*39 Decision will be entered under Rule 50.
Held: Certain structures, commonly known as greenhouses, were "buildings" within the meaning of sec. 48(a)(1)(B), I.R.C. 1954. The greenhouses therefore did not constitute "section 38 property," and investments in such structures were ineligible for tax credits under sec. 38 of the Code.
*113 The Commissioner determined deficiencies in petitioner's income tax as follows:
| Year ending | Deficiency |
| June 30, 1964 | $ 9,604.69 |
| June 30, 1966 | 6,130.96 |
| June 30, 1967 | 9,126.15 |
| June 30, 1968 | 148.56 |
*40 *114 The sole issue remaining for decision is whether certain structures, commonly known as greenhouses, were "buildings" within the meaning of section 48(a)(1)(B), I.R.C. 1954, with the consequence that petitioner's investment in such structures was ineligible for the so-called investment credit provided by section 38 of the Code.
FINDINGS OF FACT
The parties have filed a stipulation of facts which, together with accompanying exhibits, is incorporated herein by this reference.
Petitioner Sunnyside Nurseries (petitioner or Sunnyside), a California corporation, filed Federal corporate income tax returns for each of its taxable years ending June 30, 1964, 1966, 1967, and 1968, with the district director of internal revenue at San Francisco, Calif. At the time its petition herein was filed Sunnyside's principal office was in Hayward, Calif.
Petitioner was engaged in the business of growing and selling a wide variety of flowers and other plants, including chrysanthemums, poinsettias, hyacinths, lilies, tulips, other assorted bulb plants, and about 60 types of prestarted garden plants known as bedding plants. Petitioner also grew foliage crops such as rubber plants and split-leaf*41 philodendrons. Sunnyside's markets were located chiefly in the western United States. Petitioner sold certain types of flowers throughout the year, but the demand for most of its plants was seasonal in nature. Its peak market periods came at certain holidays such as Valentine's Day, Easter, Mother's Day, Thanksgiving, and Christmas.
Most of Sunnyside's plants were nurtured, for at least parts of their lives, in structures commonly and synonymously known as greenhouses, glasshouses, or hothouses. During the years at issue petitioner made expenditures for the construction of and improvements to such structures, as follows:
| Year ending | Greenhouse investment |
| June 30, 1964 | $ 45,540.12 |
| June 30, 1966 | 74,558.18 |
| June 30, 1967 | 238,268.99 |
| June 30, 1968 | 646,322.39 |
Almost all of the greenhouse construction took place at petitioner's production facilities outside Salinas, Calif., in Monterey County; a small portion of the above expenditures related to petitioner's smaller production facilities at Hayward, Calif. The work done at Hayward was identical to the construction at Salinas, as the parties have stipulated "for purposes of this case." Petitioner claimed depreciation*42 deductions *115 in regard to its greenhouses, which had useful lives of more than 8 years. The sole issue herein is whether Sunnyside is entitled to investment credits under section 38, I.R.C. 1954, in respect of its greenhouse expenditures, and the resolution of this issue, in turn, depends on whether the greenhouses were "buildings."
Sunnyside made expenditures in respect of five greenhouses at Salinas, all of which were completely enclosed, rectangularly based structures. Four of the greenhouses ("sections A, B, C, and D," respectively) were virtually identical in construction, each being approximately 260 feet long and 293.4 feet wide. The space within each of these four greenhouses was a large open area divided into nine parallel bays, each of which was as long as the entire structure and aproximately 32.6 feet wide. The fifth greenhouse ("section E") was approximately 340 feet long and 459.6 feet wide. Its interior was divided into 12 parallel bays, each approximately 340 feet long and 38.3 feet wide. A wide paved aisle or hallway ran perpendicularly to the bays along the entire width of section E. The continuity of the space therein was further broken by a number*43 of walls which were strategically placed to accommodate petitioner's production process.
The greenhouses were all of steel frame and aluminum bar construction and had concrete floors and foundations. Over each bay was an A-frame roof supported by a series of traverse trusses which, in turn, were supported at both sides of each bay by steel posts set in the concrete floors. The roofs were approximately 16 feet high at the peaks. They were made of ordinary single-strength window glass which admitted the light essential to plant growth. The greenhouse walls were also made of clear glass. Sliding glass-paneled doors were located at both ends of all the bays and also along the longitudinal walls of the endmost bays.
After they were built and put into operation, Sunnyside's greenhouses provided a totally artificial environment that permitted the year-round growing of commercially marketable plants in a manner which allowed life cycles to be precisely timed to meet petitioner's demand schedule. Natural environmental conditions in northern California precluded the outdoor growing of plants during certain seasons and did not allow times of maturation to be perfectly controlled. Petitioner's*44 business could thus have been conducted on a year-round basis only by using enclosed facilities such as greenhouses, because some of petitioner's plants were perishable and apparently could not be kept on hand for any appreciable length of time.
In addition to shielding plants from the elements, Sunnyside's greenhouses permitted quite sophisticated regulation of growing conditions. At the time of year when sunlight became more intense than *116 some of its plants could tolerate, petitioner had helicopters cover the roofs of the structures housing those plants with a whitewash which screened a quantum of light from the greenhouses. Later in the year, when sunlight diminished in intensity, a crane-like, self-operating washing device was placed on the greenhouse roofs to remove the whitewash. Sunnyside also regulated the duration of plants' exposure to light. In order to induce chrysanthemums to bloom daily during the summer months, it was necessary to reduce the number of hours per day they received light. This was accomplished by drawing a black curtain across a bay in which the chrysanthemums grew. To extend the length of time plants received light, petitioner illuminated*45 incandescent lights which were spaced throughout each greenhouse. A preset timer mechanism on a control panel in the greenhouse automatically operated the light and curtain systems.
Sunnyside's greenhouses also contained thermostatic temperature control systems. Optimal growing temperatures varied for different types of plants and even for one plant at different stages of growth. Above the doors at the ends of the greenhouse bays were louvered windows and fans which ran constantly. When the temperature inside a greenhouse rose above a set level, the louvers opened and the fans drew air from outside into large plastic tubes which ran the length of the bays. These tubes distributed air to the greenhouses through holes in their surfaces. In addition, rows of glass panels, or vents, were built into the roofs and walls of the greenhouses. If the temperature continued to rise after the louvers opened, the vents opened to enhance the circulation of air. The glass walls and roofs of petitioner's greenhouses retained a great deal of heat. However, when the temperature inside a greenhouse fell below a determined level, a system of ground-level and elevated steam-conducting pipes was*46 activated to provide radiated heat. The steam for all the greenhouses was generated in a natural-gas powered boiler located in a separate building.
Sunnyside used the four greenhouses designated as "sections A through D," respectively, to grow several varieties of plants. At a given time of year, most of the space in these four structures was devoted to the type of plant whose peak selling period was next to arrive. After being cleared out of the greenhouses and sold, each crop was replaced with a new growing crop. Petitioner rotated plants in sections A through D in this manner throughout the year.
Sunnyside used section E exclusively to grow chrysanthemums. Section E was divided into a "propagating area" and a "growing area." The initial planting and nurturing of chrysanthemums took place in the propagating area. Prior to planting, petitioner's workers, using a forklift machine, brought wooden trays loaded with small, soil-filled pots into the greenhouse and set the trays upon cinder blocks. Each tray was 8 feet long and 8 feet wide and held about 120 pots. In *117 the propagating area, workers placed plant cuttings, which had been made from mature plants at petitioner's*47 facilities at Hayward, into the pots. The workers then watered each plant by hand. Once each week, they washed excess soil from the greenhouse floor with a water hose. The plants were left in the propagating area for about 10 days, during which time the area was kept hot and humid. A mechanical misting system created humidity and irrigated and fertilized the plants in the propagating area. The misting system was operated from the same control panel as were the light and temperature control systems. The greenhouse lighting system supplemented the plants' light requirements during the propagation period.
At the conclusion of the propagation period, the trays on which the pots rested were transported by forklift to the growing area of section E, where workers moved the pots to permanent tables. These tables, which were about 8 feet by 60 feet, consisted of series of connected wood planks resting on cinder blocks. A "spaghetti" system irrigated the plants in the growing area. This system consisted of a network of spaghetti-like, thin plastic tubes which fed water and fertilizer to the individual pots. The "spaghetti" were attached to master tubes which ran along each table. *48 These tubes, in turn, were attached to pipes which were laid under the greenhouse floors and which carried water drawn from wells on the Salinas property. Hand-operated valves regulated the flow of water to the master tubes.
Temperature, ventilation, and duration of light in the growing area were controlled automatically, as described above. Other needs of the chrysanthemum plants were attended to by Sunnyside's employees. They opened the valves of the irrigation system each day, and they replaced individual "spaghetti" whenever a plant showed that its water supply was deficient. The workers also used hoses to sprinkle the growing area when the air was hot and the vents were open, in order to increase humidity. In addition, they periodically removed extraneous buds from the plants, moved the pots farther apart to allow the plants more growing space, eliminated weeds, fumigated the greenhouses to control insects and diseases, and "pinched" the plants to produce a greater number of flower-bearing branches. Some pinching was also done in the propagating area. The fumigation process sometimes entailed spraying the plants with either an ordinary garden hose or a machine mounted *49 on an electric cart. Fumigation was otherwise done with smoke-emitting canisters usually left in the greenhouses overnight while the workers were absent.
Sunnyside sold its chrysanthemum plants in the pots in which they were grown. When the flowers had bloomed and were ready for marketing, petitioner's employees wrapped each pot in decorative foil and placed it in a protective bag. Occasionally they cleaned plants that had suffered fertilizer "burns" or other stains. The workers then packed the *118 bags containing the potted plants in corrugated boxes and stacked the boxes on carts which they had rolled into the growing area. The entire packing process took place in the greenhouse.
Sections A through D, unlike section E, had no separate propagating areas; the environmental control equipment in these other greenhouses resembled that in section E's growing area in most respects. The five structures in issue each housed about 50,000 pots, or about 5,000 pots in each bay. Most of the methods used to care for chrysanthemum plants in section E's growing area were employed in sections A through D, although some of the work involved in processing chrysanthemums was not performed*50 in respect of certain other plants or else was carried on outside the greenhouses. The length of time different varieties of plants remained in Sunnyside's several greenhouses ranged from a few weeks to several months. Petitioner's greenhouses might have been used to grow other flowers or varieties of vegetation, but they were not economically adaptable to any other purposes.
Sunnyside had approximately 86 employees at the time of the trial herein. More than half of such employees worked full time inside the greenhouses, 5 days a week, for approximately 7 1/2 hours a day. They participated in most of those phases of the production cycles of the various plants that took place within the greenhouses. Pathways between the tables on which the plants were grown provided the employees with access to the plants and working space. The greenhouse workers moved from one area to another, spending their time wherever they were needed, and they sometimes worked in one or two greenhouses in addition to the five here in issue. Thus, depending on the stage of development of the plants in a particular structure, as few as 1 or 2 persons or as many as 50 persons might work there on a given day. *51 Also among petitioner's employees were two watchmen who each made two nightly tours of all the greenhouses.
The greenhouse personnel occasionally enjoyed lunches and work breaks inside the structures, and section D provided them with some tables and chairs. Most facilities for the employees' recreation and comfort, however, were located elsewhere on petitioner's property and the workers generally took their lunches and breaks at such other places rather than in the greenhouses.
At the time it constructed the five greenhouses at Salinas which are the subjects of the present controversy, petitioner was told that such greenhouses would be exempt from the building permit requirements of Monterey County under county ordinances then in effect which so provided in respect of certain "[buildings] or [structures] * * * used primarily for agricultural, [or] horticultural * * * purposes." Pursuant to this advice, Sunnyside neither applied for nor received permits for the five greenhouses.
Petitioner claimed investment credits in respect of the greenhouse *119 expenditures it had made during the years at issue. The Commissioner determined that the greenhouses "do not constitute assets*52 of the type which qualify for the investment credit since they are considered to be buildings or structural components of buildings."
OPINION
The only issue remaining for decision is whether petitioner was entitled to tax credits under section 38, I.R.C. 1954, in respect of its investment in greenhouses. Petitioner's greenhouse expenditures qualified for such credits if the greenhouses constituted "section 38 property." That term is defined by section 48(a)(1), which provided as follows in respect of the years at issue:
SEC. 48. DEFINITIONS; SPECIAL RULES.
(a) Section 38 Property. --
(1) In general. -- * * * the term "section 38 property" means --
(A) tangible personal property, or
(B) other tangible property (not including a building and its structural components) but only if such property --
(i) is used as an integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electrical energy, gas, water, or sewage disposal services, or
(ii) constitutes a research or storage facility used in connection with any of the activities referred to in clause (i) * * *
Such term includes only property with respect to which depreciation*53 (or amortization in lieu of depreciation) is allowable and having a useful life (determined as of the time such property is placed in service) of 4 years or more. [Emphasis supplied.]There is no disagreement between the parties that the greenhouses were not "tangible personal property." Their sole difference in regard to the structures' qualification under section 48(a)(1)(B), relating to "other tangible property," is whether or not the greenhouses were "buildings." The Commissioner has determined that they were, and we agree.
In terms of their physical appearance and function, petitioner's greenhouses were certainly "buildings" in the ordinary sense of the word. They had steel and aluminum frames, concrete floors, and glass walls and roofs which completely enclosed a large volume of space. They were built over concrete foundations. The materials of which they were constructed were commonly used building components, and the structures were permanent in nature. They had doors, vents which resembled windows, and heating systems. A corps of petitioner's employees regularly spent full workdays inside the structures, engaging in a broad range of activities related to the processing*54 of commercially marketable plants. As many as 50 persons sometimes worked in a greenhouse at once, often making use of an assortment of *120 machinery and equipment. All of these characteristics are associated with "buildings" as that term is commonly understood.
Petitioner contends, however, that "building" is not used in its ordinary sense in section 48(a)(1)(B), but rather in a "technical" sense which excludes highly specialized structures such as greenhouses. But Congress has made it clear that --
The term "building" is to be given its commonly accepted meaning, that is, a structure or edifice enclosing a space within its walls, and usually covered by a roof. It is the basic structure of an improvement to land the purpose of which is, for example, to provide shelter or housing or to provide working, office, display, or sales space. The term would include, for example, the basic structure used as a factory, office building, warehouse, theater, railway or bus station, gymnasium, or clubhouse. * * * [H. Rept. No. 1447, 87th Cong., 2d Sess., p. A18 (1962); S. Rept. No. 1881, 87th Cong., 2d Sess., pp. 154-155 (1962).]
Consistent with the foregoing principles, section*55 1.48-1(e)(1) of the regulations provides as follows:
Sec. 1.48-1 Definition of section 38 property.
(e) Definition of building and structural components. (1) Buildings and structural components thereof do not qualify as section 38 property. The term "building" generally means any structure or edifice enclosing a space within its walls, and usually covered by a roof, the purpose of which is, for example, to provide shelter or housing, or to provide working, office, parking, display, or sales space. The term includes, for example, structures such as apartment houses, factory and office buildings, warehouses, barns, garages, railway or bus stations, and stores. Such term includes any such structure constructed by, or for, a lessee even if such structure must be removed, or ownership of such structure reverts to the lessor, at the termination of the lease. Such term does not include (i) a structure which is essentially an item of machinery or equipment, or (ii) a structure which houses property used as an integral part of an activity specified in section 48(a)(1)(B)(i) if the use of the structure is so closely related to the use of such property that the structure clearly can*56 be expected to be replaced when the property it initially houses is replaced. Factors which indicate that a structure is closely related to the use of the property it houses include the fact that the structure is specifically designed to provide for the stress and other demands of such property and the fact that the structure could not be economically used for other purposes. Thus, the term "building" does not include such structures as oil and gas storage tanks, grain storage bins, silos, fractionating towers, blast furnaces, basic oxygen furnaces, coke ovens, brick kilns, and coal tipples. 1
*57 *121 In our view, petitioner's greenhouses resembled the examples of "buildings" in the regulations more closely than those structures which the regulations declare not to be "buildings." Any of the first group of structures would ordinarily be thought of as a "building" in terms of its physical attributes as, we think, would petitioner's greenhouses. The structures in the second group, on the other hand, would generally be regarded as either "storage facilities" or "machines" rather than "buildings." To be sure, the greenhouses participated directly in the processing of growing plants, but to characterize them as "machines" on this account would distort the commonly understood meaning of that term. The greenhouses were more than just processing chambers, for a substantial amount of employee activity took place in them. They shared with the first group of structures in the regulations the characteristic of frequent and regular human occupation. By contrast, those in the second group would ordinarily be entered by persons, if at all, only for purposes of maintenance or to bring in or remove goods. Such goods would usually be processed or stored in these structures entirely*58 without the participation of human workers. Cf. Robert E. Catron, 50 T.C. 306">50 T.C. 306, 315-316.
The activities of petitioner's employees in the greenhouses were, as petitioner has stressed, supplemental to the structures' function of constructing an environment conducive to controlled plant growth. The regulations provide that the "term 'building' generally means any structure * * * the purpose of which is, for example, to provide shelter or housing, or to provide working, office, parking, display, or sales space" (emphasis supplied). Although the regulations do not expressly include structures whose purpose is similar to that of petitioner's greenhouses, its enumeration of purposes is obviously illustrative rather than exhaustive. Cf. Robert E. Catron, 50 T.C. at 311. Such language must be read in light of the congressional dictate that the "term 'building' is to be given its commonly accepted meaning." Cf. Joseph Henry Moore, 58 T.C. 1045">58 T.C. 1045, 1052-1053. The greenhouses plainly served as working areas in conjunction with their function of conditioning the environment. In the circumstances, *59 we think that their overall purpose was within the broad range of purposes contemplated by the regulations.
Petitioner has relied upon Central Citrus Company, 58 T.C. 365">58 T.C. 365; Robert E. Catron, 50 T.C. 306">50 T.C. 306; Adolph Coors Co., 27 T.C.M. (CCH) 1351">27 T.C.M. 1351; Rev. Rul. 71-359, 2 C.B. 62">1971-2 C.B. 62; Rev. Rul. 71-104, 1 C.B. 5">1971-1 C.B. 5; Rev. Rul. 69-557, 2 C.B. 3">1969-2 C.B. 3; Rev. Rul. 69-412, 2 C.B. 2">1969-2 C.B. 2; Rev. Rul. 68-132, 1 C.B. 14">1968-1 C.B. 14; Rev. Rul. 66-215, 2 C.B. 11">1966-2 C.B. 11; and S. Rept. No. 92-437, 92d Cong., 1st Sess., pp. 29-30 (1971). None of the facilities considered not to be "buildings" in these cited cases or materials bore as striking a physical resemblance to a "building" as did *122 petitioner's greenhouses. Nor did any of such facilities, in contrast to the greenhouses, provide "working space" where a substantial number of persons were frequently and regularly occupied. *60 By these standards the greenhouses were like the structures held to be "buildings" in Robert E. Catron, 50 T.C. at 312-313; Rev. Rul. 66-156, 1 C.B. 11">1966-1 C.B. 11; Rev. Rul. 66-299, 2 C.B. 14">1966-2 C.B. 14; and Rev. Rul. 68-209, 1 C.B. 16">1968-1 C.B. 16.
It is of no consequence that petitioner considered its greenhouses to be exempt from county building permit requirements. Section 1.48-1(c), Income Tax Regs., provides that "Local law shall not be controlling for purposes of determining whether property is or is not 'tangible' or 'personal,'" and we think that local law is likewise irrelevant to a determination of whether property is a "building" under section 48(a)(1)(B) of the Code. In any event, the Monterey County ordinances which were presumably applicable to petitioner's facilities at Salinas provided that certain "[buildings] or [structures] * * * used primarily for agricultural, [or] horticultural * * * purposes" required no building permits. Thus, petitioner's greenhouses may have been exempt from permit requirements, and yet have constituted*61 "buildings" under local law. We hold that they were "buildings" under section 48(a)(1)(B) of the Code and that petitioner's claimed investment credits in respect of such structures were properly disallowed.
Decision will be entered under Rule 50.
Footnotes
1. The regulation was recently amended to read as above by T.D. 7203, 37 Fed. Reg. 17123 (1972). The first four sentences of the regulation were left unchanged by T.D. 7203↩. Prior to amendment and during the years at issue, the remainder of the regulation read as follows: "Such term does not include (i) a structure which is essentially an item of machinery or equipment, or (ii) an enclosure which is so closely combined with the machinery or equipment which it supports, houses, or serves that it must be replaced, retired or abandoned contemporaneously with such machinery or equipment, and which is depreciated over the life of such machinery or equipment. Thus, the term "building" does not include such structures as oil and gas storage tanks, grain storage bins, silos, fractionating towers, blast furnaces, coke ovens, brick kilns, and coal tipples." We think that petitioner's greenhouses must be characterized as "buildings" under either version of the regulation.