Category: Real Estate, Accounting Periods & Methods Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com THIS MEMO IS A FOLLOW UP TO: Completed Contract Method of Accounting; Real Estate Construction Defined; IRC: 460. As you know, for real property tax purposes a fixture is something attached permanently to real estate and thus becomes part of the tax base for real estate tax purposes. As I told you, I think I have seen the California case you mentioned regarding storage tanks. The citation is C.R. Frederick, Inc. V. SBE, 204 Cal App 3rd 252, 251 Cal Rptr 305 (1988). The statutory definition of a fixture under California law is found at California Civil Code Section 660. (1) Anything attached to land by roots, such as a tree, vine, or shrub; The California Revenue and Taxation Code does not define fixture. For purposes of applying the real property tax and the sales tax, the courts in California have looked to the California Civil Code. The analogy, obviously, is since the term real property is not defined by the Internal Revenue Code, one must look to the definition under local law. I did a limited amount of searching in an effort to find out the extent to which federal tax law respects local law determinations of whether a particular asset constitutes real property. I found a very few instances in which the federal tax law says for purposes of a particular tax provision (or group of provisions) the definition of real property under local law is not controlling for federal tax purposes. This seems to be the case in the following areas of the tax law. Real estate investment trust (REIT). Given the very limited number of instances in which the federal tax law provides that local law determinations are not controlling, it appears that in general local law does control unless federal tax law says otherwise. If the agent buys into this argument, I suspect that with some additional research we can locate a case that backs this up, but I think it unwise to pursue this aspect of the case until we have the agent's reaction to our argument. As we discussed, I suspect that our argument that the tanks are real property might be overcome by the Service. I suspect (although I do not know for certain) that the tanks are not real property under California law until they are actually installed. Obviously, there is nothing about the tanks that make them inherently real property. They become real property by virtue of being permanently attached to the ground (or a building). I wonder if the fact that the tanks are useless unless they are so attached matters to this determination. In any event, the manufacturing process alone may not be an activity connected with construction of real property any more than would the manufacture of say drywall or some other material commonly incorporated into a building. Further there is the Committee Report language I mentioned which separates manufacture from installation of an item such as an elevator. In actuality, the Committee Reports refer to the old regulations under pre-1986 long-term contracting rules. Regulation Section 1.451-3(b) provides the elevator example. Even though an elevator seems to me to be analogous to the tanks in our case, if the agent cites this regulation, I suggest asking why the pre-1986 long-term contract regulations are even applicable now. The agent may not be aware of the link in the Committee Reports to the old regulations. As you may know, I am not an attorney. I suggest that it might be wise to involve an attorney for the purpose of assisting in the determination of whether the tanks in question are real property under California law. |
