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.
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*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
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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
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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:
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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:
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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
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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
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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.