Rev. Rul. 68-280

Advice has been requested whether certain items of a marshalling yard and the wharf of one of the taxpayer's new marine terminal facilities qualify as `section 38 property' for investment credit purposes under the circumstances described below.

The taxpayer is engaged in the business of providing marine terminal services to its customers. One of the taxpayer's new marine terminal facilities provides only for the transshipping of trailer-size container units, which may be placed on dolly wheel assemblies for trucking purposes, between a truckline and a shipline, and for the holding of these container units in a marshalling yard until instructions for their disposition are received from the shipper of the goods.

The marshalling yard and wharf items of the above-mentioned new marine terminal facility presented for consideration in this case were:

1. Certain components of the marshalling yard (excluding certain small buildings and the structural components), as follows:

a. The electric distribution system (excluding any parts thereof which are required for any building) used primarily for outdoor lighting and crane operation,

b. The water distribution system used primarily for fire hydrants and ship servicing,

c. The chain-link fencing used to enclose the entire area of the marshalling yard,

d. The bituminous paving of the entire yard including the paint markings for spaces to park the container units,

e. The concrete dolly strips beneath the paving (used as reinforcement to prevent the wheels of the dolly assemblies from sinking into the paving),

f. The concrete bumpers (used as stops to block the dolly wheels), and

g. The guard rails (used to confine trucking activity in the yard).

2. Certain components of the wharf area, as follows:

a. A marginal pier, 810 feet long by 45 feet wide, used to provide docking for cargo ships and to load and unload such ships (including the dredging for its construction and excluding the gantry crane foundation),

b. The gantry crane foundation (a foundation specially designed and constructed to support the gantry crane), and

c. The dredging of the river bottom to a depth of 31 feet for the ship berth, 900 feet long by 120 feet wide, and for two ship channels, 300 feet long by 200 feet wide.

`Section 38 property,' defined in section 1.48-1(a) of the Income Tax Regulations, includes property, (1) with respect to which depreciation (or amortization in lieu of depreciation) is allowable to the taxpayer, (2) which has an estimated useful life of 4 years or more (determined as of the time such property is placed in service), and (3) which is either `tangible personal property' or `other tangible property' (not including a building or its structural components).

To qualify as `section 38 property,' section 1.48-1(d)(1) of the regulations provides, in part, that `other tangible property' must be used as an integral part of specified activities (including furnishing transportation services) by a person engaged in a trade or business of furnishing any such service.

Section 1.48-1(d)(4) of the regulations states in general that property is used as an integral part of one of the specified activities if (1) it is used directly in the activity and (2) it is essential to the completeness of the activity.

Section 1.48-1(f) of the regulations states, in part, that intangible property does not qualify as `section 38 property.'

The operation of the marine terminal facility is a necessary link which connects two forms of transportation, land and water. The facility is, therefore, used by the taxpayer in its business of furnishing transportation services within the meaning of section 1.48-1(d) of the regulations.

The electric distribution system, bituminous paving with its paint markings, concrete dolly strips and bumpers, and the guard rails (all components of the marshalling yard) are used directly in the transportation activity as `other tangible property' and are essential to the completeness of that activity.

The water distribution system and the chain-link fencing are items of property not used as integral parts of the transportation activity as they are inherently permanent structures related to general land improvements and not to the business activity.

The marginal pier (including the dredging for its construction and the foundations for the gantry crane) is an inherently permanent structure (improvement to the land) but is used as an integral part of the transportation activity.

The dredged portion of the river bottom for the ship berth and the ship channels is an intangible asset. See Revenue Ruling 66-71, C.B. 1966-1, 44, where expenditures for such dredging are held to be expenditures for an intangible asset.

Accordingly, the electric distribution system (excluding any parts thereof which are required for any building), the bituminous paving with its paint markings, the concrete dolly strips and bumpers, the guard rails, the marginal pier (including the dredging for its construction), and the gantry crane foundation, are used directly in the transportation activity and are essential to the completeness of the activity, and are `section 38 property' for investment credit purposes if otherwise qualified in the regulations.

Since the water distribution system and the chain-link fencing are not used directly in the transportation activity, and since the river bottom dredging is an intangible asset, these items are not `section 38 property' for investment credit purposes.