. Petitioner concluded
                                      that this work substantially prolonged the useful life of the
                                      bridge.
                                                                                06–1069
                                         Petitioner performed this project for the Lakes of Coppell
                                      housing subdivision in Coppell, Texas. Petitioner worked on
                                      a failing retaining wall that spanned the length of the water-
                                      ways running through the subdivision. The wall had cracked
                                      and was falling into the water. Petitioner replaced the failing
                                      wall with a new retaining wall and improved the drainage
                                      behind the wall. Petitioner concluded that this work substan-
                                      tially prolonged the useful life of the subdivision and materi-
                                      ally increased its value.
                                                                                06–1071
                                        Petitioner performed this project for the TxDOT. Petitioner
                                      worked on a bridge on U.S. Highway 290 in Texas. Petitioner
                                      installed new bridge joints to improve the life of the new
                                      overlay. Petitioner concluded that this work substantially
                                      prolonged the useful life of the property.
                                                                                06–1085
                                         Petitioner performed this project for the TxDOT. Petitioner
                                      worked on a culvert along State Highway 121 in Texas. Peti-
                                      tioner’s work consisted of structural repairs and water-
                                      proofing. Petitioner concluded that this work was repair or
                                      maintenance.




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                                                                                06–1089
                                         Petitioner performed this project for the TxDOT. Petitioner
                                      worked on a bridge on Interstate Highway 30 in Texas. Peti-
                                      tioner rehabilitated concrete pavement so that an asphalt
                                      overlay could be installed properly. Petitioner concluded that
                                      this work substantially prolonged the useful life of the pave-
                                      ment on the bridge.
                                                                                06–1093
                                        Petitioner performed this project for the TxDOT. Petitioner
                                      worked on the State Highway 356/Interstate Highway 35E/
                                      U.S. Highway 75 bridge in Texas. Petitioner applied an
                                      epoxy overlay to restore the driving surface and protect the
                                      concrete deck from future corrosion. Petitioner concluded
                                      that this work substantially prolonged the useful life of the
                                      bridge.
                                                                                Misc. Jobs
                                        Petitioner does not explain the jobs that it has included in
                                      this project. We understand petitioner not to argue that the
                                      work on this project was other than repair or maintenance.
                                                                      Rehabilitation Projects
                                                                                02–861
                                        Petitioner performed this project for the Dallas/Forth
                                      Worth Airport Authority. Petitioner worked on pavement at
                                      Dallas/Fort Worth Airport. Petitioner rehabilitated the pave-
                                      ment on the runway/taxiway. Petitioner concluded that this
                                      work substantially prolonged the useful life of the runway/
                                      taxiway.
                                                                                03–874
                                        Petitioner performed this project for the TxDOT. Petitioner
                                      worked on a bridge on Interstate Highway 35 and Peachtree
                                      Road in Tarrant County, Texas. Petitioner rehabilitated
                                      pavement and joints. Petitioner concluded that this work
                                      substantially prolonged the useful life of the bridge.
                                                                                03–890
                                       Petitioner performed this project for the ODOT. Petitioner
                                      worked on various bridges in Garvin, Lincoln, and Johnston




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                                      Counties, Oklahoma, near State Highways 18, 19, and 99.
                                      Petitioner sealed joints, patched bridge decks, and retrofitted
                                      beam ends. Petitioner concluded that this work substantially
                                      prolonged the useful lives of the bridges.
                                                                                03–902
                                        Petitioner performed this project for the ODOT. Petitioner
                                      worked on various bridges in Caddo and Love Counties,
                                      Oklahoma, near State Highways 32 and 58 and U.S. High-
                                      ways 77 and 281. Petitioner sealed joints, patched bridge
                                      decks, and retrofitted beam ends. Petitioner concluded that
                                      this work substantially prolonged the useful lives of the
                                      bridges.
                                                                                03–915
                                         Petitioner performed this project for the TxDOT. Petitioner
                                      worked on a bridge on Interstate Highway 635 in Texas.
                                      Petitioner rehabilitated pavement and joints so that an
                                      asphalt overlay could be installed properly. Petitioner con-
                                      cluded that this work substantially prolonged the useful life
                                      of the bridge.
                                                                                04–950
                                         Petitioner performed this project for the ODOT. Petitioner
                                      worked on bridges at U.S. Highways 39 and 77 in Cleveland
                                      and McClain Counties, Oklahoma. The bridges were rapidly
                                      deteriorating, and petitioner replaced the concrete decks and
                                      floor beams of the bridges. Petitioner’s work allowed the load
                                      restrictions for truck traffic to be lifted. Petitioner concluded
                                      that this work substantially prolonged the useful lives of the
                                      bridges, materially increased their values, and adapted the
                                      bridges to new or different uses.
                                                                                04–951
                                        Petitioner performed this project for the ODOT. Petitioner
                                      worked on various bridges in Oklahoma at State Highways
                                      14, 15, and 136. Petitioner removed existing lead paint (a
                                      perceived hazardous material), blasted the bridges to remove
                                      corrosion, and applied protective paint coatings designed to
                                      prevent future corrosion. Petitioner concluded that this work
                                      substantially prolonged the useful life of the bridges and
                                      materially increased their values.




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                                                                                04–958
                                        Petitioner performed this project for the ODOT. Petitioner
                                      worked on a bridge at State Highway 151 and Keystone Dam
                                      in Tulsa County, Oklahoma. Traffic had fallen through the
                                      bridge’s deck, and concrete from the pavement had fallen
                                      down into the operating mechanisms of the hoist. Petitioner
                                      rehabilitated the concrete pavement of the bridge dam and
                                      rehabilitated a guardrail. Petitioner concluded that this work
                                      substantially extended the useful life of the bridge and mate-
                                      rially increased its value.
                                                                                04–960
                                        Petitioner performed this project for the ODOT. Petitioner
                                      worked on a bridge at State Highway 54 over Calvary Creek
                                      in Washita County, Oklahoma. Petitioner added structural
                                      steel to the bridge beams which increased the weight of loads
                                      that trucks could carry on the bridge. Petitioner concluded
                                      that this work substantially prolonged the useful life of the
                                      bridge and adapted it to a new or different use.
                                                                                04–961
                                         Petitioner performed this project for the ODOT. Petitioner
                                      worked on a bridge at State Highway 54 over Horse & Deer
                                      Creeks in Custer County, Oklahoma. Petitioner added struc-
                                      tural steel to the bridge beams which increased the weight
                                      of loads that trucks could carry on the bridge. Petitioner con-
                                      cluded that this work substantially prolonged the useful life
                                      of the bridge and adapted it to a new or different use.
                                                                                04–969
                                         Petitioner performed this project for the ODOT. Petitioner
                                      worked on four bridges on county roads in Oklahoma. Peti-
                                      tioner sealed joints, patched the decks of the bridges, and
                                      retrofitted beam ends. Petitioner concluded that this work
                                      substantially prolonged the useful lives of the bridges.
                                                                                04–970
                                         Petitioner performed this project for the ODOT. Petitioner
                                      worked on seven bridges in Oklahoma. Petitioner sealed
                                      joints, patched the decks of the bridges, and retrofitted beam




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                                      ends. Petitioner concluded that this work substantially pro-
                                      longed the useful lives of the bridges.
                                                                                04–983
                                         Petitioner performed this project for the Town of Addison,
                                      Texas. Petitioner worked on pavement on a bridge on Belt
                                      Line Road in Addison. Petitioner rehabilitated pavement and
                                      joints so that an asphalt overlay could be installed properly.
                                      Petitioner concluded that this work substantially prolonged
                                      the useful life of the bridge.
                                                                                04–985
                                         Petitioner performed this project for the ODOT. Petitioner
                                      worked on a bridge at State Highway 151 and Keystone Dam
                                      in Tulsa County, Oklahoma. Petitioner rehabilitated concrete
                                      pavement across the dam and applied a sealant. Petitioner
                                      concluded that this work substantially prolonged the useful
                                      life of the bridge and materially increased its value.
                                                                                04–986
                                         Petitioner performed this project for the ODOT. Petitioner
                                      worked on a bridge at State Highway 1 and Gaines Creek in
                                      Oklahoma. Petitioner rehabilitated the structural steel,
                                      removed old corroded steel, and applied a protective paint
                                      coating designed to prevent future corrosion. Petitioner con-
                                      cluded that this work substantially prolonged the useful life
                                      of the bridge and adapted it to a new or different use.
                                                                                04–987
                                         Petitioner performed this project for the ODOT. Petitioner
                                      worked on a bridge at State Highway 99 over State Highway
                                      3 and Creek in Pontotoc County, Oklahoma. Petitioner sealed
                                      joints, patched the bridge deck, and retrofitted beam ends.
                                      Petitioner concluded that this work substantially prolonged
                                      the useful life of the bridge.
                                                                                05–1004
                                         Petitioner performed this project for the ODOT. Petitioner
                                      worked on various steel bridges at Interstate Highway 44 at
                                      12th and 19th Streets in Oklahoma County, Oklahoma. Peti-
                                      tioner sealed joints, patched the decks of the bridges, and
                                      retrofitted beam ends. Petitioner also removed existing lead




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                                      paint (a perceived hazardous material), blasted the bridges to
                                      remove corrosion, and applied protective paint coatings
                                      designed to prevent future corrosion. Petitioner concluded
                                      that this work substantially prolonged the useful lives of the
                                      bridges and materially increased their value.
                                                                                05–1006
                                        Petitioner performed this project for the NTTA. Petitioner
                                      cleaned and sealed pavement joints to prevent the intrusion
                                      of water. Petitioner concluded that this work substantially
                                      prolonged the useful life of the existing pavement.
                                                                                05–1009
                                         Petitioner performed this project for the TxDOT. Petitioner
                                      rehabilitated concrete traffic barrier walls. Petitioner con-
                                      cluded that this work substantially prolonged the useful life
                                      of the traffic barrier walls.
                                                                                05–1013
                                         Petitioner performed this project for the TxDOT. Petitioner
                                      worked on a bridge at State Highway 15 and the Brazos
                                      River in Texas. Petitioner repositioned the rocker bearing
                                      assemblies and installed new stiffeners so that the bridge
                                      would not self-destruct. (A stiffener, sometimes called a
                                      gusset plate, is an accessory to a steel structure that
                                      restrains a distortion of some or all of the steel.) Petitioner
                                      concluded that this work substantially prolonged the useful
                                      life of the bridge.
                                                                                05–1017
                                         Petitioner performed this project for the TxDOT. Petitioner
                                      worked on a bridge on or at Interstate Highway 35 in Austin
                                      (Travis County), Texas. The armor joints on the bridge were
                                      coming loose and the steel was sticking up in the traffic.
                                      Petitioner rehabilitated the joints and the steel. The bridge
                                      would have been closed without this work. Petitioner con-
                                      cluded that this work substantially prolonged the useful life
                                      of the bridge.
                                                                                05–1020
                                       Petitioner performed this project for the ODOT. Petitioner
                                      worked on a bridge in Oklahoma. Petitioner rehabilitated




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                                      pavement and joints so that an asphalt overlay could be
                                      installed properly. Petitioner concluded that this work
                                      substantially prolonged the useful life of the bridge.
                                                                                05–1022
                                        Petitioner performed this project for the TxDOT. Petitioner
                                      worked on a bridge at U.S. Highway 277 and Valley Creek
                                      in Abilene, Texas. Petitioner replaced the bearing pads on
                                      the bridge. Petitioner concluded that this work substantially
                                      prolonged the useful life of the bridge.
                                                                                05–1024
                                         Petitioner performed this project for the TxDOT. Petitioner
                                      worked on a bridge at U.S. Highway 59 in Lufkin, Texas.
                                      Petitioner rehabilitated the bridge joints. Petitioner con-
                                      cluded that this work substantially prolonged the useful life
                                      of the bridge and materially increased its value.
                                                                                05–1033
                                         Petitioner performed this project for the NTTA. Petitioner
                                      worked on pavement. Petitioner routed and sealed cracks in
                                      the pavement to prevent moisture intrusion. Petitioner con-
                                      cluded that this work substantially prolonged the useful life
                                      of the pavement.
                                                                                05–1046
                                        Petitioner performed this project for the TxDOT. Petitioner
                                      worked on a bridge on U.S. Highway 75 in Grayson County,
                                      Texas. Work was also performed on parts of the railing and
                                      the deck. Petitioner cleaned and sealed joints, patched the
                                      bridge deck, and retrofitted beam ends. Petitioner concluded
                                      that this work substantially prolonged the useful life of the
                                      bridge.
                                                                                05–1048
                                        Petitioner performed this project for the ODOT. Petitioner
                                      worked on a bridge at Interstate Highways 40 and 44 in
                                      Oklahoma County, Oklahoma. Petitioner removed existing
                                      lead paint (a perceived hazardous material), blasted the
                                      bridge to remove corrosion, and applied a protective paint
                                      coating designed to prevent future corrosion. Petitioner also
                                      rehabilitated part of the deck of the bridge. Petitioner con-




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                                      cluded that this work substantially prolonged the useful life
                                      of the bridge and materially increased its value.
                                                                                05–1049
                                         Petitioner performed this project for the ODOT. Petitioner
                                      worked on a bridge at Interstate Highways 35 and 44 in
                                      Comanche and Garvin Counties, Oklahoma. Petitioner sealed
                                      joints, patched the bridge deck, and retrofitted beam ends.
                                      Petitioner also removed existing lead paint (a perceived haz-
                                      ardous material), blasted the bridge to remove corrosion, and
                                      applied a protective paint coating designed to prevent future
                                      corrosion. Petitioner concluded that this work substantially
                                      prolonged the useful life of the bridge and materially
                                      increased its value.
                                                                                05–1050
                                         Petitioner performed this project for the ODOT. Petitioner
                                      worked on a bridge in Beckham County, Oklahoma. Peti-
                                      tioner sealed joints, patched the bridge deck, and retrofitted
                                      beam ends. Petitioner also removed existing lead paint (a
                                      perceived hazardous material), blasted the bridge to remove
                                      corrosion, and applied a protective paint coating designed to
                                      prevent future corrosion. Petitioner concluded that this work
                                      substantially prolonged the useful life of the bridge and
                                      materially increased its value.
                                                                                05–1051
                                        Petitioner performed this project for the City of Forth
                                      Worth, Texas. Petitioner worked on a bridge on Riverside
                                      Drive in Fort Worth. Petitioner removed existing lead paint
                                      (a perceived hazardous material), blasted the bridge to
                                      remove corrosion, and applied a protective paint coating
                                      designed to prevent future corrosion. Petitioner concluded
                                      that this work substantially prolonged the useful life of the
                                      bridge and materially increased its value.
                                                                                05–1061
                                        Petitioner performed this project for the ODOT. Petitioner
                                      worked on a bridge at Interstate Highway 35 and the
                                      Canadian River in Oklahoma. The expansion joints had
                                      failed, allowing the bridge deck to spall and deteriorate and
                                      allowing salt and/or water to get to the slab substructure. (In




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                                      the construction industry, the word ‘‘spall’’ as a noun refers
                                      to a surface defect and as a verb to the breaking up of a
                                      material to create a surface defect.) Petitioner rehabilitated
                                      the deck and the joints. Petitioner concluded that this work
                                      substantially extended the useful life of the bridge.
                                                                                05–1062
                                        Petitioner performed this project for the TxDOT. Petitioner
                                      worked on a bridge at Loop 1 and Gaines Creek in Texas.
                                      The bearing pads had failed, and petitioner raised the bridge
                                      and installed new and updated pads to keep the bridge from
                                      destroying itself. Petitioner concluded that this work
                                      substantially prolonged the useful life of the bridge.
                                                                                05–1063
                                        Petitioner performed this project for the NTTA. Petitioner
                                      changed the bearing pads on the Mountain Creek Lake
                                      Bridge to prevent damage at the beam/bearing seat interface.
                                      Petitioner concluded that this work substantially prolonged
                                      the useful life of the bridge.
                                                                                05–996
                                         Petitioner performed this project for the City of Tulsa,
                                      Oklahoma. Petitioner worked on the Tulsa Oklahoma Civic
                                      Center. Petitioner rehabilitated and waterproofed the deck of
                                      the civic center. Petitioner concluded that this work substan-
                                      tially prolonged the useful life of the civic center.
                                                                                05–997
                                        Petitioner performed this project for the TxDOT. Petitioner
                                      worked on a bridge on Interstate Highway 10. Petitioner
                                      removed and replaced failing expansion joints that were
                                      allowing the bridge deck to deteriorate and letting moisture
                                      into the substructure. Petitioner concluded that this work
                                      substantially prolonged the useful life of the bridge and
                                      materially increased its value.
                                                                                06–1067
                                        Petitioner performed this                    project for the TxDOT. Petitioner
                                      worked on a bridge at U.S.                     Highway 69 and Choctaw Creek
                                      in Texas. Petitioner sealed                    joints, patched the bridge deck,
                                      and retrofitted beam ends.                     Petitioner also removed existing




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                                      lead paint (a perceived hazardous material), blasted the
                                      bridge to remove corrosion, and applied a protective paint
                                      coating designed to prevent future corrosion. Petitioner con-
                                      cluded that this work substantially prolonged the useful life
                                      of the bridge and materially increased its value.
                                                                                06–1068
                                         Petitioner performed this project for the ODOT. Petitioner
                                      worked on a bridge at State Highway 58 over the Washita
                                      River in Caddo County, Oklahoma. Petitioner sealed joints,
                                      patched the bridge deck, and retrofitted beam ends. Peti-
                                      tioner concluded that this work substantially prolonged the
                                      useful life of the bridge.
                                                                                06–1070
                                        Petitioner performed this project for the City of Oklahoma
                                      City, Oklahoma. Petitioner worked on the Oklahoma City
                                      Grandstand. The expansion joints and their supports were
                                      failing in various sections of the grandstand, and petitioner
                                      rehabilitated those joints. Without the rehabilitation, the
                                      grandstand would have been unusable and continuing to self-
                                      destruct. Petitioner concluded that this work substantially
                                      extended the useful life of the structure.
                                                                                06–1075
                                        Petitioner performed this project for the TxDOT. Petitioner
                                      worked on a bridge at State Highways 82 and 87 in Texas.
                                      Petitioner strengthened and retrofitted the structural compo-
                                      nents to help the bridge regain and maintain its design loads
                                      carrying capacity. Petitioner concluded that this work
                                      substantially prolonged the useful life of the bridge.
                                                                                06–1076
                                         Petitioner performed this project for the City of Lawton,
                                      Oklahoma. Petitioner worked on a bridge at Gore Boulevard
                                      and Cashe Road in Oklahoma. Petitioner sealed joints,
                                      patched the bridge deck, and retrofitted beam ends. Peti-
                                      tioner concluded that this work substantially prolonged the
                                      useful life of the bridge and materially increased its value.




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                                                                                06–1079
                                         Petitioner performed this project for the ODOT. Petitioner
                                      worked on a bridge at U.S. Highways 62 and 74 in Oklahoma
                                      and Logan Counties, Oklahoma. Petitioner sealed joints,
                                      patched the bridge deck, and retrofitted beam ends. Peti-
                                      tioner concluded that this work substantially prolonged the
                                      useful life of the bridge.
                                                                                06–1080
                                        Petitioner performed this project for the City of Dallas,
                                      Texas. Petitioner reconfigured the streetscapes on Field, St.
                                      Paul, and Harwood Streets to provide better pedestrian
                                      movement and safety. Petitioner concluded that this work
                                      materially increased the value of the property and adapted
                                      the property to a new or different use.
                                                                                06–1081
                                         Petitioner performed this project for the City of Oklahoma
                                      City, Oklahoma. Petitioner worked on a bridge at Cimarron
                                      Road over Interstate Highway 40 in Oklahoma City. Peti-
                                      tioner sealed joints, patched the bridge deck, and retrofitted
                                      beam ends. Petitioner concluded that this work substantially
                                      prolonged the useful life of the bridge.
                                                                                06–1082
                                         Petitioner performed this project for the City of Oklahoma
                                      City, Oklahoma. Petitioner worked on the Rockwell Avenue
                                      Bridge in Oklahoma City. Petitioner sealed joints, patched
                                      the bridge deck, and retrofitted beam ends. Petitioner con-
                                      cluded that this work substantially prolonged the useful life
                                      of the bridge.
                                                                                06–1088
                                         Petitioner performed this project for the ODOT. Petitioner
                                      worked on the Rockwell Avenue Bridge in Oklahoma. Peti-
                                      tioner sealed joints, patched the bridge deck, and retrofitted
                                      beam ends. Petitioner concluded that this work substantially
                                      prolonged the useful life of the bridge.




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                                                                                06–1090
                                         Petitioner performed this project for the NTTA. Petitioner
                                      worked on the entrance to a building in Plano, Texas. Peti-
                                      tioner modified the entrance to comply with the ADA. Peti-
                                      tioner concluded that this work substantially prolonged the
                                      useful life of the property, materially increased its value, and
                                      adapted the property to a new or different use.
                                                                                06–1094
                                         Petitioner performed this project for the NTTA. Petitioner
                                      rehabilitated concrete pavement and joints on a bridge so
                                      that an asphalt overlay could be installed properly. Peti-
                                      tioner concluded that this work substantially prolonged the
                                      useful life of the bridge.
                                                                                06–1095
                                         Petitioner performed this project for CPS Energy. Petitioner
                                      rehabilitated an old trolley bridge on Mission Road,
                                      increasing the load carrying capacity of the bridge to allow
                                      for trucks. Petitioner concluded that this work substantially
                                      prolonged the useful life of the bridge, materially increased
                                      its value, and adapted the bridge to a new or different use.
                                                                                06–1096
                                         Petitioner performed this project for the TxDOT. Petitioner
                                      worked on a bridge on Interstate Highway 20 in Texas. Peti-
                                      tioner sealed joints, patched the bridge deck, and retrofitted
                                      beam ends. Petitioner concluded that this work substantially
                                      prolonged the useful life of the bridge.
                                                                                  OPINION

                                      I. Background
                                         We decide whether the disputed amount is DPGR. The par-
                                      ties agree that the disputed amount is DPGR to the extent
                                      that petitioner performed work on projects that erected or
                                      substantially renovated real property. In addition, the par-
                                      ties agree that petitioner’s work substantially renovated real
                                      property to the extent that: (1) The work renovated a major
                                      component or substantial structural part of real property and
                                      (2) the renovations materially increased the value of the real
                                      property, substantially prolonged the useful life of the




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                                      real property, and/or adapted the real property to a different
                                      or new use. Further, the parties do not dispute that peti-
                                      tioner’s work met the first prong of this two-part substantial
                                      renovation test. 6 Our decision therefore turns on whether
                                      petitioner’s work erected property or, to the extent it did not,
                                      met the second prong of the test. 7
                                         Petitioner argues that it ‘‘erected’’ or ‘‘substantially ren-
                                      ovated’’ real property and therefore the disputed amount is
                                      DPGR. Respondent argues that petitioner’s work falls outside
                                      of the meanings of those terms and therefore the disputed
                                      amount is not DPGR. We agree with petitioner.
                                      II. Burden of Proof
                                         Respondent determined that none of the disputed amount
                                      is DPGR, and respondent’s determination is presumed correct.
                                      See Welch v. Helvering, 290 U.S. 111, 115 (1933); see also
                                      Interstate Transit Lines v. Commissioner, 319 U.S. 590, 593
                                      (1943) (stating that deductions are a matter of legislative
                                      grace for which taxpayers must prove their entitlement); cf.
                                      Helvering v. Bliss, 293 U.S. 144, 150–151 (1934) (stating that
                                      tax provisions should not be narrowly construed where, as
                                      here, they are ‘‘liberalizations of the law in the taxpayer’s
                                      favor, * * * begotten from motives of public policy’’). A tax-
                                      payer generally must prove the Commissioner’s determina-
                                      tion wrong in order to prevail. See Rule 142(a). Section
                                      7491(a), however, sometimes places the burden of proof upon
                                      the Commissioner.
                                         The record allows us to decide this case without regard to
                                      which party bears the burden of proof. We proceed to do so.
                                      We need not and do not decide which party bears the burden
                                      of proof.


                                        6 Respondent concedes in his opening brief that petitioner’s work on the bridges met the first

                                      prong but advances no argument as to petitioner’s work on the other types of property. Each
                                      of those other types of property is ‘‘real property’’ within the meaning of sec. 199 because it is
                                      either a building or other property that is and ordinarily will remain affixed to real property
                                      for an indefinite period. See sec. 1.199–3(m)(2)(i), Income Tax Regs.; see also sec. 1.263A–8(c)(3),
                                      Income Tax Regs. Furthermore, we find in the record that petitioner’s work on these other types
                                      of property renovated a major component or a substantial structural part of that property. We
                                      conclude that all of the properties in dispute meet the first prong of this two-part test.
                                        7 Hereinafter, we use the term ‘‘disputed projects’’ to refer to the 104 projects discussed supra

                                      p. 198, less the 5 of those projects that petitioner characterizes as repair or maintenance.




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                                      III. Section 199
                                           A. Applicable Text
                                         Our substantive analysis begins with the relevant text of
                                      section 199. (We set forth that text in appendix D.) Section
                                      199(a) allows a corporate taxpayer such as petitioner to
                                      deduct a percentage (equal to 3 percent for the subject year)
                                      of the lesser of (1) its qualified production activities income
                                      or (2) its taxable income (as computed without regard to the
                                      deduction under section 199(a)). Section 199(b)(1) limits that
                                      deduction to 50 percent of the wages that the taxpayer pays
                                      during the year. Section 199(c)(1) defines the term ‘‘qualified
                                      production activities income’’ as the taxpayer’s DPGR less the
                                      sum of its cost of goods sold (allocable to the DPGR) plus cer-
                                      tain expenses and other items. Section 199(c)(4)(A)(ii) pro-
                                      vides that DPGR includes a taxpayer’s gross receipts from the
                                      construction of real property performed in the United States
                                      if the taxpayer is engaged in the active conduct of a construc-
                                      tion business and the gross receipts are derived in the ordi-
                                      nary course of that business.
                                         Section 199 does not define the phrase ‘‘construction of real
                                      property’’ as its appears in section 199(c)(4)(A)(ii), and it is
                                      the meaning of that phrase that is the focus of our analysis.
                                      The parties do not dispute that petitioner is entitled to a
                                      deduction under section 199(a) to the extent that petitioner’s
                                      work on the disputed projects falls within the meaning of
                                      that phrase. Nor do the parties dispute that petitioner’s work
                                      will fall within the meaning of that phrase if the work
                                      ‘‘erected’’ or ‘‘substantially renovated’’ real property within
                                      the meaning of section 1.199–3(m), Income Tax Regs.
                                           B. Legislative History
                                        Section 199 was added to the Code by the American Jobs
                                      Creation Act of 2004 (AJCA), Pub. L. 108–357, sec. 102(a), 118
                                      Stat. 1424, to give domestic manufacturers a tax deduction
                                      for certain domestic production activities. The conferees
                                      noted that then-present law did not reduce a corporate tax-
                                      payer’s income tax for income from domestic activities and
                                      stated that section 199 would provide such a reduction in
                                      certain cases. See H. Conf. Rept. 108–755, at 265–275 (2004).
                                      The conferees stated that ‘‘construction activities performed




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                                      in the United States’’ was one of those cases, that ‘‘activities
                                      that are directly related to the erection or substantial ren-
                                      ovation of residential and commercial buildings and infra-
                                      structure’’ were ‘‘construction activities’’, and that ‘‘structural
                                      improvements, but not mere cosmetic changes, such as
                                      painting’’ were ‘‘substantial renovation’’. Id. at 271 & n.26.
                                      The name of the AJCA and the statute’s wage limitation on
                                      the amount of the deduction under section 199(a) indicate
                                      that Congress intended that section 199 create jobs in the
                                      United States and otherwise strengthen the U.S. economy.
                                      IV. Guidance From the Commissioner and From the Sec-
                                         retary
                                           A. Notice 2005–14
                                         On January 19, 2005, the Commissioner released Notice
                                      2005–14, 2005–1 C.B. 498, to provide ‘‘interim guidance’’ on
                                      section 199. The notice stated that the Secretary was cur-
                                      rently developing regulations under section 199 and that tax-
                                      payers could rely on the interim guidance until the regula-
                                      tions were issued. Id. sec. 1, 2005–1 C.B. at 502.
                                         As relevant here, Notice 2005–14, sec. 4.04(11)(a) and (b),
                                      2005–1 C.B. at 520, stated that ‘‘The term ‘construction’
                                      means the construction or erection of real property’’ and that
                                      Activities constituting construction include activities performed in connec-
                                      tion with a project to erect or substantially renovate real property, but do
                                      not include tangential services such as hauling trash and debris, and deliv-
                                      ering materials, even if the tangential services are essential for construc-
                                      tion. However, if the taxpayer performing construction also, in connection
                                      with the construction project, provides tangential services such as deliv-
                                      ering materials to the construction site and removing its construction
                                      debris, the gross receipts derived from the tangential services are DPGR.
                                      Improving land (for example, grading and landscaping) and painting are
                                      activities constituting construction only if these activities are performed in
                                      connection with other activities (whether or not by the same taxpayer) that
                                      constitute the erection or substantial renovation of real property. * * *

                                        Notice 2005–14, sec. 4.04(11)(d), 2005–1 C.B. at 520, stated
                                      that the ‘‘term ‘substantial renovation’ means the renovation
                                      of a major component or substantial structural part of real
                                      property that materially increases the value of the property,
                                      substantially prolongs the useful life of the property, or
                                      adapts the property to a new or different use.’’ Notice 2005–




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                                      14, sec. 3.04(11)(d), 2005–1 C.B. at 511, explained as to that
                                      meaning:
                                      The Service and Treasury Department believe that the standard to be
                                      applied in determining whether there has been a substantial renovation of
                                      real property is the standard applied under § 263(a) to determine whether
                                      a taxpayer’s activities result in permanent improvements or betterments
                                      of property, such that the cost of the activities must be capitalized * * *
                                      [and that the definition of the term substantial renovation as set forth in
                                      the notice is] consistent with the rules under § 263(a) * * *

                                           B. 2005 Proposed Regulations
                                         On November 4, 2005, the Secretary published proposed
                                      regulations under section 199. See secs. 1.199–0 through
                                      1.199–8, Proposed Income Tax Regs., 70 Fed. Reg. 67240
                                      (Nov. 4, 2005). The proposed regulations stated that the final
                                      regulations, when published, would apply to taxable years
                                      beginning after December 31, 2004. See sec. 1.199–8(g), Pro-
                                      posed Income Tax Regs., 70 Fed. Reg. 67276 (Nov. 4, 2005).
                                      The proposed regulations stated that taxpayers could
                                      rely on the proposed regulations and/or the interim guidance
                                      set forth in Notice 2005–14, supra, until the final regulations
                                      were published in the Federal Register. See id.
                                         The definition of the word ‘‘construction’’ in the proposed
                                      regulations was similar to its definition in Notice 2005–14,
                                      supra. Section 1.199–3(l)(1)(i) and (2), Proposed Income Tax
                                      Regs., 70 Fed. Reg. 67254, 67255 (Nov. 4, 2005), stated that
                                      ‘‘The term construction means the construction or erection of
                                      real property’’ and
                                      Activities constituting construction include activities performed in connec-
                                      tion with a project to erect or substantially renovate real property, but do
                                      not include tangential services such as hauling trash and debris, and deliv-
                                      ering materials, even if the tangential services are essential for construc-
                                      tion. However, if the taxpayer performing construction also, in connection
                                      with the construction project, provides tangential services such as deliv-
                                      ering materials to the construction site and removing its construction
                                      debris, the gross receipts derived from the tangential services are DPGR.
                                      Improvements to land that are not capitalized to the land (for example,
                                      landscaping) and painting are activities constituting construction only if
                                      these activities are performed in connection with other activities (whether
                                      or not by the same taxpayer) that constitute the erection or substantial
                                      renovation of real property * * *

                                        The proposed regulations also followed the definition of the
                                      term ‘‘substantial renovation’’ set forth in Notice 2005–14,




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                                      supra. Section 1.199–3(l)(4), Proposed Income Tax Regs., 70
                                      Fed. Reg. 67255 (Nov. 4, 2005), stated that the ‘‘term
                                      substantial renovation means the renovation of a major
                                      component or substantial structural part of real property
                                      that materially increases the value of the property, substan-
                                      tially prolongs the useful life of the property, or adapts the
                                      property to a new or different use.’’ While this definition
                                      adopted some of the grounds for capitalization under section
                                      263(a) and the regulations thereunder, see sec. 1.263(a)–1(b),
                                      Income Tax Regs. (stating that an expense is generally a cap-
                                      ital expenditure if the expense adds to the value or substan-
                                      tially prolongs the useful life of property owned by the tax-
                                      payer or adapts the property to a new or different use), the
                                      proposed regulations did not explicitly adopt all of those
                                      grounds. The proposed regulations, for example, did not
                                      explicitly adopt the standard of section 1.263(a)–2(a), Income
                                      Tax Regs., that ‘‘The cost of acquisition, construction, or erec-
                                      tion of buildings, machinery and equipment, furniture and
                                      fixtures, and similar property having a useful life substan-
                                      tially beyond the taxable year’’ is a capital expenditure. See
                                      also INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 87–89
                                      (1992) (holding that an expenditure that produces a signifi-
                                      cant future benefit is a capital expenditure under section
                                      263(a)).
                                           C. 2006 Final Regulations
                                         On June 1, 2006, the Secretary published final regulations
                                      under section 199. See secs. 1.199–0 through 1.199–9, Income
                                      Tax Regs., 71 Fed. Reg. 31283 (June 1, 2006). The final regu-
                                      lations are applicable to taxable years beginning on or after
                                      June 1, 2006. See sec. 1.199–8(i)(1), Income Tax Regs. The
                                      final regulations also stated, however, that a taxpayer could
                                      rely on the final regulations for taxable years beginning
                                      before May 18, 2006, provided that the taxpayer followed all
                                      of those final regulations. See id. The final regulations stated
                                      that taxpayers who do not rely on the final regulations for
                                      taxable years beginning before June 1, 2006, may rely on the
                                      proposed regulations and/or the interim guidance set forth in
                                      Notice 2005–14, supra. See id.
                                         The final regulations stated that ‘‘The term construction
                                      means activities and services relating to the construction or




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                                      erection of real property’’. Sec. 1.199–3(m)(i)(1), Income Tax
                                      Regs. The final regulations also stated:
                                      Activities constituting construction are activities performed in connection
                                      with a project to erect or substantially renovate real property * * *
                                         * * * Activities constituting construction do not include tangential serv-
                                      ices such as hauling trash and debris, and delivering materials, even if the
                                      tangential services are essential for construction. However, if the taxpayer
                                      performing construction also, in connection with the construction project,
                                      provides tangential services such as delivering materials to the construc-
                                      tion site and removing its construction debris, then the gross receipts
                                      derived from the tangential services are DPGR.
                                         * * * Improvements to land that are not capitalizable to the land (for
                                      example, landscaping) and painting are activities constituting construction
                                      only if these activities are performed in connection with other activities
                                      (whether or not by the same taxpayer) that constitute the erection or
                                      substantial renovation of real property * * *
                                         [Sec. 1.199–3(m)(2), Income Tax Regs.]

                                         The final regulations further stated (as did Notice 2005–
                                      14, supra, and the proposed regulations) that ‘‘the term
                                      substantial renovation means the renovation of a major
                                      component or substantial structural part of real property
                                      that materially increases the value of the property, substan-
                                      tially prolongs the useful life of the property, or adapts the
                                      property to a new or different use.’’ Sec. 1.199–3(m)(5),
                                      Income Tax Regs. The final regulations, like the proposed
                                      regulations, did not explicitly adopt other grounds for capital-
                                      ization under section 263(a) and the regulations thereunder.
                                      V. Expert Testimony
                                           A. Overview
                                        Each party relies on expert testimony to support its or his
                                      view that petitioner’s work is or is not the erection or
                                      substantial renovation of real property. Petitioner called two
                                      individuals to testify as experts on engineering in the context
                                      of petitioner’s business. Respondent called one individual to
                                      testify as an expert on construction engineering and
                                      construction management. The Court recognized each of the
                                      three individuals as an expert. The Court also received into
                                      evidence each individual’s written report (as supplemented,
                                      in the cases of the individuals called by petitioner). See Rule
                                      143(g) (stating that an expert witness shall submit to the




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                                      Court a written report that serves as his or her direct testi-
                                      mony).
                                            B. Petitioner’s Experts
                                            1. Mr. Gibson
                                         William E. Gibson (Mr. Gibson) was one of petitioner’s
                                      experts. Mr. Gibson is a licensed professional engineer, and
                                      he earned a bachelor of science degree in civil engineering in
                                      1966 and a master of business administration degree in
                                      management in 1968. He has worked with highway and
                                      bridge construction for over 40 years, he has worked with
                                      structural rehabilitation for over 20 years, and he works cur-
                                      rently for petitioner as its chief executive officer. 8 Mr. Gib-
                                      son is an active member of many associations/societies of
                                      engineers, and he or petitioner has received numerous
                                      awards for his or its work in the field of construction. He has
                                      advised Federal and State highway departments on the
                                      construction of bridges and of other infrastructure.
                                         Mr. Gibson is familiar with the specific work that peti-
                                      tioner performed on each of its projects. He reinforced that
                                      familiarity by examining petitioner’s documents relating to
                                      the projects and by visiting a substantial number of the
                                      jobsites. He classified the projects into the following groups:
                                      (1) Those projects which extended the useful life of real prop-
                                      erty by more than 3 years; (2) those projects which increased
                                      the value of real property by more than 5 percent of the
                                      component being worked upon; (3) those projects that
                                      adapted the property or component to a new or different use;
                                      and (4) those projects that were part of new construction. He
                                      characterized the remaining projects which did not fall into
                                      one of these four categories as routine maintenance or
                                      repairs.
                                         Mr. Gibson concluded from his analysis that petitioner’s
                                      work on over 95 percent of the disputed projects was
                                      substantial renovation within the meaning of the final regu-
                                      lations and their predecessors. His report, as supplemented,
                                      supported his conclusion with vast amounts of data and with
                                      many diagrams, charts, and pictures depicting the specific
                                      construction work petitioner performed. His report, as
                                           8 Mr.   Gibson also has a significant financial interest in petitioner.




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                                      supplemented, further supported his conclusion with detailed
                                      bid sheets for the projects and with articles and treatises
                                      relating to pavement preservation, the extension of the use-
                                      ful life of roads and bridges, the improvement of the condi-
                                      tion of bridges, and bridge management.
                                           2. Mr. Smith
                                         Douglas L. Smith (Mr. Smith) was petitioner’s other
                                      expert. Mr. Smith is a licensed professional engineer, and he
                                      earned a bachelor of science degree in civil engineering in
                                      1983 and a master of science degree in civil engineer-
                                      ing in 1985. He has worked with building or infrastructure
                                      construction for over 18 years, and he is an active member
                                      of various societies of engineers. He currently works for a
                                      consulting, engineering, architectural, and materials science
                                      firm that is unrelated to petitioner. He and the firm spe-
                                      cialize in investigating and repairing infrastructure that fails
                                      to meet performance expectations because of deterioration,
                                      collapse, or the like. The firm’s main clients are State high-
                                      way departments and the Federal Government.
                                         Mr. Smith reviewed all of the disputed projects, including
                                      24 in depth (which represented most of petitioner’s gross
                                      receipts for the subject year), and he visited 11 of the
                                      jobsites. He scrutinized the projects and bid sheets, and he
                                      spoke to persons who worked on the projects. He concluded
                                      that petitioner’s work on the disputed projects often was
                                      required by deterioration caused by the owner’s failure to
                                      properly maintain the real property and that rehabilitation
                                      of the real property, as opposed to repair, was essential to
                                      the survival of the real property. He concluded that the
                                      bridge joints that petitioner rehabilitated had deteriorated
                                      before petitioner’s work, that the deteriorated joints were
                                      harming other parts of the bridges, and that petitioner had
                                      to tailor its work to protect the structure of the bridges
                                      prospectively. He concluded that some of petitioner’s work,
                                      e.g., replacement of bearing pads, was necessitated by design
                                      defects in the originally installed parts and was not routine
                                      maintenance. He concluded that petitioner’s work on pave-
                                      ment in job No. 02–861 (and in another job not in dispute)
                                      substantially prolonged the useful life of the pavement and
                                      increased its value.




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                                           C. Respondent’s Expert
                                         Respondent’s expert was Jeff Ronspies (Mr. Ronspies). Mr.
                                      Ronspies received a bachelor of science degree in civil
                                      engineering in 1995 and a juris doctorate in 2006. He worked
                                      as an engineer from 1995 through 2004, and he worked as
                                      an attorney for a year and a half during 2006 and 2007.
                                      From August 2007 to date, he has worked as a general engi-
                                      neer for the Internal Revenue Service, primarily ‘‘Gather[ing]
                                      facts related to fixed asset and intangible asset audits [and]
                                      Draft[ing] reports used in administrative appeal of audits,
                                      and rebuttals to taxpayer protests of proposed tax adjust-
                                      ments.’’ Mr. Ronspies is not a licensed engineer, he is not a
                                      current member of any engineering society, and he has never
                                      published a paper on engineering. Nor has Mr. Ronspies ever
                                      worked as an engineer on a construction project involving
                                      bridges, roads, or other infrastructure, other than in his role
                                      as an overseer of a firm’s basic painting operations.
                                         Mr. Ronspies reviewed the bid calculations and the
                                      descriptions of all of petitioner’s projects, and he visited 10
                                      of the jobsites (all within the Dallas/Fort Worth metropolitan
                                      area). He concluded that 29 of petitioner’s 136 projects quali-
                                      fied as substantial renovation of real property within the
                                      meaning of the final regulations, and these 29 projects
                                      became (and are) the subject of respondent’s concession. Mr.
                                      Ronspies concluded that the remaining projects (i.e., the dis-
                                      puted projects plus the projects petitioner conceded) were
                                      either repair or maintenance or ‘‘accounting anomalies’’. The
                                      ‘‘accounting anomalies’’, Mr. Ronspies stated, were projects
                                      with no receipts or job costs for the subject year. Mr.
                                      Ronspies explained that he characterized projects as repair
                                      or maintenance because petitioner worked on only part of a
                                      structure, leaving the rest of the structure to deteriorate at
                                      the same rate as before. Mr. Ronspies opined that the useful
                                      life of a structure as a whole does not change if work is per-
                                      formed on only part of the structure.
                                           D. General Rules Applicable to Expert Testimony
                                        Expert testimony is admissible where it assists the Court
                                      to understand the evidence or to determine a fact in issue.
                                      See Fed. R. Evid. 702; see also ASAT, Inc. v. Commissioner,
                                      108 T.C. 147, 168 (1997). The testimony of an expert does not




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                                      assist the Court when the testimony merely expresses a legal
                                      conclusion. See Alumax, Inc. v. Commissioner, 109 T.C. 133,
                                      171 (1997), affd. 165 F.3d 822 (11th Cir. 1999). Determining
                                      whether expert testimony is helpful to the Court is a matter
                                      within the Court’s sound discretion. See Laureys v. Commis-
                                      sioner, 92 T.C. 101, 127 (1989).
                                        We have broad discretion to evaluate the cogency of an
                                      expert’s analysis. Sometimes, an expert will help us decide a
                                      case. See, e.g., Trans City Life Ins. Co. v. Commissioner, 106
                                      T.C. 274, 302 (1996). Other times, he or she will not. See,
                                      e.g., Estate of Scanlan v. Commissioner, T.C. Memo. 1996–
                                      331, affd. without published opinion 116 F.3d 1476 (5th Cir.
                                      1997). We weigh an expert’s testimony in the light of his or
                                      her qualifications and with due regard to all other credible
                                      evidence in the record. We may embrace or reject an expert’s
                                      opinion in toto, or we may pick and choose the portions of the
                                      opinion we choose to adopt. See Helvering v. Natl. Grocery
                                      Co., 304 U.S. 282, 294–295 (1938); Silverman v. Commis-
                                      sioner, 538 F.2d 927, 933 (2d Cir. 1976), affg. T.C. Memo.
                                      1974–285; IT&S of Iowa, Inc. v. Commissioner, 97 T.C. 496,
                                      508 (1991); Parker v. Commissioner, 86 T.C. 547, 562 (1986).
                                      We are not bound by an expert’s opinion and will reject an
                                      expert’s opinion to the extent that it is contrary to the judg-
                                      ment we form on the basis of our understanding of the record
                                      as a whole. See Orth v. Commissioner, 813 F.2d 837, 842 (7th
                                      Cir. 1987), affg. Lio v. Commissioner, 85 T.C. 56 (1985);
                                      Silverman v. Commissioner, supra at 933; IT&S of Iowa, Inc.
                                      v. Commissioner, supra at 508; Chiu v. Commissioner, 84
                                      T.C. 722, 734 (1985).
                                      VI. Standards of Substantial Renovation
                                           A. Applicable Guidance
                                         Section 199(c)(4)(A)(ii) states that DPGR is derived from the
                                      ‘‘construction of real property performed in the United
                                      States’’, but section 199 does not define the word ‘‘construc-
                                      tion’’. Petitioner relies in part upon the final regulations to
                                      assert that its work on the disputed projects qualifies as
                                      construction because those projects involved erecting or
                                      substantially renovating real property. Petitioner also relies
                                      upon the final regulations to assert that some of its work
                                      substantially renovated real property because petitioner ren-




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                                      ovated a major component or substantial structural part of
                                      real property and that work materially increased the value
                                      of the property, substantially prolonged the useful life of the
                                      property, or adapted the property to a new or different use.
                                         By their terms, the final regulations are not necessarily
                                      applicable to this case because the subject year began before
                                      June 1, 2006. The final regulations, however, allow a tax-
                                      payer such as petitioner to rely upon those regulations for
                                      taxable years beginning before May 18, 2006. See sec. 1.199–
                                      8(i)(1), Income Tax Regs. Petitioner relies on portions of the
                                      final regulations to support its position. Petitioner’s reliance
                                      on portions of the final regulations means those regulations
                                      are applicable to this case in their entirety. See id. Peti-
                                      tioner’s reliance on portions of the final regulations also
                                      means that the other above-discussed guidance from the Sec-
                                      retary and from the Commissioner is not directly applicable
                                      to this case.
                                           B. Overview
                                         We proceed to decide the meaning of the phrases ‘‘materi-
                                      ally increases the value of the property’’, ‘‘substantially pro-
                                      longs the useful life of the property’’, and ‘‘adapts the prop-
                                      erty to a new or different use’’, as used in section 1.199–
                                      3(m)(5), Income Tax Regs. These phrases had their genesis
                                      in the capitalization rules set forth in section 263(a) and the
                                      regulations thereunder. See Notice 2005–14, sec. 3.04(11)(d);
                                      see also sec. 1.263(a)–1(b), Income Tax Regs. The increased
                                      value, prolonged useful life, and adapted use standards con-
                                      tained in those phrases are measured by reference to the
                                      ‘‘real property’’ (here, primarily infrastructure), inclusive of
                                      all of its components and parts. See sec. 1.199–3(m)(3) and
                                      (4), Income Tax Regs.; 9 see also sec. 1.199–3(m)(5), Income
                                         9 Sec. 1.199–3(m), Income Tax Regs., defines the terms ‘‘real property’’ and ‘‘infrastructure’’ as

                                      follows:
                                        (3) Definition of real property.—The term real property means buildings (including items that
                                      are structural components of such buildings), inherently permanent structures (as defined in §
                                      1.263A–8(c)(3)) other than machinery (as defined in § 1.263A–8(c)(4)) (including items that are
                                      structural components of such inherently permanent structures), inherently permanent land im-
                                      provements, oil and gas wells, and infrastructure (as defined in paragraph (m)(4) of this section).
                                      * * * For purposes of this paragraph (m)(3), structural components of buildings and inherently
                                      permanent structures include property such as walls, partitions, doors, wiring, plumbing, central
                                      air conditioning and heating systems, pipes and ducts, elevators and escalators, and other simi-
                                      lar property.
                                                                                                   Continued




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                                      Tax Regs. (using the words ‘‘the property’’ in reference to the
                                      words ‘‘real property’’).
                                         The words ‘‘real property’’, in turn, are best understood to
                                      refer to each freestanding item of real property that operates
                                      and performs a discrete function in and of itself. Cf. Smith
                                      v. Commissioner, 300 F.3d 1023, 1030 (9th Cir. 2002)
                                      (holding that aluminum reduction cells were sufficiently free-
                                      standing to constitute units of property separate and apart
                                      from the interconnected cell lines in aluminum smelting
                                      facility, for purposes of characterizing the expense of
                                      replacing the cell linings as a repair), affg. Vanalco, Inc. v.
                                      Commissioner, T.C. Memo. 1999–265; Ingram Indus.,
                                      Inc. v. Commissioner, T.C. Memo. 2000–323 (holding that
                                      tugboat engines were not treated separately from tugboats in
                                      determining whether engine repair costs were capital
                                      expenditures); sec. 1.263A–10(b)(1), Income Tax Regs.
                                      (stating that a unit of real property includes any components
                                      of real property owned by the taxpayer that are functionally
                                      interdependent). Thus, the relevant property that we analyze
                                      to measure whether a standard of substantial renovation is
                                      met is generally each building, bridge, or other permanent
                                      structure on which petitioner worked. As the expert testi-
                                      mony in this case shows, each of the bridges and the other
                                      real property at issue normally is constructed with a number
                                      of major interrelated components any one of which is critical
                                      to the property’s overall functionality, and the separate
                                      components of the property generally do not perform a dis-
                                      crete function in the setting of the property as a whole that
                                      would allow the component to operate and be used by itself.
                                      To the contrary, the placing in service of one component (i.e.,
                                      the readiness and availability of that component for its spe-
                                      cific use) is generally dependent on the placing in service of
                                      the other components of the bridge or the other real prop-
                                      erty.
                                           C. Repairs
                                         The capitalization rules of section 263(a) and the regula-
                                      tions thereunder do not treat an expense to repair property
                                      as a capital expenditure. Such an expense is not a capital
                                        (4) Definition of infrastructure.—The term infrastructure includes roads, power lines, water
                                      systems, railroad spurs, communications facilities, sewers, sidewalks, cable, and wiring. The
                                      term also includes inherently permanent oil and gas platforms.




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                                      expenditure because it fails to increase the value or prolong
                                      the useful life of the property (or adapt the property to a dif-
                                      ferent or new use). See Plainfield-Union Water Co. v.
                                      Commissioner, 39 T.C. 333, 338 (1962). 10 Instead, the repair
                                      generally keeps the property in its ordinarily efficient oper-
                                      ating condition over the useful life for which it was acquired.
                                      See Ill. Merchs. Trust Co. v. Commissioner, 4 B.T.A. 103, 106
                                      (1926); see also sec. 1.162–4, Income Tax Regs. (stating that
                                      ‘‘incidental repairs’’ do not ‘‘materially add to the value of the
                                      property’’ or ‘‘appreciably prolong its life, but keep it in an
                                      ordinarily efficient operating condition’’ and that ‘‘Repairs in
                                      the nature of replacements, to the extent that they arrest
                                      deterioration and appreciably prolong the life of the property,
                                      shall * * * be capitalized’’). Whether an expense is a repair
                                      is a factual determination that turns on a finding that the
                                      work did or did not prolong the life of the property, increase
                                      its value, or make it adaptable to a different use. See R.R.
                                      Hensler, Inc. v. Commissioner, 73 T.C. 168, 178–182 (1979).
                                         Sometimes, an expense that would otherwise be character-
                                      ized as a repair may be characterized as a capital expendi-
                                      ture if the expense is part of the property’s rehabilitation,
                                      modernization, and improvement. See United States v.
                                      Wehrli, 400 F.2d 686, 689–690 (10th Cir. 1968); Jones v.
                                      Commissioner, 242 F.2d 616 (5th Cir. 1957), affg. 24 T.C. 563
                                      (1955). Such may be so even if the property was not com-
                                      pletely out of service or in total disrepair. See Norwest Corp.
                                      & Subs. v. Commissioner, 108 T.C. 265, 279–280 (1997)
                                      (holding that the costs of removing asbestos-containing mate-
                                      rials must be capitalized because they were part of a general
                                      plan of rehabilitation and renovation that improved the
                                      building); see also Bank of Houston v. Commissioner, T.C.
                                      Memo. 1960–110. In addition, the Secretary has proposed a
                                      regulation under which an expense is a capital expenditure,
                                      rather than a repair, where the property has deteriorated to
                                         10 In Plainfield-Union Water Co. v. Commissioner, 39 T.C. 333, 338 (1962), the taxpayer

                                      claimed deductions for the cleaning and lining of cement pipe which restored the original water-
                                      carrying capacity of the pipes. The Court held that the expenses were repairs because the tax-
                                      payer continued to use the property in its normal course of business and the useful life of the
                                      water main was not increased, nor was its strength or capacity enhanced. Id. The Court noted
                                      that a repair returns property to the state it was before the condition necessitating the expendi-
                                      ture arose and does not make the property more valuable, more useful, or longer lived. Id. The
                                      Court noted that a capital expenditure under sec. 263(a) generally results in a longer lasting
                                      increase in the longevity, utility, or worth of the property. Id.; see also Norwest Corp. & Subs.
                                      v. Commissioner, 108 T.C. 265, 279–280 (1997).




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                                      a state of disrepair and is no longer functional for its
                                      intended use and the expense returns the property to its
                                      former ordinarily efficient operating condition. See sec.
                                      1.263(a)–3(e)(2)(iv), Proposed Income Tax Regs., 73 Fed. Reg.
                                      12859 (Mar. 10, 2008).
                                           D. Substantial Renovation Standards
                                           1. Materially Increases the Value
                                        A taxpayer’s receipts may be DPGR if the receipts are
                                      attributable to renovations that materially increase the value
                                      of real property. See sec. 1.199–3(m)(5), Income Tax Regs.
                                      Respondent asserts that a material increase in the value of
                                      real property in the context of public works projects requires
                                      that the functional value of the property increase on account
                                      of the project. We agree. See Plainfield-Union Water Co. v.
                                      Commissioner, supra at 338. Each of petitioner’s projects
                                      may have materially increased the value of the underlying
                                      real property only to the extent that the project led to a more
                                      permanent increment in the longevity, utility, or worth of the
                                      property. Such a permanent increment may have occurred,
                                      for example, if the project rehabilitated a critical component
                                      of the property, thus making the rehabilitation tantamount
                                      to replacing the property as a whole.
                                        An increase in value following a casualty is measured by
                                      comparing the value of the real property after the project
                                      with the value of the real property before the casualty. See
                                      R.R. Hensler, Inc. v. Commissioner, supra at 180–182. An
                                      increase in value in other cases is measured by comparing
                                      the value of the real property after the project with the value
                                      of the real property before the project. See Plainfield-Union
                                      Water Co. v. Commissioner, supra at 337. In all cases, any
                                      increase in value must be ‘‘material’’ to qualify the receipts
                                      as DPGR.
                                           2. Substantially Prolongs the Useful Life
                                        A project may substantially prolong the useful life of prop-
                                      erty if the project rehabilitates a critical and functional
                                      component of the property and gives the property a new life
                                      expectancy. See Smith v. Commissioner, 300 F.3d 1023 (9th
                                      Cir. 2002). The replacement of a component that is so
                                      integral to the overall functioning of property effectively con-




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                                      (195)             GIBSON & ASSOCIATES, INC. v. COMMISSIONER                                    235


                                      fers a new lifespan on the property equivalent to the life of
                                      the component. Id. at 1033. The useful life of property may
                                      be substantially prolonged where the useful life of the prop-
                                      erty as a whole was increased or the replacement of a compo-
                                      nent effectively increased the useful life of the property.
                                        An increase in useful life following a casualty is measured
                                      by comparing the useful life of the real property after the
                                      project with the remaining useful life of the real property
                                      before the casualty. See R.R. Hensler, Inc. v. Commissioner,
                                      supra at 180–182. An increase in useful life in other cases is
                                      measured by comparing the useful life of the real property
                                      after the project with the remaining useful life of the real
                                      property before the project. See Plainfield-Union Water Co. v.
                                      Commissioner, 39 T.C. at 337; Ill. Merchs. Trust Co. v.
                                      Commissioner, 4 B.T.A. at 106. In all cases, any prolonging
                                      of useful life must be ‘‘substantial’’ to qualify the receipts as
                                      DPGR.

                                           3. Adapts the Property to a New or Different Use
                                         Property is adapted to a new or different use if the use of
                                      the property after the project is not consistent with the tax-
                                      payer’s intended use of the property before the project. As
                                      the parties acknowledge, and we agree, such an adaption
                                      often corresponds to a material increase in value or to a
                                      substantial prolonging of useful life. If a project qualifies as
                                      a substantial renovation under either one of the other two
                                      standards, it is not necessary to determine whether the prop-
                                      erty also is adapted for a new or different use.
                                         Job No. 05–1011 is the only project that petitioner
                                      characterized as adapting property to a new or different use
                                      without substantially prolonging the useful life of the prop-
                                      erty or materially increasing its value. There, petitioner was
                                      paid approximately $30,000 to modify a handrail (and to
                                      remove and to replace concrete) to comply with the ADA. Peti-
                                      tioner concluded that this work adapted the property to a
                                      new or different use. We agree. Petitioner’s modification of
                                      the handrail allowed access to the property by those persons
                                      to whom the ADA applied, and the handrail could not have
                                      been so used without the modifications. We sustain peti-
                                      tioner’s conclusion that this project qualified under section
                                      199 without further specific discussion of this project.




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                                      VII. Characterization of Remaining Projects
                                           A. Overview
                                         We now consider whether petitioner’s work on the
                                      remaining disputed projects was the erection or substantial
                                      renovation of real property. We do so on a project by project
                                      basis. We are aided by the testimony of Messrs. Gibson and
                                      Smith, both of whom are licensed, well-credentialed, and
                                      knowledgeable longtime prominent professional engineers in
                                      the fields of highway and bridge construction and structural
                                      rehabilitation. We heard them and perceived them to be
                                      more knowledgeable and reliable than Mr. Ronspies on the
                                      matter at hand, and we find the testimony of Messrs. Gibson
                                      and Smith to be sincere and most persuasive. 11 Mr.
                                      Ronspies, on the other hand, lacks any practical experience
                                      in road and bridge construction, and we decline to accept his
                                      testimony on that subject to the extent that it conflicts with
                                      the testimony of Messrs. Gibson and Smith. We note as to
                                      Mr. Ronspies that he ultimately agreed that 7 of petitioner’s
                                      10 bridge projects that he visited qualified under section 199
                                      and acknowledged that his opinion as to the qualification of
                                      petitioner’s remaining projects might have changed had he
                                      visited them as well.
                                         Petitioner asserts that its work on each disputed project
                                      erected real property or substantially renovated real prop-
                                      erty. We agree. Petitioner erected real property in job Nos.
                                      04–937 (a blast fence), 04–965 (additional lanes and drive-
                                      ways), 04–971 (a ramp), 05–1002 (a traffic rail and a bridge
                                      deck), 05–1043 (additional turn lanes), and 06–1069 (a
                                      retaining wall). 12 In the other projects, petitioner: (1) Ren-
                                      ovated major components or substantial structural parts of
                                      infrastructure; (2) addressed design errors or construction
                                      flaws by restoring infrastructure to perform efficiently as
                                      intended; (3) allowed infrastructure to be put back in service
                                      after damage or severe deterioration; (4) returned a major
                                      component from a deteriorated state, either from age, expo-
                                      sure, or casualty loss, to its former operational efficiency; (5)
                                         11 Of course, we recognize that the interests of petitioner and Mr. Gibson overlap in that he

                                      is petitioner’s chief executive officer and has a significant financial interest in this matter. We
                                      have taken those considerations into account in our evaluation of his testimony and have con-
                                      cluded that his testimony was sincere and credible.
                                         12 Mr. Ronspies now agrees that job No. 04–937 qualifies under sec. 199.




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                                      abated environmental hazards, e.g., by removing or encap-
                                      sulating lead paint; and/or (6) brought infrastructure into
                                      compliance with laws such as the ADA. Petitioner’s work on
                                      these other projects effected the renovation of a major compo-
                                      nent or substantial structural part of real property, and we
                                      conclude from our description of each project (as set forth in
                                      our findings of fact and in appendixes A, B, and C) and our
                                      consideration of the expert testimony of Messrs. Gibson and
                                      Smith that the work materially increased the value of the
                                      real property and/or substantially prolonged the useful life of
                                      the real property.
                                           B. Conclusions as to Specific Projects
                                           1. Casualty Projects
                                         The 18 casualty projects in dispute involved petitioner’s
                                      work on damaged infrastructure (mainly bridges) that either
                                      were completely inoperative (e.g., not open to traffic) or not
                                      fully operative. Petitioner restored the integrity of the infra-
                                      structure through substantial structural rehabilitation that
                                      allowed the infrastructure to function as intended for many
                                      years thereafter. Much of the infrastructure was of little to
                                      no use without petitioner’s work. Petitioner’s final contract
                                      amount for each project ranged from $11,500 to $640,994.
                                         We conclude from the record at hand that the functionality
                                      and dollar values of the real property underlying most of the
                                      casualty projects increased substantially on account of peti-
                                      tioner’s work. We also conclude that for those projects, and
                                      for each of the other casualty projects for which petitioner
                                      does not assert a material increase in value (specifically, job
                                      Nos. 05–1023, 05–999, 06–1074, 06–1078, 06–1084, 06–1087,
                                      and 06–1091), that petitioner’s work substantially prolonged
                                      the useful life of the infrastructure.
                                           2. New Construction and Rehabilitation Projects
                                         The remaining 80 projects in dispute (i.e., the 86
                                      remaining projects in dispute less the 6 projects that erected
                                      real property) involved work that petitioner performed pri-
                                      marily as a subcontractor, which petitioner calls ‘‘New
                                      Construction’’, and work that petitioner performed as a con-
                                      tractor rehabilitating dilapidated real property, which peti-
                                      tioner calls ‘‘Rehabilitation Projects’’. While petitioner places




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                                      these projects into two categories primarily on the basis of its
                                      role as a contractor or a subcontractor, we do not do simi-
                                      larly. Each project ultimately involves the rehabilitation of
                                      dilapidated real property, and we do not think the character-
                                      ization of petitioner’s work is any different just because peti-
                                      tioner performed its work as a contractor versus a subcon-
                                      tractor. To be sure, petitioner’s work on the ‘‘new projects’’
                                      was just as new as its work on the ‘‘rehabilitation projects’’.
                                         Petitioner concluded that its work on each of these projects
                                      substantially prolonged the useful life of the underlying real
                                      property. We agree. 13 That real property (typically bridges)
                                      had deteriorated to a state of disrepair on account of a lack
                                      of proper maintenance, and the real property was no longer
                                      functioning as intended. Petitioner significantly improved
                                      and solidified the integrity of the dilapidated bridges and the
                                      other real property through petitioner’s renovation and
                                      redesign of major structural components thereof (e.g., beams
                                      and joints), and petitioner performed other services such as
                                      corrosion protection, pavement rehabilitation, and expansive
                                      joint rehabilitation. Petitioner’s work enhanced the operating
                                      condition of the real property for many years into the future.
                                      Mr. Gibson concluded that each of these projects increased
                                      the useful life of the real property by more than 3 years, and
                                      we find that conclusion persuasive taking into account the
                                      specialized work petitioner did on each project and the final
                                      contract amounts (ranging from $3,990 to $2,748,957) for
                                      these projects. 14
                                           C. Additional Rationale for All Projects
                                        Respondent argues that petitioner’s work on the casualty
                                      projects ‘‘merely brought the bridges back to their normal
                                      operating condition’’ and that petitioner’s work on the new
                                      construction and rehabilitation projects was routine mainte-
                                      nance. We disagree. Petitioner’s work on many of the projects
                                        13 Petitioner also concluded that its work on 16 of these projects materially increased the

                                      value of the underlying real property. We need not consider this conclusion given our agreement
                                      with petitioner’s primary conclusion.
                                        14 As to one of the projects in issue, job No. 03–921, petitioner’s sole work was ‘‘patching’’ the

                                      deck of the bridge. While this work in and of itself would appear to be routine maintenance,
                                      petitioner performed this work as a subcontractor on a larger project that rehabilitated the
                                      bridge. Given the additional facts that petitioner’s final contract amount for this job was
                                      $105,646 and that the job was paid for with Federal funds, we conclude that petitioner’s work
                                      was part of a substantial renovation of the bridge and classify it as such.




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                                      was critical and essential to the well-being and future oper-
                                      ation of the structures underlying the projects. Petitioner, for
                                      example, removed and replaced the joints on bridges because
                                      the old joints were failing from lack of proper maintenance
                                      and threatening the structure of each of the bridges as a
                                      whole. Similarly, petitioner replaced damaged or deteriorated
                                      beams with new beams to give the bridge its requisite sup-
                                      port. Likewise, petitioner rehabilitated a beam using special-
                                      ized materials and procedures such as epoxy, heat, and
                                      mechanical force.
                                        Mr. Gibson explained that petitioner performed six types of
                                      specialized work on the disputed projects and that this work
                                      either (or both) substantially prolonged the useful life of the
                                      structure underlying the project or materially increased its
                                      value. Mr. Gibson listed this work as corrosion protection,
                                      concrete structural renovation, steel structural renovation,
                                      pavement rehabilitation, implementation of structure
                                      redesign, and expansion joint rehabilitation. He described
                                      each of these types of work as follows:
                                         Corrosion protection: Involves the removal of all rust and corrosion on
                                      the existing structural steel components and then the application of a
                                      three coat corrosion protection system to the structure. The three coat
                                      process involves a base layer of zinc to protect the steel from rust, a second
                                      epoxy layer to protect the base layer, and a final UV layer to protect the
                                      epoxy layer. The deteriorated steel beam ends must be removed and
                                      replaced before the cleaning and painting takes place. (A beam end is the
                                      portion of the beam beneath a joint in the deck of the bridge.) This protec-
                                      tion generally allows the load carrying capacity of a bridge to be increased
                                      to its original limits and extends the useful life of the structure.
                                         Concrete structural renovation: Involves a structural renovation of a con-
                                      crete bridge. Without the renovation, the bridge does not function as origi-
                                      nally designed (e.g., some lanes must be closed to traffic).
                                         Steel structural renovation: Involves a structural renovation of steel on
                                      a bridge. Without the renovation, the bridge does not function as originally
                                      designed (e.g., some lanes must be closed to traffic). This work extends the
                                      useful life of the bridge.
                                         Pavement rehabilitation: Involves the joint and spall rehabilitation of the
                                      pavement of a bridge. This process extends the useful life of the bridge by
                                      10 to 15 years.
                                         Implementation of structure redesign: Involves three different types of
                                      projects. The first type involves the strengthening of structural steel, the
                                      replacement of spalled concrete, the installation of new bearing pads, and
                                      the painting of the bridge. (The bearings on a bridge allow the bridge to
                                      expand, contract, flex, and vibrate without a transfer of the resulting
                                      stress into adjacent support elements.) The second type involves the




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                                      replacement of an old bridge by a new, longer, and wider bridge. This is
                                      done by removing the old bridge deck, adding shear connectors to the steel
                                      stringers (to increase the load carrying capacity), cleaning and painting the
                                      bridge, moving the new bridge into position, and pouring concrete to serve
                                      as the deck of the bridge. (A stringer is a steel beam spanning lengthwise
                                      in a bridge.) The third type involves raising a bridge to increase the clear-
                                      ance between the bottom of the bridge and the roadway below.
                                        Expansion joint rehabilitation: This involves rehabilitating deteriorated
                                      expansion joints to increase the useful life of the bridge.

                                         Mr. Ronspies opined that petitioner’s work was primarily
                                      routine maintenance, and he identified the following types of
                                      work performed by petitioner as routine maintenance: (1)
                                      Joint replacement (because, he stated, joints do not have the
                                      expected life of the concrete or structural steel bridge spans,
                                      and it is recommended that joints be replaced regularly); (2)
                                      rehabilitation or replacement of bridge bearings (because, he
                                      stated, this work is typically performed as part of a sched-
                                      uled maintenance program); (3) patching of concrete or
                                      asphalt by removing deteriorated concrete and replacing it
                                      with new material (because, he stated, the patch material
                                      does not increase the life of the surrounding material); (4)
                                      painting (because, he stated, this work is typically performed
                                      as part of a scheduled maintenance program); and (5)
                                      installing stiffeners and other structural steel (because, he
                                      stated, this work does not increase the capacity of the
                                      bridge). We disagree that these categories of work, as per-
                                      formed by petitioner, are routine maintenance. Mr. Gibson
                                      visited many of the jobsites of the disputed projects, and he
                                      was the individual who was most familiar with the specific
                                      work that petitioner performed. He testified persuasively as
                                      to the type, extent, and significance of the work that peti-
                                      tioner performed on each project. He testified persuasively
                                      that Mr. Ronspies failed to understand the type, extent, and
                                      significance of the work that petitioner performed on the
                                      projects. 15
                                         In addition, Mr. Gibson explained that the bridges on
                                      which petitioner worked were dilapidated because they had
                                      not been properly maintained and that petitioner could not
                                        15 For example, Mr. Ronspies viewed job No. 05–1028 as a simple paint job, and he viewed

                                      job No. 06–1089 as isolated asphalt repairs and some new expansion joints. Mr. Ronspies’ view
                                      was blurred as to both jobs. In the former job, the ODOT paid petitioner approximately $266,000
                                      to remove a perceived hazardous material, to blast a bridge to remove corrosion, and to apply
                                      a protective paint coating. In the latter job, the TxDOT paid petitioner approximately $65,000
                                      to rehabilitate the joint and spall of pavement.




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                                      simply repair the bridges but had to rehabilitate the bridges
                                      significantly. He also explained that petitioner’s addition of
                                      a protective coating to a bridge is significantly different from
                                      and more sophisticated and extensive than the outdated
                                      basic type of painting job with which Mr. Ronspies was
                                      familiar. 16 Bridges, Mr. Gibson stated, used to be painted
                                      with materials that have now been established to be haz-
                                      ardous to the environment and to human health, and the
                                      trend in the last decade or two has been to apply a protective
                                      coating to a bridge instead of simply painting it. He
                                      explained that the protective coating is designed to last
                                      approximately 20 or more years without any additional
                                      maintenance and that failing to coat can cause beams to
                                      rust, thus resulting in the bridge not being usable anymore.
                                      His testimony was echoed in many regards by Mr. Smith’s
                                      testimony.
                                         As respondent would have it, the rehabilitation of one or
                                      more components of real property would be a repair unless
                                      all of the property’s major components were replaced. Such
                                      is so, Mr. Ronspies stated, even if the new component was
                                      (or components were) superior to the old component(s). We
                                      disagree with this view. First, as discussed supra pp. 232–
                                      234, we do not understand such a principle to apply to
                                      repairs in general. Second, petitioner concludes (and we
                                      agree) that petitioner’s renovation of major components often
                                      extended the useful life of the structures as a whole on
                                      account of the intricate interaction of all of the components.
                                      Petitioner’s work on a part of a structure resulted in a more
                                      permanent increment in the longevity, utility, and worth of
                                      the structure as a whole which, in turn, increased the useful
                                      life of the overall structure. See Smith v. Commissioner, 300
                                      F.3d at 1033–1034. Third, Messrs. Gibson and Smith opined
                                      persuasively that a bridge usually does not deteriorate
                                      evenly throughout its life but that certain sections of the
                                      bridge deteriorate faster than others on account of their loca-
                                      tion on the bridge and their exposure to the weather, among
                                      other reasons. Fourth, Mr. Smith explained that a repair of
                                      infrastructure or other similar real property is typically an
                                        16 Mr. Ronspies worked for a limited time as an overseer of a construction company’s painting

                                      operations. Those operations were the basic type of painting that Mr. Gibson opined was routine
                                      maintenance and was not the contemporary painting that Mr. Gibson stated was a substantial
                                      renovation.




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                                      242                    136 UNITED STATES TAX COURT REPORTS                                         (195)


                                      expense that the designer anticipated as part of the prop-
                                      erty’s regularly scheduled maintenance program and that
                                      such maintenance was not done here. He stated that the lack
                                      of normal or routine maintenance and the resulting deterio-
                                      ration of a single component of infrastructure may make the
                                      overall infrastructure unusable because it is unsafe. He
                                      stated that work such as petitioner’s which is aimed specifi-
                                      cally at components of infrastructure that have been allowed
                                      to deteriorate to a state of disrepair therefore significantly
                                      prolongs the useful life of the infrastructure as a whole.
                                         Respondent argues that petitioner cannot prevail because
                                      it has not established with any specificity that its work mate-
                                      rially increased the value or substantially prolonged the use-
                                      ful life of the disputed property. We disagree. Although the
                                      record may not allow us to pinpoint the exact increases in
                                      value or useful life on account of petitioner’s work, suffice it
                                      to say that the record supports petitioner’s conclusion that
                                      the applicable standards were met for each disputed project.
                                      The bid sheets show the scope of petitioner’s work and the
                                      dollar amounts of its projects, and petitioner’s use of the 3-
                                      year and 5-percent benchmarks is reasonable in the setting
                                      at hand to establish that petitioner’s work substantially
                                      increased the value, capacity, efficiency, strength, and/or
                                      quality of each of the items of real property underlying the
                                      disputed projects. 17
                                         All the same, Mr. Gibson, on behalf of petitioner, analyzed
                                      each project and ascertained whether the work on each
                                      project materially increased the value of property or substan-
                                      tially prolonged its useful life. (We have included in our
                                      description of each project petitioner’s conclusion as to
                                      whether the project materially increased the value of prop-
                                      erty and/or substantially prolonged its useful life.) He
                                      explained that maintenance projects are anticipated by the
                                      designer and included in a regularly scheduled maintenance
                                      plan and considered when determining the life of the struc-
                                      ture. He explained that regularly scheduled maintenance
                                      was lacking as to many of the structures underlying the dis-
                                      puted projects. He explained that the value of a bridge
                                      declines from $400,000 to zero over 40 years if it has little
                                      or no maintenance, but with $200,000 of rehabilitation work
                                           17 The   same is true as to a material increase in useful life.




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                                      (195)             GIBSON & ASSOCIATES, INC. v. COMMISSIONER                                        243


                                      after 30 years, the value increases from $100,000 to $300,000
                                      and the life of the bridge is extended from 40 years to 60
                                      years. He concluded that petitioner’s major rehabilitation
                                      work on a bridge increased each bridge’s value by the cost of
                                      the rehabilitation work and prolonged the bridge’s useful life
                                      by 20 years. We accept that rationale and understand it to
                                      apply with equal strength to petitioner’s nonbridge properties
                                      as well.
                                      VIII. Conclusion
                                        We conclude that petitioner’s projects qualify under section
                                      199 to the extent stated herein. 18 All arguments for a dif-
                                      ferent conclusion have been considered, and those arguments
                                      not discussed herein have been rejected as without merit. To
                                      take into account the parties’ concessions,
                                                                         Decision will be entered under Rule 155.



                                                                                 APPENDIX A

                                                                               Casualty Projects
                                                                                       Final            Revenue
                                                                                      contract         earned in
                                            Job No.       General type of work        amount          subject year   RM     UL    V     DU

                                            05–1021       Bridge rehabilitation      $640,994          $347,837      ---     *     *    ---
                                            05–1023       Highway sign shoring         22,114            17,114      ---     *    ---   ---
                                            05–1025       Bridge rehabilitation        77,240            77,240      ---     *     *    ---
                                            05–1029       Bridge rehabilitation        28,200            28,200      ---     *     *    ---
                                            05–1045       Bridge rehabilitation       395,337           395,337      ---     *     *    ---
                                            05–1054       Bridge rehabilitation        49,000            49,000      ---     *     *    ---
                                            05–1056       Bridge rehabilitation        31,935            31,935      ---     *     *    ---
                                            05–1059       Bridge rehabilitation        43,200            43,200      ---     *     *    ---
                                            05–1060       Highway repair              398,234           398,234      ---    ---   ---   ---
                                            05–1064       Bridge rehabilitation       141,785           140,850      ---     *     *    ---
                                            05–1065       Bridge rehabilitation        73,000            73,000      ---     *     *    ---
                                            05–999        Bridge rehabilitation        79,668             6,000      ---     *    ---   ---
                                            06–1072       Bridge rehabilitation        40,853            40,053      ---     *     *    ---
                                            06–1073       Bridge rehabilitation        25,884            25,784      ---     *     *    ---
                                            06–1074       Bridge rehabilitation        24,901            24,910      ---     *    ---   ---
                                            06–1078       Bridge rehabilitation        24,900            24,025      ---     *    ---   ---
                                            06–1084       Bridge rehabilitation        39,830            39,830      ---     *    ---   ---




                                        18 Our conclusion is consistent with the legislative intent for sec. 199 (e.g., petitioner hired

                                      additional employees in years after the subject years) and with 23 U.S.C. sec. 116 (2006) (the
                                      Secretary of Transportation presumably concluded that petitioner’s projects subject to that title
                                      were a cost-effective means of extending the useful lives of Federal-aid highways).




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                                      244                 136 UNITED STATES TAX COURT REPORTS                                             (195)


                                                                                Casualty Projects
                                                                                        Final            Revenue
                                                                                       contract         earned in
                                            Job No.       General type of work         amount          subject year   RM      UL     V    DU


                                            06–1087       Bridge rehabilitation        112,000              1,950     ---       *   ---   ---
                                            06–1091       Bridge rehabilitation         11,500 #           11,500     ---       *   ---   ---

                                                                                                        1,775,999

                                            #:    Project paid for with Federal funds.
                                            RM:   Repair or maintenance.
                                            UL:   Substantially prolonged useful life of real property.
                                            V:    Materially increased value of real property.
                                            DU:   Adapted real property to different or new use.
                                            *:    Category or categories to which petitioner assigned project.




                                                                                  APPENDIX B

                                                                        New Construction Projects
                                                                                  Final contract       Revenue earned in
                                       Job No.          General type of work         amount               subject year      RM      UL    V     DU

                                       03–906           Bridge work                  $85,014   #              -0-             ---    *    ---   ---
                                       03–921           Bridge work                  105,646   #          $20,000             ---    *    ---   ---
                                       03–926           Bridge work                   62,050   #              -0-             ---    *    ---
                                       04–937           Built blast fence          2,323,112   #            (2,405)           ---   ---    *     *
                                       04–954           Bridge work                   77,313   #               500            ---    *    ---   ---
                                       04–955           Bridge work                   73,868   #              -0-             ---    *    ---   ---
                                       04–956           Bridge work                  178,661   #          159,340             ---    *    ---   ---
                                       04–959           Bridge work                  504,241   #            (5,480)           ---    *    ---   ---
                                       04–965           Highway work                 357,883   #            (1,484)           ---    *     *     *
                                       04–967           Bridge work                  153,863   #              -0-             ---    *    ---   ---
                                       04–968           Building work                112,536                  -0-             ---    *    ---   ---
                                       04–971           Built airport ramp           406,322                  -0-             ---    *     *     *
                                       04–981           Bridge work                  250,166   #           66,072             ---    *    ---   ---
                                       04–982           Bridge work                  483,936   #          442,948             ---    *    ---   ---
                                       05–1000          Bridge work                   41,456   #           41,456             ---    *    ---   ---
                                       05–1002          Bridge work                  140,094                      1           ---    *     *     *
                                       05–1003          Bridge work                1,391,452            1,034,097             ---    *    ---   ---
                                       05–1011          Modified handrail             29,985               27,485             ---   ---   ---    *
                                       05–1018          Bridge work                   41,992   #           37,992             ---   ---   ---   ---
                                       05–1019          Bridge work                  264,204             264,204              ---    *    ---   ---
                                       05–1028          Bridge work                  266,800   #             6,000            ---    *     *    ---
                                       05–1032          Bridge work                   11,328   #           11,328             ---   ---   ---   ---
                                       05–1036          Bridge work                  422,372   #           35,290             ---    *     *    ---
                                       05–1037          Bridge work                  178,360   #          110,825             ---    *    ---   ---
                                       05–1038          Bridge work                  169,012   #          110,700             ---    *    ---   ---
                                       05–1043          Highway work                 747,602   #           25,280             ---   ---    *     *
                                       05–1047          Bridge work                  122,000              122,000             ---    *    ---   ---
                                       05–1052          Airport terminal work      2,261,192   #        1,944,968             ---    *     *     *
                                       05–1057          Bridge work                   57,100   #               100            ---    *    ---   ---
                                       05–995           Bridge work                   86,606               86,606             ---    *    ---   ---
                                       06–1069          Built retaining wall         154,273             154,273              ---    *     *    ---
                                       06–1071          Bridge work                   64,530   #           11,000             ---    *    ---   ---
                                       06–1085          Culvert work                  45,823               45,823              *    ---   ---   ---




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                                      (195)             GIBSON & ASSOCIATES, INC. v. COMMISSIONER                                                  245


                                                                        New Construction Projects
                                                                                   Final contract        Revenue earned in
                                       Job No.          General type of work          amount                subject year         RM        UL    V       DU

                                       06–1089          Bridge work                    65,592 #                 58,425             ---      *    ---     ---
                                       06–1093          Bridge work                   908,143 #                  2,000             ---      *    ---     ---
                                         Misc.              ---                       329,273                  329,273             ---     ---   ---     ---

                                                                                                5,138,617
                                      #:  Project paid for with Federal funds.
                                      RM: Repair or maintenance.
                                      UL: Substantially prolonged useful life of real property.
                                      V:  Materially increased value of real property.
                                      DU: Adapted real property to different or new use.
                                      *:  Category or categories to which petitioner assigned project.




                                                                                 APPENDIX C

                                                                          Rehabilitation Projects
                                                                                          Final                Revenue earned
                                       Job No.            General type of work       contract amount           in subject year      RM      UL       V    DU

                                      02–861             Airport pavement work              $2,011,996   #            -0-            ---     *     ---     ---
                                      03–874             Bridge work                           356,500   #            -0-            ---     *     ---     ---
                                      03–890             Bridge work                           159,722   #          $21,810          ---     *     ---     ---
                                      03–902             Bridge work                           291,789   #            (1,885)        ---     *     ---     ---
                                      03–915             Bridge work                           653,395   #           18,000          ---     *     ---     ---
                                      04–950             Bridge work                         2,481,935   #           79,520          ---     *      *       *
                                      04–951             Bridge work                           179,000   #            -0-            ---     *      *      ---
                                      04–958             Bridge work                           620,622   #            -0-            ---     *      *      ---
                                      04–960             Bridge work                            47,870                -0-            ---     *     ---      *
                                      04–961             Bridge work                           173,378                 2,260         ---     *     ---      *
                                      04–969             Bridge work                            48,086   #               297         ---     *     ---     ---
                                      04–970             Bridge work                           534,083   #          140,659          ---     *     ---     ---
                                      04–983             Bridge work                             3,990                -0-            ---     *     ---     ---
                                      04–985             Bridge work                           535,148   #           65,259          ---     *      *      ---
                                      04–986             Bridge work                           161,819                -0-            ---     *     ---      *
                                      04–987             Bridge work                            19,981   #                11         ---     *     ---     ---
                                      05–1004            Bridge work                           145,174   #             7,713         ---     *      *      ---
                                      05–1006            Pavement work                         719,924              540,103          ---     *     ---     ---
                                      05–1009            Traffic barrier wall                  294,863              236,185          ---     *     ---     ---
                                      05–1013            Bridge work                            18,600               18,600          ---     *     ---     ---
                                      05–1017            Bridge work                           174,716              174,716          ---     *     ---     ---
                                      05–1020            Bridge work                           724,352   #          681,101          ---     *     ---     ---
                                      05–1022            Bridge work                            24,868               21,368          ---     *     ---     ---
                                      05–1024            Bridge work                           167,198              167,198          ---     *      *      ---
                                      05–1033            Pavement work                         116,815              116,815          ---     *     ---     ---
                                      05–1046            Bridge work                           294,788              294,788          ---     *     ---     ---
                                      05–1048            Bridge work                           959,694   #           97,531          ---     *      *      ---
                                      05–1049            Bridge work                           543,670   #           53,478          ---     *     ---     ---
                                      05–1050            Bridge work                           537,943   #          327,661          ---     *      *      ---
                                      05–1051            Bridge work                           256,122              256,122          ---     *      *      ---
                                      05–1061            Bridge work                           370,929   #          164,449          ---     *     ---     ---
                                      05–1062            Bridge work                            64,649               64,649          ---     *     ---     ---
                                      05–1063            Bridge work                         1,180,258              784,069          ---     *     ---     ---
                                      05–996             Work on civic center                   99,901                 2,336         ---     *     ---     ---
                                      05–997             Bridge work                           432,030              159,935          ---     *      *      ---
                                      06–1067            Bridge work                            37,079               37,079          ---     *      *      ---
                                      06–1068            Bridge work                            51,179                   500         ---     *     ---     ---
                                      06–1070            Work on grandstand                     23,400               23,400          ---     *     ---     ---
                                      06–1075            Bridge work                           950,931   #          163,395          ---     *     ---     ---




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                                      246                136 UNITED STATES TAX COURT REPORTS                                                       (195)


                                                                              Rehabilitation Projects
                                                                                              Final                 Revenue earned
                                       Job No.           General type of work            contract amount            in subject year    RM    UL     V      DU

                                      06–1076            Bridge work                              89,298                   89,298      ---    *      *     ---
                                      06–1079            Bridge work                             434,498 #                  3,000      ---    *     ---    ---
                                      06–1080            Streetscape work                      2,748,957 #                  -0-        ---   ---     *      *
                                      06–1081            Bridge work                             131,147                   67,269      ---    *     ---    ---
                                      06–1082            Bridge work                             123,222                  122,892      ---    *     ---    ---
                                      06–1088            Bridge work                             549,490 #                  3,000      ---    *     ---    ---
                                      06–1090            Modified entranceway                     24,971                   24,971      ---    *      *      *
                                      06–1094            Bridge work                           1,102,617                    -0-        ---    *     ---    ---
                                      06–1095            Highway work                            159,375                    -0-        ---    *      *      *
                                      06–1096            Bridge work                             321,910                    1,000      ---    *     ---    ---

                                                                                                                         5,030,552
                                     #:  Project paid for with Federal funds.
                                     RM: Repair or maintenance.
                                     UL: Substantially prolonged useful life of real property.
                                     V:  Materially increased value of real property.
                                     DU: Adapted real property to different or new use.
                                     *:  Category or categories to which petitioner assigned project.




                                                                                    APPENDIX D

                                      SEC. 199. INCOME ATTRIBUTABLE TO DOMESTIC PRODUCTION
                                                ACTIVITIES.

                                           (a) ALLOWANCE OF DEDUCTION.—
                                             (1) IN GENERAL.—There shall be allowed as a deduction an amount
                                           equal to 9 percent of the lesser of—
                                                (A) the qualified production activities income of the taxpayer for the
                                             taxable year, or
                                                (B) taxable income (determined without regard to this section) for
                                             the taxable year.
                                             (2) PHASEIN.—In the case of any taxable year beginning after 2004 and
                                           before 2010, paragraph (1) shall be applied by substituting for the
                                           percentage contained therein the transition percentage determined
                                           under the following table:

                                                                                                                           The
                                                        For taxable years                                               transition
                                                          beginning in:                                               percentage is:

                                                        2005 or 2006 ............................................              3
                                                        2007, 2008, or 2009 .................................                  6

                                           (b) DEDUCTION LIMITED TO WAGES PAID.—
                                             (1) IN GENERAL.—The amount of the deduction allowable under sub-
                                           section (a) for any taxable year shall not exceed 50 percent of the W–
                                           2 wages of the taxpayer for the taxable year.

                                                                         *      *      *       *     *      *        *




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                                      (195)             GIBSON & ASSOCIATES, INC. v. COMMISSIONER                                    247


                                        (c) QUALIFIED PRODUCTION ACTIVITIES INCOME.—For purposes of this
                                      section—
                                           (1) IN GENERAL.—The term ‘‘qualified production activities income’’ for
                                        any taxable year means an amount equal to the excess (if any) of—
                                             (A) the taxpayer’s domestic production gross receipts for such tax-
                                           able year, over
                                             (B) the sum of—
                                                (i) the cost of goods sold that are allocable to such receipts, and
                                                (ii) other expenses, losses, or deductions (other than the deduction
                                             allowed under this section), which are properly allocable to such
                                             receipts.

                                                               *    *    *   *   *   *   *
                                            (4) DOMESTIC PRODUCTION GROSS RECEIPTS.—
                                              (A) IN GENERAL.—The term ‘‘domestic production gross receipts’’
                                            means the gross receipts of the taxpayer which are derived from—

                                                                  *    *   *   *   *  *    *
                                                  (ii) in the case of a taxpayer engaged in the active conduct of a
                                               construction trade or business, construction of real property per-
                                               formed in the United States by the taxpayer in the ordinary course
                                               of such trade or business * * *

                                                                               f




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