                         T.C. Memo. 2002-120



                       UNITED STATES TAX COURT



                 ESTATE OF JAMES G. FRAZIER, DECEASED,
            JAMES G. FRAZIER, JR., EXECUTOR, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent*



     Docket No. 18886-97.               Filed May 15, 2002.


     John J. McGregor, for petitioner.

     Jeffrey L. Heinkel, for respondent.



         SUPPLEMENTAL MEMORANDUM FINDINGS OF FACT AND OPINION


     VASQUEZ, Judge:    This case is before the Court on remand

from the U.S. Court of Appeals for the Ninth Circuit for further

consideration consistent with its opinion in Estate of Frazier v.



     *
        This opinion supplements Estate of Frazier v.
Commissioner, T.C. Memo. 1999-201, revd. and remanded 12 Fed.
Appx. 502 (9th Cir. 2001).
                               - 2 -

Commissioner, 12 Fed. Appx. 502 (9th Cir. 2001), reversing our

decision in T.C. Memo. 1999-201, regarding whether the tenant

retained a right to remove trade fixtures, and remanding for a

determination of whether the improvements at issue were trade

fixtures within the meaning of California Civil Code section 1019

(California Code section 1019)(West 1982).

                         FINDINGS OF FACT

     We stated the facts of this case in our original opinion.

Estate of Frazier v. Commissioner, T.C. Memo. 1999-201.    The

findings of fact from that opinion are incorporated herein by

this reference.   For convenience, we summarize the relevant

facts.   We set forth additional findings of fact for purposes of

deciding the issue remanded.

General Facts

     James G. Frazier (decedent) died on March 20, 1993.   At the

time of his death, decedent resided in Waterford, California.     On

or about June 22, 1994, decedent’s son, James G. Frazier, Jr., as

executor, filed decedent’s estate tax return.   At the time the

petition was filed, decedent’s son resided in Stanislaus County,

California.

     In 1981, decedent incorporated Frazier Nut Farms, Inc.

(FNF).   FNF conducted an almond and walnut processing, packaging,

marketing, sales, and shipping business.    Decedent formed FNF for

his family and hoped that it would be passed down through the
                                 - 3 -

generations.   At the time of decedent’s death, all of FNF stock

was held by decedent, his son, his daughter, and a trust for

decedent’s grandchildren.

     On January 1, 1983, decedent, as landlord, and FNF, as

tenant, executed a lease for a 5-acre tract of land located in

Waterford, California (the premises).1    Under the terms of the

lease, FNF agreed to pay $1,000 per year in rent plus all

maintenance and taxes on the premises.    The lease contained an

initial term of 10 years, with two options to renew for 10 years

each.

     During the initial 10-year term of the lease, FNF made the

following improvements on the premises for the purposes of its

business and at its sole cost:2

1.   Lunchroom:     The building has a wood frame with corrugated

     steel or aluminum siding and windows.    It covers 1,200

     square feet.    The building is placed upon a cement

     foundation.    The corner supports are plates that are nailed

     into a four by four.    An interior hallway is covered with

     plywood and leads to men’s and women’s restrooms.

2.   Pole barn:     This building is used to store walnut trailers.

     It has a wood frame with corrugated aluminum siding nailed


     1
        The 5-acre tract is on a ranch of 135 acres owned equally
by decedent, his son, and his daughter. The 5 acres leased by
FNF are located in the middle of the ranch.
     2
         These improvements currently remain on the premises.
                                 - 4 -

     to the frame.    The floor is blacktop.   The building is

     supported by wooden poles that are sunk into the ground

     approximately 8 feet deep.    The building covers an area of

     50 by 86 feet.

3.   Cold storage units:     This building is multipurpose, and

     covers an area of 80 by 200 feet.    It has a similar

     structure to the pole barn; it has a wood frame with metal

     poles supporting the shell of the structure.     The portion of

     the building used for cold storage has fiberboard insulation

     in its walls.    The floor is half asphalt and half concrete

     (including a concrete foundation).

4.   Elb scan room:     This building covers an area of 100 by 200

     feet.   The building has a metal frame and metal siding.     The

     siding is connected to the frame by self-tapping screws.

     The floor is concrete with a heavy concrete foundation.      The

     support beams are secured by screwing them on bolts embedded

     in the concrete.

5.   Fumigation chamber:     This chamber is a heavy steel unit that

     covers an area of 12 by 28 feet.    The chamber is not affixed

     to the ground.

6.   Water tanks:     The tanks are old fuel tanks that are filled

     with water for emergency purposes, e.g., in case of fire.

     The tanks sit on the surface of the ground.
                                  - 5 -

7.    Well:   The well is used to keep the water tanks full, to

      give firefighters immediate access to water in case of

      emergency, and to cool the pump in the fumigation chamber.

      The well has casing that can be up to 75 feet deep into the

      ground.     This casing is removed for repair purposes in order

      to reach the suction portion of the pump that is deep into

      the ground.

8.    Nut bin:     The structure comprises three storage tanks, which

      hold processed in-shell walnuts for drying before packaging,

      and a sacking hopper.    The structure’s roof is made of metal

      and the structure itself is made of wood.    The structure is

      supported by metal poles, which are sunk into the ground

      approximately 8 feet and are supported by surrounding

      concrete.    The structure has a concrete floor.

9.    Shop and storage building:     This building functions mostly

      as a warehouse that contains storage bins for processed

      almonds or shelled walnuts, and one-sixth of the building is

      used for a shop.    The building covers an area of 75 by 200

      feet.   The building has a heavy reinforced concrete floor

      and foundation.    The building has walls and is supported by

      beams that are anchored to bolts embedded in the concrete.

10.   Steel equipment cover:     This structure has no walls and has

      a corrugated metal roof.    The metal support beams are sunk
                                 - 6 -

      into the ground approximately 8 feet deep.    The structure

      has a dirt floor and covers an area of 39 by 51 feet.

11.   Asphalt paving:    The paving covers approximately 40,000

      square feet in driveways and parking and processing areas.

      The paving is approximately 4 inches thick.    The asphalt

      covers most of the 5 acres leased, excluding those areas

      that have a concrete foundation.

The foundation of each improvement is either an asphalt layer

that is approximately 4 to 5 inches deep, and/or a concrete layer

that is approximately 1 foot deep.3      A forklift or backhoe would

be used to remove the blacktop in 5 to 6 feet-wide chunks.       To

remove the concrete, a jackhammer would have to be used to break

the concrete into pieces.     To remove the support poles, a 30-ton

forklift would pull out the poles after the blacktop or concrete

is broken.

      Decedent discontinued his active participation in the

operations of FNF when he discovered he had cancer in 1988 or

1989.     By 1992, decedent’s son became FNF’s chief executive

officer, decedent’s daughter, Heidi, became the FNF

secretary/treasurer, and decedent’s son-in-law, Steve, became the

vice president.     Decedent and his family never anticipated that

FNF would ever leave the premises.


      3
        The concrete layer is approximately 6 to 8 inches thick
above the surface, then another 6 to 8 inches deep below the
surface.
                                 - 7 -

     On June 19, 1997, respondent issued a notice of deficiency.

In the notice, respondent determined that the above improvements

were part of the real property owned by decedent, and, therefore,

includable in decedent’s gross estate.

Prior Court Proceedings

     The main issue for decision was whether these improvements

were includable in decedent’s gross estate.          Estate of Frazier v.

Commissioner, T.C. Memo. 1999-201.       We held that, at the time of

decedent’s death, the improvements belonged to decedent and were

includable in his gross estate under section 20334 because FNF

did not have a statutory right to remove its improvements after

the expiration of the original tenancy.        Id.

         The estate appealed our decision.     Estate of Frazier v.

Commissioner, 12 Fed. Appx. at 502.      The U.S. Court of Appeals

for the Ninth Circuit found that FNF’s lease included an implied

right to remove trade fixtures and an implied agreement that any

holdover tenancy would continue according to the terms of the

original lease (except as to duration).        Id. at 503.   The U.S.

Court of Appeals held that FNF retained the right to remove trade

fixtures even after decedent’s death.        Id.   On remand, we were

instructed to determine whether the improvements at issue were



     4
        Unless otherwise indicated, all Rule references are to
the Tax Court Rules of Practice and Procedure, and all section
references are to the Internal Revenue Code in effect at the date
of decedent’s death.
                                 - 8 -

trade fixtures within the meaning of California Code section

1019.    Id.5

                                OPINION

     Petitioner has the burden of proving that the improvements

at issue are removable trade fixtures within the meaning of

California Code section 1019.     Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933).

     The parties stipulated that the improvements at issue are

removable trade fixtures within the meaning of California Code

section 1019 and remained the property of FNF at the time of

decedent’s death if we find that:    (1) FNF’s tenancy at will

under the lease continued notwithstanding the death of decedent;

(2) the improvements could be removed without injury to the

premises; and (3) the improvements, by the manner in which they

were affixed, had not become an integral part of the premises.

In our original opinion, we ruled on the first element.    The U.S.

Court of Appeals reversed and held that FNF’s tenancy, and,

hence, implied right of removal, continued notwithstanding the

death of decedent.   We must determine, therefore, whether the


     5
        In our opinion, we found that “The improvements placed on
the land by FNF were ‘trade fixtures’ within the meaning of
California Civil Code section 1019.” Estate of Frazier v.
Commissioner, T.C. Memo. 1999-201. This statement is not
dispositive of the question we are directed to resolve on remand.
We construe the question posed by the U.S. Court of Appeals as
the parties construe it, infra, whether the improvements meet the
elements of California Code sec. 1019 in order to qualify as a
removable trade fixture.
                                - 9 -

improvements could be removed without injury to the premises and

whether the improvements had become an integral part of the

premises in order to determine if the improvements at issue are

removable trade fixtures under California Code section 1019 and,

thereby, not includable in decedent’s estate.

       The estate contends that the improvements are removable

trade fixtures.    The estate argues that removal of FNF’s

improvements would not injure the premises because removal would

cause only minor damages, which is permitted under California

law.    Additionally, the estate argues that removal of the

improvements would leave the 5 acres suitable for farming because

removal is only from the underlying land and there is no

structure to be damaged.    The estate further contends that the

improvements are “large erector sets, held together by screws,

nuts and steel I-beams” and, therefore, are not integral parts of

the premises.

       Respondent argues that we must apply three tests to

determine whether or not an improvement is a nonremovable

fixture:    (1) The manner of its annexation to the land; (2) its

adaptability to a use and purpose instrumental to that for which

the realty is used; and (3) the intention of the parties to the

lease.    Respondent contends that the mutual intent of the parties

to the lease regarding the permanency of the improvements is the

most influential factor.    Respondent further argues that decedent
                                - 10 -

never had the intention of removing the improvements from the

premises because FNF was a family-operated business that decedent

wanted to continue.     Additionally, respondent contends that

removal of the improvements would destroy the assets and require

a “massive amount of effort”.

     A decedent’s gross estate includes all property to the

extent of the decedent’s interest therein at the time of his

death.    Sec. 2033.   A decedent’s interest in property is

determined by State law.     Morgan v. Commissioner, 309 U.S. 78, 80

(1940).    The decisions of the State’s highest court are

conclusive as to that State’s law, but in the absence of a

decision by that court we may look to the State’s lower courts’

rulings and holdings.     Commissioner v. Estate of Bosch, 387 U.S.

456, 465 (1967).

     Under California law, a fixture is a thing that is so

attached to realty as to be considered in law a part of the

realty itself.    Cal. Civ. Code sec. 660 (West 1982).6   Generally,

a tenant of real property has no right to remove fixtures from



     6
        Sec. 660 of the California Civil Code provides, in
relevant part:

          A thing is deemed to be affixed to land when it is
     attached to it by roots, as in the case of trees,
     vines, or shrubs; or imbedded in it, as in the case of
     walls; or permanently resting upon it, as in the case
     of buildings; or permanently attached to what is thus
     permanent, as by means of cement, plaster, nails,
     bolts, or screws * * *.
                              - 11 -

the leased premises, regardless of whether the tenant placed the

fixtures there at his own expense.     Cal. Civ. Code sec. 1013

(West 1982).7   Where fixtures are placed on leased premises for

the purposes of trade (trade fixtures), however, a tenant has a

limited right to remove those fixtures.     We look to California

Code section 1019 to define removable trade fixtures because the

lease failed to provide a definition.8    Realty Dock & Improv.

Corp. v. Anderson, 174 Cal. 672, 676 (1917).     Whether the

improvements are removable trade fixtures within the meaning of

the law is a question of fact.   Borchers Bros. Co. v. Ciaparro,

211 Cal. 507, 511 (1931).   The definition of a removable trade

fixture is codified in California Code section 1019 which

provides:

          A tenant may remove from the demised premises, any
     time during the continuance of his term, anything
     affixed thereto for purposes of trade, manufacture,
     ornament, or domestic use, if the removal can be
     effected without injury to the premises, unless the



     7
         California Civil Code sec. 1013 provides:

          When a person affixes his property to the land of
     another, without an agreement permitting him to remove
     it, the thing affixed, except as otherwise provided in
     this chapter, belongs to the owner of the land, unless
     he chooses to require the former to remove it or the
     former elects to exercise the right of removal provided
     for in Section 1013.5 of this chapter.
     8
        California law allows parties to classify their property
between themselves, and the law will respect such agreements.
Md. Cas. Co. v. Knight, 96 F.3d 1284, 1291 (9th Cir. 1996)
(citing Goldie v. Bauchet Props., 15 Cal. 3d 307, 313 (1975)).
                               - 12 -

      thing has, by the manner in which it is affixed, become
      an integral part of the premises.

Id.   By statutory definition, an improvement must meet certain

criteria before it can be classified as a removable trade

fixture:    (1) The improvements must be affixed by the tenant for

purposes of trade; (2) the improvements must be removable by the

tenant from the leased premises at any time during the

continuance of the term; (3) the improvements must not be so

physically annexed to the premises that their removal could not

be effected without injury to the premises; and (4) the

improvements by the manner in which they were affixed must not

have become an integral part of the premises.    Sec. Loan & Trust

Co. v. Willamette Steam Mills L&M Co., 99 Cal. 636, 639 (1893).

      We conclude that the lunchroom (1), pole barn (2), cold

storage units (3), elb scan room (4), well (7), nut bin (8), shop

and storage building (9), steel equipment cover (10), and asphalt

paving (11) are not removable trade fixtures under California

Code section 1019 because they became integral parts of the

premises.

      When the California Supreme Court found buildings to be

removable trade fixtures, the buildings had not become integral

parts of the property.   See MacDonough v. Starbird, 105 Cal. 15,

17 (1894) (held that a one-story wooden structure, which was

placed on mud sills as its foundation, was a removable trade

fixture under California Code section 1019); Sec. Loan & Trust
                              - 13 -

Co. v. Willamette Steam Mills L. & M. Co., supra (held that a one

and one-half story lumberyard office, with a chimney that did not

extend to the ground, which rested on mud sills, was a removable

trade fixture under California Code section 1019).    In each

instance, the buildings were not embedded into the land through

the use of a foundation or supported by beams sunk into the

ground several feet but rested on the surface by the use of mud

sills.9

     Each of the improvements that we hold not to be a removable

trade fixture has a foundation that is several inches of either

heavy concrete or blacktop, which in most instances is embedded

below the ground surface, and/or has support beams that are sunk

into the ground several feet and are encased in concrete and/or

blacktop.   In addition, the well uses a suction pump that is

located approximately 75 feet below the ground surface.    Although

the estate argues that these improvements can be removed, their

removal would require significant effort.   The statute clearly

refers to the “manner in which it is affixed” in determining

whether an improvement is integral to the premises.    Because

these foundations are affixed to the ground as firmly as

possible, these improvements require heavy construction machinery



     9
        By definition, mud sills are “a supporting sill (as of a
building or bridge) resting directly on a base and especially the
earth”. Merriam-Webster’s Collegiate Dictionary 763 (10th ed.
1996).
                              - 14 -

for their removal.   The method by which they are affixed to the

ground supports the conclusion that these improvements are

integral to the premises.

     Additionally, we find that the parties to the lease intended

to integrate these improvements into the premises.   The U.S.

Court of Appeals for the Ninth Circuit and State courts have

examined intent with regard to this point.10   FNF is a family-

operated business, with decedent and his family owning all of the

FNF shares and the land upon which the leased premises is located

and holding all the executive positions in FNF.   At trial,

decedent’s son testified that the decedent created FNF for his

family to operate and pass down to his children and, hopefully,

his grandchildren.   At the time the improvements were made,


     10
        See Societa Italiana Di Mutua Beneficenza v. Burr, 71
F.2d 496 (9th Cir. 1934). The U.S. Court of Appeals for the
Ninth Circuit, in determining whether a motor and pump were
fixtures, stated that “the question of whether or not personal
property attached to the land has become a fixture by reason of
the method by which it is affixed is a question of intent * * *.”
Id. at 500.

     See also Pfeifle v. Tanabe, 620 N.W.2d 167 (N.D. 2000). The
Supreme Court of North Dakota, in interpreting a statute with
similar language to California Code sec. 1019, stated that “the
parties’ intent is the preeminent factor in analyzing whether an
item is a trade fixture”. Id. at 174. The Court stated that the
means of attachment and the adaption of the item to the purpose
of the premises are evidence of this intent. Id.

     See also Hanson v. Ryan, 201 N.W. 749 (Wis. 1925). The
Supreme Court of Wisconsin stated that intent is the principal
consideration in determining whether personal property placed on
real estate is removable or not, in interpreting a State statute
similar to California Code sec. 1019. Id. at 750-751.
                              - 15 -

decedent and FNF intended that the business be located

permanently on the leased premises.    There is no evidence that

the improvements were intended to be transitory or temporary.

     Further, we find that these improvements became an integral

part of the premises because the improvements were being used for

a purpose instrumental to the premises’ purpose; i.e., to process

nuts.

     By contrast, we hold that the fumigation chamber (5) and the

water tanks (6) are removable trade fixtures within the meaning

of California Code section 1019.   The fumigation chamber and the

water tanks are not affixed to the ground and could be easily

removed.   These improvements, by the manner they were placed on

the premises, were never intended to become part of the realty.

We do not find that these improvements became an integral part of

the premises.

     In reaching all of our holdings herein, we have considered

all arguments made by the parties, and, to the extent not herein

discussed, we find them to be irrelevant or without merit.

     To reflect the foregoing,

                                               Decision will be

                                          entered under Rule 155.
