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Illinois Cereal Mills Inc. v. Commissioner of Internal Revenue

*fn*: April 28, 1986.

ILLINOIS CEREAL MILLS, INC., APPELLEE,
v.
COMMISSIONER OF INTERNAL REVENUE, APPELLANT



On Appeal from the Decision of the United States Tax Court.

Author: Bauer

Before BAUER, WOOD and ESCHBACH, Circuit Judges.

BAUER, Circuit Judge. This is an appeal by the Commissioner of Internal Revenue from a decision of the United States Tax Court. The Commissioner argues the Tax Court erred in holding that ninety-five percent of the cost of Illinois Cereal Mill's factory electrical system qualified for the investment tax credit. We affirm.

I.

Illinois Cereal Mills ("ICM") conducts a corn milling business in Paris, Illinois. In 1976, ICM completed construction of a new speciality mill. The electrical distribution system that provides power to the specialty mill is contained in a separate room within the mill building. The system consists of circuit breakers, transformers, power panels, switchboards, motor control centers, and associated wiring. It functions to break down the 4,160 volts received from the electric utility into voltages usable in the mill. Ninety-five percent of the electrical load entering the system is used to run mill machinery. The remaining five percent is used for lighting and other general building needs.

In its tax return filed for its fiscal year ending September 30, 1976, ICM treated the entire cost of the electrical system as an expenditure qualifying for the investment tax credit. The Commissioner determined that none of the cost qualified and claimed a deficiency on that basis. The Tax Court held that ninety-five percent of the cost of the electrical distribution system qualified for the investment tax credit because ninety-five percent of its function was to supply usable power to mill machinery qualifying for the investment tax credit. The Commissioner appeals. We affirm.

II.

This case concerns the investment tax credit ("ITC"). The ITC was added to the Internal Revenue Code in 1962. Pub. L. 87-834, 76 Stat. 967 (1962). It is designed to increase economic productivity, output, and growth by creating a tax incentive for the purchase of machinery, equipment, and other property used to produce goods or run a business. Comdisco v. United States, 756 F.2d 569, 572 (7th Cir. 1985); CIR v. Schuyler Grain Co., 411 F.2d 649, 652 (7th Cir. 1969); See, H.R. Rep. No. 1447, 87th Cong., 2d Sess. 11 (1962); S. Rep. No. 1881, 87th Cong., 2d Sess. 11 (1962).

The ITC is established in § 38 of the Internal Revenue Code. To qualify for ITC treatment, property must meet the definition of "section 38 property" found at § 48 of the Code. In 1976, the relevant tax year for this appeal, § 48 read in pertinent part as follows.

§ 48. Definitions; special rules

(a) Seciton 38 property --

(1) In general. -- Except as provided in this subsection, the term "section 38 property" means --

(A) tangible personal property, or

(B) other tangible property (not including a building and its structural components).. . .

26 U.S.C. § 48(a)(1) (1976). Thus, the Code establishes two ways for property to qualify as ITC property: (1) by meeting the definition of "tangible personal property" or (2) by meeting the definition of "other tangible property" and qualifying as something other than a building or structural component of a building.

The labyrinthian analysis developed in the statute, regulations, cases, and legislative history to determine whether property qualifies as "tangible personal property" or "other personal property" (and thus as § 38 property given ITC treatment) is a meandering path of many steps. We first ...


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