Rev. Rul. 69-14

Advice has been requested whether a taxpayer's "movable wall system" and "movable office room or floor partitions" are "section 38 property" for investment credit purposes.

In 1963, a taxpayer constructed a 19-story office building containing about 231,000 square feet of floor area. The taxpayer purchased from a manufacturer and installed in its office building "movable partitions," some with doors, and some without doors, referred to by the manufacturer as a "movable wall system." The taxpayer also purchased and installed, at the same time, movable office room or floor partitions of "bank height" (about 66 inches), some with gates and some without gates. Upon completion of all the floors (including the installation of the movable partitions and the bank height partitions), the entire building was placed in service and has since been used by the taxpayer as its home office.

The movable partitions, as described by the manufacturer, consist of steel panels, rockwool insulated and factory assembled into complete panel units. The installed steel panels are of floor-to-ceiling height and of varying widths. The panels lock together at posts by steel clips wedged into slots provided in the verticals. The clips and verticals in turn are concealed by a recessed resilient feature strip providing a light and sound seal. The feature strip and clips can be easily removed for the purpose of rearranging or removing the panels. The base of each panel is adjustable to floor variations. The base is installed individually from each side of the panel to allow continuous electric wiring. The top of the base is attached by a continuous sheet steel member securely fastened to the bottom of the panel edge. A floor channel for the panels was constructed with a continuous light and sound seal at the floor. End fillers that are attached to fixed walls or columns are made of double steel sheets and are rockwool packed. The end fillers join adjacent posts, and the panel units fit neatly into a channel securely fastened to the fixed building wall. The channel has a light and sound seal. Ceiling trim is adjustable to variations in ceiling level. Trim is also attached at the bottom. The ceiling channel is constructed with an inorganic seal at the ceiling. Each post is braced at the ceiling with a post extension to provide a rigid connection of panel post to ceiling channel. Each post extension is functionally designed to permit continuous wiring. The door frames are of cold rolled, one-piece welded sheet steel. The doors are made of sheet steel.

The bank height partitions, with or without gates, consist of steel panels of about 66 inches in height. They fit flush with posts and are constructed of steel skins laminated to a honeycomb core. The panels are attached to posts with twin spring clips to provide positive locking and straight joints, and at the same time allow interchange of panels without removing adjacent panels. The panels are of standard width. The posts fit flush with panel units presenting a smooth appearance on all exposed post surfaces. All posts have a built-in threaded leveling device, with a sliding aluminum plinth to conceal the mechanism. The anchors, holding the posts to the floor, are covered by anodized aluminum plates. When the panels are attached to the posts, the bottom of the steel panel unit is four inches above the floor.

Both the moveable partitions and the bank height partitions have a useful life of four years or more.

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). In order to qualify as "section 38 property," the property must also be depreciable property and have a useful life of four years or more.

Section 1.48-1(c) of the Income Tax Regulations defines "tangible personal property" as any tangible property except land and improvements thereto, such as buildings or other inherently permanent structures (including items which are structural components of such buildings or structures). Local law shall not be controlling for purposes of determining whether property is or is not tangible or personal. Tangible personal property includes all property (other than structural components) which is contained in or attached to a building, such as production machinery, printing presses, transportation and office equipment, refrigerators, grocery counters, testing equipment, display racks and shelves, and neon and other signs.

Structural components of a building do not qualify as "section 38 property." Section 1.48-1(e)(2) of the regulations defines "structural components" as including such parts of a building as walls, partitions, floors, and ceilings, as well as any permanent coverings therefor such as paneling or tiling; windows and doors; all components (whether in, on, or adjacent to the building) of a central air-conditioning or heating system, including motors, compressors, pipes and ducts; plumbing and plumbing fixtures, such as sinks and bathtubs; electric wiring and lighting fixtures, chimneys; stairs, including all components thereof; sprinkler systems; fire escapes and other components relating to the operation or maintenance of a building.

The partitions of a building do not have to be fixed or permanent to qualify as structural components. Because of their flexibility, movable partitions enable a building to remain functional for longer periods of time and are an alternative to permanent partitions. The function they serve is essentially the same as that served by permanent partitions in subdividing the working area of an office building. Accordingly, the movable partitions, whether of ceiling or bank height, installed by the taxpayer are "structural components" of the building, within the meaning of section 1.48-1(e)(2) of the regulations, and do not qualify as "section 38 property" for investment credit purposes.