Rev. Rul. 73-217, 1973-1 CB 35
REV-RUL, Investment credit., Rev. Rul. 73-217, 1973-1 CB 35, (Jan. 01, 1973)
Section 48.--Definitions; Special Rules
26 CFR 1.48-1: Definition of section 38 property.
[IRS Headnote] Investment credit.--
Temporary logging roads and log dumps constructed under a Form 2400-5 United
States Forest Service timber cutting contract are "section 38
property"; Rev. Rul. 68-281 distinguished.
Advice has been requested whether temporary logging roads and log dumps constructed by a taxpayer under the circumstances described below are "section 38 property" as defined by section 48 of the Internal Revenue Code of 1954.
The taxpayer is in the business of converting standing timber to marketable logs that it delivers by truck over temporary logging roads to log dumps at tidewater. The taxpayer was the successful bidder on a United States Forest Service timber sale, and entered into a timber sale contract designated by the Forest Service as a "Form 2400-5 timber sale contract" in 1972. The contract terminates in 1979.
The taxpayer constructed temporary logging roads for use in logging the timber and transporting the logs to log dumps. These temporary roads are required by the contract to be destroyed prior to termination of the contract. The total cost of construction, maintenance, and erosion control prior to destruction of the temporary roads is borne by the taxpayer. Other parties may use the roads, but only if their use does not interfere with the taxpayer's operations.
In addition to the temporary roads the contract authorizes the taxpayer to construct log dumps on National Forest land. The contract requires that the log dumps be destroyed by the taxpayer within six months after the termination of the contract. Should the taxpayer fail to destroy the dumps, the Forest Service may at its option destroy them at the taxpayer's expense or, upon written notice to the taxpayer, assume title to them in the name of the United States.
All temporary roads and log dumps constructed under the contract are property with respect to which depreciation, or amortization in lieu of depreciation, is allowable, and having useful lives of three years or more.
Section 48(a)(1) of the Code provides, in part, that the term "section 38 property" means tangible personal property or other tangible property (not including a building or its structural components) but only if such other tangible property is used as an integral part of manufacturing, production, or extraction. Further, "section 38 property" includes only property with respect to which depreciation (or amortization in lieu of depreciation) is allowable and having a useful life of three years or more.
Section 1.48-1(d)(2) of the Income Tax Regulations provides, in part, that "section 38 property" includes property used as an integral part of the operation of sawmills, the production of lumber, lumber products or other building materials, and the fabrication of paper.
Section 1.48-1(d)(4) of the regulations provides, in part, that property is used as an integral part of a specified activity if it is used directly in the activity and is essential to the completeness of the activity. It further provides that all property (such as docks, railroad tracks, and bridges) used by a taxpayer in acquiring raw materials or supplies, or in transporting raw materials or supplies to the point where the actual processing commences, is considered as property used as an integral part of manufacturing.
In the instant case, the temporary logging roads and log dumps are means
by which the logs are taken to the point where the actual processing begins
and therefore are used directly in and are essential to the completeness of
the taxpayer's production of logs and their transportation to tidewater.
Thus, the temporary
logging roads and log dumps are an integral part of a specified activity,
the production of lumber and lumber products, within the meaning of section
48(a)(1) of the Code and section 1.48-1(d)(4) of the regulations.
Section 48(a)(5) of the Code provides, in part, that the term
"section 38 property" does not include property used by the United
States or any agency or instrumentality thereof. Section 1.48-1(k) of the
regulations states that the term "property used by the United
States" means property owned by a governmental unit
(whether or not leased to another person), and property leased to a
governmental unit.
Situation 6 of Rev. Rul. 68-281, 1968-1 C.B. 22, considered a
"temporary" type road constructed by a taxpayer under a U. S.
Forest Service timber sale agreement on land owned by the Federal
Government. In that situation no part of the road qualified for the
investment credit under the authority of section 48(a)(5) of
the Code since all roads constructed by the purchaser (taxpayer) under the
terms of that timber sale contract became the property of the United States.
Situation 6 of Rev. Rul. 68-281 is distinguishable on its facts from the instant case. Here the contract does not include a provision that all roads constructed by the taxpayer are the property of the United States. The taxpayer has a proprietary interest in the temporary roads from the time construction is started until the roads lose their usefulness to the taxpayer because (1) the taxpayer constructs, performs all maintenance on, and prepares the temporary roads for abandonment at its own expense, (2) at no time during the useful lives of the temporary roads does the Forest Service accept responsibility for them, and (3) any use by others must be subordinate to the taxpayer's logging operations. The United States, in the instant case, is not the owner within the meaning of section 1.48-1(k) of the regulations of the temporary logging roads or log dumps.
Accordingly, it is held that the temporary logging roads and log dumps constructed by the taxpayer under the contract are "section 38 property" as defined in section 48 of the Code.
Rev. Rul. 68-281 is distinguished.