Rev. Rul. 69-412

Advice has been requested whether, under the circumstances described below, a taxpayer's modern steam generating electric power plant of 750-megawatt capacity qualifies as "section 38 property" that is "public utility property" for investment credit purposes.

The taxpayer's plant consists of boilers to convert fossil fuel energy into steam energy, turbines to convert steam energy into mechanical energy, and generators to convert mechanical energy into electricity.

Modern steam power plants of 300-megawatt capacity or larger are designed and built on the unit principle. One steam generating component (boiler) supplies steam to one turbine generator component with no inter-connection with other units in the same station. Unlike older types of stations in which a bank of boilers fed steam to a turbo-generator and were cross-connected to serve other units in an emergency or outage, the modern unit has a single boiler, tailored and designed specifically for the turbo-generator to which it is connected. When either the boiler or the turbo-generator is retired from service the remaining component will also be retired from service. However, auxiliary equipment (such as pumps, motors, valves, relays, heat exchangers, etc.), can be and is replaced at the end of the useful life of such equipment.

In designing the structure to surround and support the required units, the size and type of turbine generators are the initial factors to determine the size and dimensions of the turbine foundations. Exact alignment and freedom from vibration are essential to the reliable operation of the turbine generator. The turbine foundation must provide for the contained condenser. Therefore, turbine foundations are massive (up to 800 tons) reinforced-concrete pedestals the size of which, in turn, determines the length and width of the turbine room structure and the structural steel framework for the turbine room crane of up to 250-ton capacity.

The steam generating equipment (boiler) is designed specifically to meet the needs of the particular turbine it supplies. These specific needs determine the volume, temperature, and pressure of steam needed to feed the turbine. For example, the modern boiler which feeds a typical 500-megawatt turbo-generator measures 185 feet in height, 35 feet by 60 feet in cross section, and weighs 7,000 tons. Because it expands when in operation and because the amount of expansion increases with age, the boiler does not stand on a foundation but must be suspended from a steel frame (based upon the manufacturer's loading specifications which establish the loads to be suspended from the overhead steel and the spacing of the steel columns needed to support the boiler and its related equipment). This determines the framework of the boiler room steel and all its platforms, stairs, and walkways. Accessory components of the boiler are also mounted on the steel frame.

The boiler structure is oriented to the turbine structure. The positioning of auxiliary equipment, layout of piping, ductwork, and electrical cables are emplaced on and supported by the same steel framework that supports the boiler.

The entire boiler and turbo-generator structure is either wholly or partially enclosed, usually with metallic skin covering, primarily to provide a facility for preheating boiler air, noise abatement, and weather protection for the equipment during operation as well as during maintenance periods. In all cases, the equipment throughout the the structure can be weatherized and in some cases where the climate is favorable it is, in fact, completely exposed to the elements (except for a covering over the generator). The actual cost of such weatherizing however, usually approximates or exceeds the cost of providing the typical sheet metal "skin type" enclosure.

Flooring is laid around the turbo-generators to provide laydown space for periodic repair and maintenance of the generating equipment. The flooring is detached and baffled from the turbo-generator pedestal to prevent vibration transfer through the structure.

Small areas within the structures are partitioned off to provide washrooms, a control room, shops, and other necessary personnel areas.

Attached to the turbine structure is an office type structure that provides the working space for plant clerical and operating personnel, such as offices, locker rooms, washrooms, etc.

Section 38 of the Internal Revenue Code of 1954 allows a credit against Federal income tax for qualified investment in "section 38 property." The determination of what property qualifies as "section 38 property" is made in accordance with the rules provided in section 48 of the Code.

Section 48(a)(1) of the Code provides, in pertinent part, that the term "section 38 property" means tangible personal property or other tangible property (not including a building and its structural components) but only if such property is used as an integral part of specific activities including the furnishing of electrical energy.

Section 46(c)(3) of the Code provides that in the case of section 38 property which is public utility property the amount of the qualified investment shall be 3/7 of the amount determined under section 46(c)(1) of the Code. For purposes of this section "public utility property" includes property used predominantly in the trade or business of the furnishing or sale of electrical energy.

The term "building" is defined generally and in pertinent part in section 1.48-1(e) of the Income Tax Regulations to include any structure or edifice enclosing a space within its walls 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 structures such as apartment houses, factory and office buildings, warehouses, barns, garages, railway or bus stations, and stores.

This section of the regulations also provides that the term "building" 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 retired, replaced, or abandoned contemporaneously with such machinery or equipment, and which is depreciated over the life of such machinery or equipment.

In the instant case and under the facts described above, the boiler and turbo-generator structure is an integrated unit of three basic pieces of machinery each interrelated to the other in terms of useful life, function, structure, and design. The spacing and location of each of the components of the unit is fixed by engineering requirements of the generating system and is not subject to rearrangement or shutdown of any of the components independently of one another. Where the structure is enclosed with a sheet metal skin, the structural elements added to support the outer covering or skin as well as such covering enclosing the structure is an integral part of the whole as described above. The enclosed areas within the boiler and turbo-generator structure do not provide "space" in the general sense in which the term applies, for example, to a factory where floor or working space is normally provided for personnel and for movement of machinery and equipment in connection with the manufacturing process or activity conducted in such factory. The nature of its design and construction of the boiler and turbo-generator structure precludes the shifting or rearrangement of the basic equipment.

Furthermore, by the nature of the specific interrelationship of the design and operation of the basic components (structure--boiler--turbine--generator) the useful economic lives of all are common to each other and it is anticipated that each component will be retired, replaced, or abandoned contemporaneously with one another. Although it is theoretically and technically feasible to replace turbines and generators, advances in technology, increases in boiler and turbo-generator efficiency and other factors make such a possibility unrealistic and if such replacement did occur it would be under rare and unusual circumstances.

Accordingly, under the facts described above, the structure enclosing the modern electric generating station is not a building under section 48 of the Code and 1.48-1(e) of the regulations. Except for the attached office structure, the entire structure qualifies as section 38 property that is "public utility property" for investment credit purposes. The service structure (offices) is a "building" and does not qualify as section 38 property for investment credit purposes.