                        T.C. Memo. 1996-374



                      UNITED STATES TAX COURT



            WALGREEN CO. & SUBSIDIARIES, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent*


     Docket No.   6634-92.                    Filed August 13, 1996.



          P, engaged in the retail pharmacy and restaurant
     business, made substantial improvements to certain leased
     premises. The leasehold improvements constituted property
     described in sec. 1250, I.R.C., which P seeks to depreciate
     under asset depreciation range Class 57.0, Distributive
     Trades and Services, prescribed in Rev. Proc. 83-35, 1983-1
     C.B. 745, 762, and R seeks to include under Class 65.0,
     Building Services, Rev. Proc. 72-10, 1972-1 C.B. 721, 730.
     On the facts, Held: P's leasehold improvements allocated
     between Building Services and Distributive Trades and
     Services. Walgreen Co. & Subs. v. Commissioner, 68 F.3d
     1006 (7th Cir. 1995), revg. and remanding 103 T.C. 582
     (1994), applied.



_____________________
     *This opinion supplements our previously filed opinion in
Walgreen Co. & Subs. v. Commissioner, 103 T.C. 582 (1994), revd.
and remanded 68 F.3d 1006 (7th Cir. 1995).
     David J. Duez, Lydia R.B. Kelley, and Gregory F. Jenner, for

petitioner.

     James S. Stanis, Patricia Pierce Davis, and James M.

Cascino, for respondent.

                    SUPPLEMENTAL MEMORANDUM OPINION

     NIMS, Judge:    In Walgreen Co. & Subs. v. Commissioner, 103

T.C. 582 (1994), revd. and remanded 68 F.3d 1006 (7th Cir. 1995),

we held that section 5 of the Act of January 3, 1975 (1974 Act),

Pub. L. 93-625, 88 Stat. 2112, removed all section 1250 property

from the Asset Depreciation Range (ADR) classification system,

until such time as the Treasury Department prescribed class lines

explicitly containing section 1250 property, which had not been

done as of the time the case was submitted.    Since the parties

stipulated that all of the leasehold improvements in dispute

constituted section 1250 property, we held, consistently with the

foregoing holding, that the improvements had no ADR class life

and that, consequently, section 168(c)(2)(D) designated them as

15-year real property, as opposed to 10-year recovery property.

     Unless otherwise indicated, all section references are to

sections of the Internal Revenue Code in effect for the years in

issue.   Rule references are to the Tax Court Rules of Practice

and Procedure.

     The U.S. Court of Appeals for the Seventh Circuit reversed

and remanded this case for a further factual determination,

described infra.     Walgreen Co. & Subs. v. Commissioner, 68 F.3d
                               - 3 -


1006 (7th Cir. 1995), revg. and remanding 103 T.C. 582 (1994).

In its opinion, the Court of Appeals quoted Rev. Proc. 77-3,

1977-1 C.B. 535, as directing that "'all classes of Rev. Proc.

72-10 * * * are hereby represcribed to include items of section

1250 property that were included prior to January 1, 1974 * * *

except for * * * Building Services and * * * Land Improvements.'"

Id. at 1008.   From this the Court of Appeals reasoned that

     if any items of section 1250 property, and specifically
     the leasehold improvements that Walgreen made in its
     drugstores and restaurants between 1980 and 1984, had
     been included in Wholesale and Retail Trade by Rev.
     Proc. 72-10, they continued to be included in it after
     the Treasury "represcribed" the classes of Rev. Proc.
     72-10 (all but Building Services and Land Improvements)
     in 1977.

          The Asset Depreciation Range system was later
     replaced by the Accelerated Cost Recovery System, and
     it is the latter system that is applicable to the
     leasehold improvements in this case. But it
     incorporates by reference the earlier classifications,
     with the result that if the leasehold improvements are
     classified in Wholesale and Retail Trade (now Class
     57.0, but identical to the old Class 50.0, Hauptli v.
     Commissioner, 56 T.C.M. (CCH) 583, 586, 1988 WL 116965
     (T.C. 1988), revd. on other grounds, 902 F.2d 1505
     (10th Cir. 1990)), Walgreen can depreciate them over 10
     years. Otherwise it must depreciate them over either
     15 or 18 years, depending on the dates on which various
     improvements were made. 26 U.S.C. sections
     168(c)(2)(C)(ii), (D), (g)(2) (1984).

          In summary, when in 1972 the Internal Revenue
     Service (in Rev. Proc. 72-10) repromulgated the class
     Wholesale and Retail Trade after "eligible property"
     had been expanded to include section 1250 property, the
     effect was to bring within the class all assets used in
     wholesale or retail trade except those classifiable
     under Building Services; and when five years later the
     Service repromulgated the Wholesale and Retail Trade
                              - 4 -


     class intact, the section 1250 property used in that
     trade was again included in the class except as it
     might also fall under Building Services. * * * [Id. at
     1008-1009.]


     The Court of Appeals felt that the foregoing was the obvious

inference to be drawn from the history that Court had narrated.

We had denied petitioner's claim that, since certain of its

leasehold improvements did not constitute the structural shell of

a building or an integral part thereof (thus being classifiable

under Class 65.0, Building Service), they were classified in

asset depreciation range (ADR) 57.0, Distributive Trades and

Services (the successor to Class 50.0, see below).   We rejected

petitioner's claim on the ground that the Treasury Department had

failed to represcribe section 1250 property "explicitly".

     The Court of Appeals stated:


     We hold that Class 50.0 (now 57.0), Wholesale and
     Retail Trade, includes all section 1250 property not
     classified in Class 65.0, Building Services, and
     therefore remand to the Tax Court for a determination
     whether any of Walgreen's leasehold improvements are
     section 1250 property not classified in Class 65.0, in
     which event Walgreen is entitled to depreciate it, for
     the taxable years in question, on the basis of a useful
     life of 10 years. [Walgreen Co. & Subs. v.
     Commissioner, 68 F.3d at 1010.]


We now address that task.

     The relevant part of Class 65.0, Building Services, reads as

follows:
                              - 5 -


     Building Services:

        Provision of the services of buildings, whether for use
     by others or for taxpayer's own account. Assets in the
     classes listed below include the structural shells of
     buildings and all integral parts thereof; equipment that
     services normal heating, plumbing, air conditioning,
     illumination, fire prevention, and power requirements;
     equipment for the movement of passengers and freight within
     the building; and any additions to buildings or their
     components, capitalized remodeling costs, and partitions
     both permanent and semipermanent. [Rev. Proc. 72-10, 1972-1
     C.B. 721, 730; fn. ref. omitted.]


     Class 50.0, Wholesale and Retail Trade, reads as follows:

     Wholesale and retail trade:

        Includes assets used in carrying out the activities of
     purchasing, assembling, storing, sorting, grading, and
     selling of goods at both the wholesale and retail level.
     Also includes assets used in such activities as the
     operation of restaurants, cafes, coin-operated dispensing
     machines, and in brokerage of scrap metal. [Id.]


     Class 57.0, Distributive Trades and Services, which the

Court of Appeals held is the successor to Class 50.0, now reads

as follows:

     Distributive Trades and Services:

     Includes assets used in wholesale and retail trade, and
     personal and professional services. Includes section 1245
     assets used in marketing petroleum and petroleum products.
     [Rev. Proc. 83-35, 1983-1 C.B. 745, 762.]


     In the reply brief that petitioner filed in the previous

proceeding before us, the items in dispute were identified as

follows:
                                - 6 -


     1.    Interior partitions, including primarily drywall

partitions, but also including some glass partitions in Walgreen

drugstores and metal partitions in washrooms, and including the

carpentry, framing, millwork, metalwork, and trimwork necessary

for installation, and also including doors;

     2.    ceilings, including the acoustic ceiling system

consisting of panels and grid, and also including some drywall

ceilings;

     3.    electrical lighting fixtures, including recessed and

lay-in lighting, beyond emergency lighting, night lighting, and

exit lighting, and the branch circuit systems and power system

relating thereto;

     4.    interior floor finishes, including carpet, vinyl or

rubber tile, ceramic and quarry tile, and epoxy or sealers; and,

     5.    decor finishes, primarily the decorative canopy system

relating to the Wag's restaurants, including the concrete

foundation, concrete piers, lumber, and signs attached thereto.

     In its opinion, the Court of Appeals noted that the parties

agree that any asset that might be included in both "Wholesale

and Retail Trade" and "Building Services" would be classified in

Building Services.    Walgreen Co. & Subs. v. Commissioner, 68 F.3d

at 1008.    In complying with the Mandate of the Court of Appeals

to fit a legal definition to the facts of this case, we find

that, though items in categories 1 through 4, supra, might
                                  - 7 -


arguably fall within Wholesale and Retail Trade (or Distributive

Trades and Services), they more logically and comfortably fit

within Building Services, and so must be included in that class.

We reach this conclusion without resorting to an analysis of real

property concepts of "fixtures", a legal analysis which might

well require us to go beyond the parameters of our assigned fact

finding task.    Instead, we compare the items in controversy with

the descriptions contained in Rev. Proc. 72-10.     The items in

categories 1 through 4, above, fall squarely within "equipment

that services * * * illumination * * * and any additions to

buildings or their components, capitalized remodeling costs, and

partitions both permanent and semipermanent", and we so find.

Rev. Proc. 72-10, supra at 730 (emphasis added).

     On the other hand, all of the items referred to in category

5 can be described as "assets used in such activities as the

operation of restaurants, cafes, * * *" and are not building

components.     Id.   These items are largely decorative and not

integral parts of any structural shell.     They therefore fall

exclusively within Class 50.0, Wholesale and Retail Trade or,

alternatively, Class 57.0, Distributive Trades and Services.

Rev. Proc. 72-10, supra; Rev. Proc. 83-35, supra.

     In petitioner's supplemental brief, filed in response to an

Order of this Court following the reversal and remand of our

prior Opinion, petitioner argues that a taxpayer providing
                               - 8 -


building services might utilize assets described in Class 65.0,

and such assets would be properly classified in Class 65.0; but

petitioner says it is not in the business of providing "building

services".   Petitioner argues that it was the recipient of

building services, not the provider, and Class 65.0 by its

express terms embraces only items used to provide "Building

Services".   Therefore, petitioner reasons that none of the

property in question falls under Class 65.0.

     Petitioner's provider-recipient argument raises an issue

that was not addressed by the Court of Appeals, nor was it raised

in the prior proceeding before this Court.     Since this new issue

is beyond the scope of the remand, it is inappropriate to address

it now, and we do not do so.

     To reflect the above findings,

                                       Decision will be entered

                               under Rule 155.
