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Rev. Rul. 69-557, 1969-2 CB 3

REV-RUL, Definition of section 38 property., Rev. Rul. 69-557, 1969-2 CB 3, (Jan. 01, 1969)

Section 48.--Definitions: Special Rules

26 CFR 1.48-1: Definition of section 38 property.
Dry-kiln structures, and control rooms structures, used to remove moisture from green lumber are essentially items of machinery and equipment that qualify as section 38 property.

Advice has been requested whether certain dry-kiln structures, described below, qualify as "section 38 property" for investment credit purposes.

A taxpayer is engaged in the business of manufacturing wood doors, porch columns, and spindles. Its principal raw material is rough cut lumber that is purchased "green" from various sawmills. "Green" lumber is newly cut "unseasoned" lumber that has the moisture content associated with the wood in its natural state. It is usually necessary, when manufacturing articles out of wood from green lumber, to remove the moisture content under controlled conditions.

In order to accomplish the moisture removing process under controlled conditions, the taxpayer uses a facility known as a "dry-kiln." Essentially, a dry-kiln facility includes a structure into which green lumber is placed, a heating system that provides the necessary temperature to draw the moisture from the lumber, and an exhaust system to remove the moisture from the enclosed structure.

The taxpayer in the instant case constructed and placed in service four dry-kiln facilities during 1968. The structure of each of these facilities has a concrete base, two sides of tile, two sides composed of large sliding doors, and a built-up roof. They are 20 feet high, 44 feet long, and 210 feet wide. The width is divided into six chambers each 35 feet wide, sharing common walls and sealed off from one another. Each chamber contains heating coils, a spray system for steam, a sensing unit for control, fans for circulating the air, metal duct work for uniformly removing the moisture-laden hot air, and forced air venting fans. There is also a sprinkler system for fire protection.

Three control rooms were constructed on the outside of and butted against each dry-kiln structure. Each control room provides the controls for two chambers. They are constructed out of frame lumber and are six by eight feet in area and are ten feet high. The primary purpose of each control room structure is to protect the control equipment from the elements. Each control room houses the steam supply system with the shut-off valves and automatic regulating valves for controlling the steam and for adding moisture to the chamber, the control panels for the steam and heat, the controls for pressure venting, the controls for the operation of the fans, and all the main electrical panels for control of fan motors. Each dry-kiln structure includes, in combination, three control rooms and six chambers.

Each chamber contains two pressure venting systems each of which is covered by a metal movable louver that is operated by an air motor and also has a fan to force the venting action. There is a venting distribution duct that is approximately 24 inches square at the fan end and extends the length of the dry-kiln with a reduction in size continuing down its length to the other end. It has ports distributed throughout this length, for uniform air control. When the sensing devices transmit a signal to the controlling units indicating that there is too much moisture in the chamber the louvered vents open and the fans start, one bringing in the air from the outside and the other exhausting the moisture laden air from the inside. This function stops when the sensing devices send a signal to the controlling unit that the relative humidity is down to the desired level.

Inside each chamber on either side of the vertical heating coils there is a row of railroad tracks (for the rail cars) extending the length of the chamber and approximately sixty feet beyond in either direction. The floor in each chamber is sand, except for concrete ribbons that underline the tracks and provide support for the vertical coils.

A normal working load for one dry-kiln chamber is 66,500 board feet of lumber. When the dry-kilns are loaded, the doors are sealed mechanically and within three hours the temperature is raised to 190 degrees Fahrenheit and maintained for five to ten days, depending on the type of lumber desired. When the lumber is moved out, another rail car load is immediately moved in. Each dry-kiln facility is operated continuously, except for periods of breakdown and repairs.

Air space is required in the chambers for circulation of air and removal of moisture, but it would be impossible for a person to live and work anywhere within the dry-kiln structure while the facility is in operation. The dry-kiln structure is not used to provide working space or shelter. It was designed to maintain an even heat of 190 degrees Fahrenheit and to provide for an air velocity of 700 feet per minute between courses of lumber. The design is such that, during the first 24 hours, one kiln chamber will evaporate 60,000 pounds of water from green lumber. Heat, spray, and fan controls are set and then automatically controlled.

Section 38 of the Internal Revenue Code of 1954 allows a credit against Federal income tax for qualified investment in "section 38 property." Whether property qualifies as "section 38 property" is determined under the rules in section 48 of the Code and the Income Tax Regulations thereunder.

Section 1.48-1(a) of the regulations provides, in pertinent part, that property qualifying as "section 38 property" must be depreciable property having a useful life of four years or more, and must be either "tangible personal property" or "other tangible property" (except buildings or structural components of buildings) but only if used by the taxpayer as an integral part of certain specified activities.

Section 1.48-1(c) of the regulations defines "tangible personal property" to include all property in the nature of machinery (other than structural components of a building or other inherently permanent structures) even though located outside a building.

Section 1.48-1(e)(1) of the regulations in defining a "building" excepts therefrom a structure which is essentially an item of machinery and equipment. Brick kilns are cited in section 1.48-1(e)(1) of the regulations as not included in the term "building." The structures in the instant case are comparable to the shells or chambers of an oven, or of a gas tank, and as such are inseparable parts of (and essentially are) items of machinery or equipment.

The dry-kiln structures in the instant case are generally indistinguishable, except for their large size, from the shells or chambers of ovens. No work other than automatic processes is performed within the structures. The structures are entered by working personnel only to make repairs or adjustments to the equipment or machinery housed in the structure.

Accordingly, it is held in the instant case that the taxpayer's dry-kiln structures (including the control room structures) are not "buildings" under section 1.48-1(e)(1)(i) of the regulations, but are essentially items of machinery or equipment qualifying as "section 38 property" for investment credit purposes.