Truck service facilities require 39-year depreciation

Plain-English summary

A partnership claimed 15-year depreciation for facilities leased to a related truck dealer that sold and leased trucks, sold parts, and performed maintenance and repairs. The properties sold oil, lubricants, and diesel exhaust fluid, but did not sell gasoline or diesel fuel, and their petroleum-product activity was insubstantial compared with the broader truck business. Chief Counsel treated the facilities according to the lessee's use and found that they were not retail motor-fuels outlets. Fuel sales were also an essential feature of a service-station building in asset class 57.1, and the properties were not primarily used to market petroleum products. The facilities therefore were nonresidential real property with a 39-year recovery period under section 168.

Ruling snapshot

• Question: Do the truck sales and service facilities qualify for 15-year treatment as motor-fuels outlets or service-station property?
• Outcome: Advice given, the facilities are 39-year nonresidential real property
• Key authorities: IRC §§ 167 and 168; Treas. Reg. § 1.167(a)-11; Rev. Proc. 87-56

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       memorandum
       Number: 201509029
       Release Date: 2/27/2015
       CC:ITA:B07:DHKIM
       POSTF-122634-14

UILC: 168.20-00

date: September 29, 2014

 to:   Associate Area Counsel (Seattle)
       (Large Business & International), CC:LB&I:CTM:SEA

from: Branch Chief, Branch 7
Office of Associate Chief Counsel (Income Tax and Accounting), CC:ITA:7

subject: Request for guidance regarding the depreciation classification of a truck service
facility under section 168

       This Chief Counsel Advice responds to your request for technical assistance dated July
       1, 2014. This advice may not be used or cited as precedent.

       LEGEND

       Taxpayer     =   ------------------------------------------------------------------
       Properties   =   -------------------------------------------------------------------
       Date1        =   ---------------------------
       Date2        =   -------
       Date3        =   -------
       Date4        =   -------
       Date5        =   -------------------
       A            =   ----------------------------
       B            =   ---------------------------------------
       C            =   -------------
       D            =   ----
       E            =   ----
       F            =   ----

       ISSUE

       Whether the Properties are retail motor fuels outlets under section 168(e)(3)(E)(iii) of
       the Internal Revenue Code or are includible in Asset Class 57.1, Distributive Trades and
       Services – Billboard, Service Station Buildings, and Petroleum Marketing Land

POSTF-122634-14 2

Improvements, of Rev. Proc. 87-56, 1987-2 C.B. 674, with a 15-year recovery period for
purposes of section 168(a), or are nonresidential real property with a 39-year recovery
period for purposes of section 168(a)?

CONCLUSION

The Properties are nonresidential real property with a 39-year recovery period for
purposes of section 168(a).

FACTS

Taxpayer is classified as a partnership for federal income tax purposes. For the taxable
year ended Date1 (the “Date2” taxable year), the partners of Taxpayer were A and his
spouse. Taxpayer owns real estate and leases the majority of the properties it owns to
a related entity, B. B is a C corporation and is 100 percent owned by A.

Taxpayer filed a Form 1065, U.S. Return of Partnership Income, for the Date2 taxable
year. On this tax return, Taxpayer depreciated the majority of its buildings over a
recovery period of 39 years under section 168(a). However, Taxpayer depreciated four
of its buildings as 15-year property (collectively known as the “Properties”). Taxpayer
included the Properties in asset class 57.1, Distributive Trades and Services-Billboard,
Service Station Buildings and Petroleum Marketing Land Improvements, of Rev. Proc.
87-56 for depreciation purposes. Assets included in asset class 57.1 of Rev. Proc. 87-
56 have a recovery period of 15 years as compared to 39 years for nonresidential real
property for purposes of section 168(a). Taxpayer placed in service one of the
Properties in Date3 (a prior taxable year) and the other three of the Properties in Date2.
For some of the Properties placed in service during the Date2 taxable year, Taxpayer
claimed the 100-percent additional first year depreciation provided under section
168(k)(5).

At issue in this case is the classification of the Properties under section 168(e) for the
Date2 taxable year. Taxpayer owns the Properties and leases them to B.

B is engaged primarily in the sale, service, and leasing of new and used heavy and
medium-duty trucks and trailers. B is authorized to sell new trucks, trailers, and parts
and to perform warranty services. On its website, B describes its activities:

   ---------------------------------------------------------------------------------------------------
   ---------------------------------------------------------------------------------------------------
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   --------------------

In Taxpayer’s rebuttal to the notice of proposed adjustments, Taxpayer describes the
Properties as offering “full service truck sales and leasing services, insurance, financing,
rental, authorized service and warranty centers for a variety of truck manufacturers,
POSTF-122634-14 3

inventory of parts for purchase, state-of-the-art body shop and service facilities
providing alignments, oil changes, mechanical work, engine, transmission, drive-train,
brake and other systems service.” Photographs show the service bays, specialized
equipment, parts inventory areas, restrooms, as well as the retail show room and what
appear to be offices above. Personnel providing the truck maintenance services are
specially trained and substantially all of them hold special certifications to perform
maintenance on specific truck brands. Other personnel are engaged in B’s retail
activities as sales persons and sales support personnel.

Although fueling is listed as a service on the B website, Taxpayer admits that the
Properties do not offer fueling. In response to an IDR regarding petroleum products
sold, Taxpayer responded that “C oil and other lubricating products are sold at each
facility.” Taxpayer asserts that B sells petroleum products through retail sales of truck
engine oil and through its service offerings of engine oil changes, transmission oil
changes, and other lube services. Further, Taxpayer asserts that B sells Diesel
Exhaust Fluid (“DEF”), which Taxpayer states is a liquid based petroleum product used
in diesel vehicles to reduce engine emissions and improve engine performance.

In response to IDR #2, Taxpayer advised that “revenue from the sales of petroleum
products is blended into the overall truck maintenance service revenue, and is not
readily available as a meaningful amount or percentage of total revenue from all
sources.” In Taxpayer’s rebuttal to the notice of proposed adjustments, Taxpayer states
that the revenues from these services do not exceed 50 percent of the total revenues
for each of the Properties.

However, Taxpayer states that B’s truck service and maintenance business provides
the largest component of gross profit for B in relation to all of its activities at each of the
Properties. Taxpayer represents that “in Date4, the revenue from truck service, parts
sales and truck body-detail services represented D percent of total revenues and E
percent of net profits for B. The revenue generated from truck sales for the fiscal year
ended Date5, was F percent of total revenues.” The D percent of total revenues is less
than 50 percent. Date4 is the taxable year subsequent to the Date2 taxable year, and
Date5 is within the Date4 calendar year.

Further, Taxpayer provides that the percentage floor space in each of the Properties
that is dedicated to “traditional service station services” is more than 50 percent of the
total floor space for each of the Properties. No information was provided as to what
Taxpayer considers to be “traditional service station services” or how Taxpayer
determined the percentage.

LAW AND ANALYSIS

Section 167(a) provides that there shall be allowed as a depreciation deduction a
reasonable allowance for the exhaustion, wear and tear (including a reasonable
allowance for obsolescence) of property used in a taxpayer’s trade or business.
POSTF-122634-14 4

The depreciation deduction provided by section 167(a) for tangible property placed in
service after 1986 generally is determined under section 168. This section prescribes
two methods for determining depreciation allowances. One method is the general
depreciation system in section 168(a) and the other method is the alternative
depreciation system in section 168(g). Under either depreciation system, the
depreciation deduction is computed by using a prescribed depreciation method,
recovery period, and convention.

For purposes of the general depreciation system, the depreciation method and recovery
period are determined by the property’s classification under section 168(e). Pursuant to
section 168(e)(1), property with a class life of 20 years or more but less than 25 years is
classified as 15-year property.

For purposes of either section 168(a) or 168(g), the applicable recovery period is
determined by reference to class life or by statute. Section 168(i)(1) defines the term
"class life" as meaning the class life (if any) that would be applicable with respect to any
property as of January 1, 1986, under section 167(m) (determined without regard to
section 167(m)(4) and as if the taxpayer had made an election under section 167(m)) as
in effect on the day before the date of enactment of the Revenue Reconciliation Act of
1990. Former section 167(m) provided that in the case of a taxpayer who elected the
Class Life Asset Depreciation Range ("ADR") system of depreciation, the depreciation
allowance was based on the class life prescribed by the Secretary that reasonably
reflected the anticipated useful life of that class of property to the industry or other
group.

Section 1.167(a)-11(b)(4)(iii)(b) of the Income Tax Regulations provides rules for
classifying property under former section 167(m). Property is included in the asset
class for the activity in which the property is primarily used. Property is classified
according to primary use even though the activity in which the property is primarily used
is insubstantial in relation to all the taxpayer’s activities.

In the case of a lessor of property, section 1.167(a)-11(e)(3)(iii) provides that the asset
class for such property is determined as if the property were owned by the lessee
unless there is an asset class in effect for lessors of such property. However, in the
case of an asset class based upon the type of property (such as trucks or railroad cars)
as distinguished from the activity in which used, the property is classified without regard
to the activity of the lessee.

Rev. Proc. 87-56 sets forth the class lives of property that are necessary to compute the
depreciation allowance under section 168. This revenue procedure establishes two
broad categories of depreciable assets: (1) asset classes 00.11 through 00.4 that
consist of specific depreciable assets used in all business activities; and (2) asset
classes 01.1 through 80.0 that consist of depreciable assets used in specific business
activities. An asset that falls within both an asset group (that is, asset classes 00.11
POSTF-122634-14 5

through 00.4) and an activity group (that is, asset classes 01.1 through 80.0) would be
classified in the asset group. See Norwest Corp. & Subs. v. Commissioner, 111 T.C.
105, 156-64 (1998).

Pursuant to Rev. Proc. 87-56, asset class 57.1, Distributive Trades and Services—
Billboard, Service Station Buildings and Petroleum Marketing Land Improvements,
includes section 1250 assets, including service station buildings and depreciable land
improvements, whether 1245 property or section 1250 property, used in the marketing
of petroleum and petroleum products, but not including any of these facilities related to
petroleum and natural gas trunk pipelines. Asset class 57.1 also includes car wash
buildings and related land improvements, and billboards, whether such assets are
section 1245 property or section 1250 property. Asset class 57.1 excludes all other
land improvements, buildings and structural components as defined in section 1.48-
1(e). Assets in this class have a class life of 20 years and have a recovery period of 15
years for purposes of section 168(a).

Rev. Proc. 80-15, 1980-1 C.B. 618, established asset classes 57.0 and 57.1. Pursuant
to section 1 of Rev. Proc. 80-15, asset class 57.0 includes, among other things, the
section 1245 property included in asset class 13.4, Marketing of Petroleum and
Petroleum Products, of Rev. Proc. 77-10, 1977-1 C.B. 548, and asset class 57.1
includes the section 1250 property, including service station buildings and all
depreciable land improvements, included in asset class 13.4 of Rev. Proc. 77-10.

Asset class 13.4 of Rev. Proc. 77-10 included assets used in marketing petroleum and
petroleum products, such as related storage facilities and complete service stations, but
not including any of these facilities related to petroleum and natural gas trunk pipelines.
The description of asset class 13.4 in Rev. Proc. 77-10 is similar to the description of
asset class 13.4 in Rev. Proc. 72-10, 1972-1 C.B. 721.

Rev. Rul. 2003-81, 2003-2 C.B. 126, in a discussion of classes of property under Rev.
Proc. 87-56, provides that Rev. Proc. 87-56 is an extension and modification of Rev.
Proc. 62-21, 1962-2 C.B. 418. Although Rev. Proc. 62-21 was revoked by Rev. Proc.
72-10, the descriptions of the asset classes in Rev. Proc. 62-21 are helpful in
understanding the asset classes in Rev. Proc. 87-56. In Supplement I of Rev. Proc. 62-
21, 1963-2 C.B. 740, which contains annotations to the class descriptions in Rev. Proc.
62-21, adds that the Petroleum and Natural Gas group includes marketing, which
includes gasoline service stations (including building) (i.e., Group Three, Class 17(d)).

Rev. Proc. 62-21 also provided a series of questions and answers regarding
classification of assets. In Supplement II of Rev. Proc. 62-10, 1963-2 C.B. 744,
question and answer 78 provided that if a building is used for various purposes or
activities, such as offices, retail stores, and a warehouse, it will be classified according
to the building’s primary use. Question and answer 78 also provided that primary use
may be determined in any reasonable manner. In GCM 39179, the Internal Revenue
Service (“Service”) concluded that a floor-space test is a reasonable method for
POSTF-122634-14 6

determining the primary use of a building that is used for fuel sales, automobile repair
services, and retail sales of automobile parts.

Section 168(e)(2)(B) provides that the term “nonresidential real property” means section
1250 property which is not (i) residential rental property, or (ii) property with a class life
of less than 27.5 years. Pursuant to section 168(c), the recovery period under the
general depreciation system of section 168(a) for nonresidential real property is 39
years.

Section 168(e)(3)(E)(iii) provides that any section 1250 property which is a retail motor
fuels outlet (whether or not food or other convenience items are sold at the outlet) is
classified as 15-year property. This provision was added to the Code by section 1120
of the Small Business Job Protection Act of 1996, 1996-3 C.B. 155, 165 (the Act), and is
effective for property placed in service after August 19, 1996.

The Senate Committee Report to the Act provides insight into what type of property is
depreciated with a 15-year recovery period prior to the Act. See S. Rep. No. 281, 104th
Cong., 2nd Sess. 15 (1996). It states that under present law, property used in the retail
gasoline trade is depreciated under section 168 using a 15-year recovery period and the
150-percent declining balance method.

While section 168 does not define the term “retail motor fuels outlet,” the Senate
Committee Report to the Act also provides insight into what is a retail motor fuels outlet.
It provides that a retail motor fuels outlet does not include any facility related to
petroleum or natural gas trunk pipelines or to any section 1250 property used only to an
insubstantial extent in the retail marketing of petroleum or petroleum products.

Also, it clarifies what types of property qualify as a retail motor fuels outlet. Section
1250 property will so qualify if it meets a 50-percent test. The 50-percent test is met if:
(1) 50-percent or more of the gross revenues that are generated from the property are
derived from petroleum sales, or (2) 50 percent or more of the floor space in the
property is devoted to petroleum marketing sales. Further, the Senate Committee
Report to the Act provides that the determination of whether either prong of this test is
met will be made pursuant to the recent Coordinated Issue Paper (CIP) (but by using
the disjunctive test intended by the Senate Finance Committee rather than the
conjunctive test of the CIP).

The CIP referred to by the Senate Committee Report to the Act is a CIP for the
petroleum and retail industries released by the Service on March 1, 1995 (“1995 CIP”).
In this document, the Service addressed the proper depreciation period for gas station
convenience store (C-store) buildings and truckstop structures. Specifically, it
considered whether a C-store building or truckstop structure is includible in asset class
57.1 of Rev. Proc. 87-56 with a 15-year recovery period or whether it is nonresidential
real property depreciable over 31.5 years (39 years for property placed in service after
May 12, 1993). The 1995 CIP stated that a C-store is a “convenience” store that, in
POSTF-122634-14 7

addition to selling gasoline, offers a broad spectrum of consumer goods including
groceries, beverages, household cleaning supplies, newspapers, magazines, picnic
fare, and tobacco products. Typically, only about 10 to 20 percent of the facility’s floor
space is devoted to the marketing of petroleum products. This includes facilities such
as counters relating to the sale of gasoline dispensed from pump islands, as well
automobile supplies such as oil, anti-freeze, and window-washer fluid. The remainder
of the C-store floor space is devoted to office area, storage, restrooms, food
preparation, walk-in cooler, general sales area, and, in some cases, seating for
customers. The C-store contains none of the features typically associated with
traditional oil company service stations such as service bays, tire changing and repair
facilities, and car lifts. In fact, the C-store provides no services relating to the
maintenance of automobiles and trucks and employs no mechanics or other personnel
who specialize in caring for motor vehicles. The typical employee resembles an
employee found in other consumer goods retail facilities.

The 1995 CIP concluded that because a C-store does not possess any of the traditional
attributes of a service station, a C-store building cannot be a “service station building”
within the meaning of asset class 57.1 of Rev. Proc. 87-56.

However, as a section 1250 asset, the building can still be included in asset class 57.1
of Rev. Proc. 87-56 if it is primarily used in petroleum marketing. As previously
mentioned, section 1.167(a)-11(b)(4)(iii)(b) provides that property is included in the
asset class for the activity in which the property is primarily used, and shall be classified
according to primary use even though the activity in which the property is primarily used
is insubstantial in relation to all the taxpayer’s activities. Although the primary activity of
the oil company is to market gasoline through its network of distribution outlets (formerly
referred to as service stations), the primary use of the C-store building is to compete in
the convenience/grocery store markets. To determine if a C-store building is primarily
used in petroleum marketing for purposes of asset class 57.1, the 1995 CIP sets forth a
conjunctive two-prong test: (1) is 50 percent or more of the gross revenues generated
by the C-store derived from gasoline sales, and (2) is 50 percent or more of the floor
space in the building (including restrooms, counters, and other areas allocable to
traditional service stations “services”) devoted to the petroleum marketing activity? If a
C-store building meets both prongs of the test, the building is included in asset class
57.1; otherwise, the building should be treated as an ordinary retail building. If an island
marketer’s building has 1,400 sq. ft. or less, the Service will not challenge the taxpayer’s
position that such building is used primarily for petroleum marketing.

As discussed above, the Senate Committee Report to the Act intended that the
conjunctive two-prong test in the 1995 CIP (i.e., the gross-revenue test and the floor-
space test) should be a disjunctive test for determining whether a building or structure is
a retail motor fuels outlet for purposes of section 168(e)(3)(E)(iii). Consequently, the
Service issued a revised CIP on April 2, 1997 (“1997 CIP”) to reflect Congress’ intent
that the test be disjunctive. Thus, the Service has taken the position that the
appropriate test for determining whether a C-store building or truckstop structure either
POSTF-122634-14 8

is primarily used in petroleum marketing for purposes of asset class 57.1 of Rev. Proc.
87-56 or is a retail motor fuels outlet under section 168(e)(3)(E)(iii) is a disjunctive test:
(1) is 50 percent or more of the gross revenues generated by the C-store derived from
gasoline sales, or (2) is 50 percent or more of the floor space in the building (including
restrooms, counters, and other areas allocable to traditional service stations “services”)
devoted to the petroleum marketing activity?

In applying the disjunctive test for a retail motor fuels outlet, section 2.01(4)(b)(vi) of the
APPENDIX of Rev. Proc. 97-37, 1997-2 C.B. 455, 468, provided that gross revenue
from the sale of petroleum products does not include gross revenue from related
services, such as the labor cost of oil changes, and the floor space devoted to the sale
of petroleum products does not include the floor space devoted to related services, such
as oil changes. The current successor to section 2.01(4)(b)(vi) of the APPENDIX of
Rev. Proc. 97-37 is section 6.01(3)(b)(vi) of the APPENDIX of Rev. Proc. 2011-14,
2011-4 I.R.B. 330, 362. Section 6.01(3)(b)(vi) of the APPENDIX of Rev. Proc. 2011-14
also provides that gross revenue from the sale of petroleum products does not include
gross revenue from related services, such as the labor cost of oil changes, and the floor
space devoted to the sale of petroleum products does not include the floor space
devoted to related services, such as oil changes.

The initial issue is whether the classification of each of the Properties is based on
Taxpayer’s or B’s activities in that building. In this case, Taxpayer owns the Properties
and leases them to B. Consequently and pursuant to section 1.167(a)-11(e)(3)(iii), the
asset class for the Properties is determined as if the Properties were owned by B.
Accordingly, each of the Properties is classified based on B’s activities in that building.

Whether the Properties are retail motor fuels outlets under section 168(e)(3)(E)(iii)

Section 168(e)(3)(E)(iii) provides that any section 1250 property which is a retail motor
fuels outlet (whether or not food or other convenience items are sold at the outlet) is
classified as 15-year property.

While the Code does not define “retail motor fuels outlet,” the Senate Committee Report
to the Act provides insight as to what types of property qualify and do not qualify as a
retail motor fuels outlet. It provides that section 1250 property will qualify as a retail
motor fuels outlet if: (1) 50 percent or more of the gross revenues that are generated
from the property are derived from petroleum sales, or (2) 50 percent or more of the
floor space in the property is devoted to petroleum marketing sales. It also provides
that a retail motor fuels outlet does not include any section 1250 property used only to
an insubstantial extent in the retail marketing of petroleum or petroleum products.

In applying the above test, section 2.01(4)(b)(vi) of the APPENDIX of Rev. Proc. 97-37
and its current successor, section 6.01(3)(b)(vi) of the APPENDIX of Rev. Proc. 2011-
14, provide that gross revenue from the sale of petroleum products does not include
gross revenue from related services, such as the labor cost of oil changes, and the floor
POSTF-122634-14 9

space devoted to the sale of petroleum products does not include the floor space
devoted to related services, such as oil changes.

In this case, each of the Properties is a building used for multiple business activities:
sale and leasing of trucks, insurance, financing, authorized service and warranty
centers for a variety of truck manufacturers, sale of parts, body shop, and service
facilities providing alignments, oil changes, mechanical work, engine, transmission,
drive-train, brake, and other systems service. B sells petroleum products (for example,
oil) at each of the Properties through retail sales of truck engine oil and through its
service offerings of engine oil changes, transmission oil changes, and other lube
services. B does not sell fuel (gasoline and/or diesel fuel) at any of the Properties.

Based on the information provided to us, we believe that B primarily uses each of the
Properties to sell and lease trucks, sell truck parts, and provide truck maintenance and
repair services. While B sells petroleum products at each of the Properties, each of the
Properties is “used only to an insubstantial extent in the retail marketing of petroleum or
petroleum products.” See S. Rep. No. 281, 104th Cong., 2nd Sess. 15 (1996).
Accordingly, each of the Properties is not a retail motor fuels outlet.

Whether the Properties are included in asset class 57.1 of Rev. Proc. 87-56

Asset class 57.1 of Rev. Proc. 87-56 includes, in relevant part, section 1250 assets,
including service station buildings and depreciable land improvements, whether section
1245 or section 1250 property, used in the marketing of petroleum and petroleum
products. Thus, a section 1250 asset can be included in asset class 57.1 if it is a
service station building or it is primarily used in the marketing of petroleum and
petroleum products.

We will first determine if the Properties are service station buildings.

In this case, each of the Properties is a building used for multiple business activities:
sale and leasing of trucks, insurance, financing, authorized service and warranty
centers for a variety of truck manufacturers, sale of parts, body shop, and service
facilities providing alignments, oil changes, mechanical work, engine, transmission,
drive-train, brake, and other systems service. B sells petroleum products (for example,
oil) at each of the Properties through retail sales of truck engine oil and through its
service offerings of engine oil changes, transmission oil changes, and other lube
services. However, B does not sell fuel at any of the Properties.

The issue in this case is whether or not sales of gasoline and/or diesel fuel are required
in order for a building that possesses the traditional attributes of a service station to be a
service station building within the meaning of asset class 57.1 of Rev. Proc. 87-56.

Asset class 57.1 of Rev. Proc. 87-56 includes, in relevant part, section 1250 assets,
including service station buildings and depreciable land improvements, whether section
POSTF-122634-14 10

1245 or section 1250 property, used in the marketing of petroleum and petroleum
products. The phrase “used in the marketing of petroleum and petroleum products” in
asset class 57.1 applies to both section 1250 assets and depreciable land
improvements. Consequently, asset class 57.1 provides that a service station building
is one type of a section 1250 asset that is used in the marketing of petroleum and
petroleum products (emphasis added).

Our position is supported by the predecessors of asset class 57.1, the 1995 CIP, and
the Senate Committee Report to the Act.

As previously mentioned, Rev. Proc. 80-15 established asset class 57.1 and provided
that it includes the section 1250 property, including service station buildings and all
depreciable land improvements, included in asset class 13.4 of Rev. Proc. 77-10. Asset
class 13.4 of Rev. Proc. 77-10 included assets used in marketing petroleum and
petroleum products, such as related storage facilities and complete service stations, but
not including any of these facilities related to petroleum and natural gas trunk pipelines.
Asset class 13.4 of Rev. Proc. 77-10 clearly provides that service stations are an
example of an asset used in marketing petroleum and petroleum products (emphasis
added).

Further, we considered whether or not automotive service centers were included in
asset class 13.4 of Rev. Proc. 77-10. The Service treated such centers that sold fuel as
being included in asset class 13.4, and such centers that did not sell fuel as not being
included in asset class 13.4. See GCM 39179. We believe that this treatment
continues to apply in determining whether an automotive facility is included in asset
class 57.1 of Rev. Proc. 87-56.

Moreover, the 1995 CIP provides that service stations sell gasoline where it states, in
distinguishing a C-store building from a service station, that the primary activity of the oil
company is to market gasoline through its network of distribution outlets (formerly
referred to as service stations) (emphasis added). Also, in describing the law before the
Act, the Senate Committee Report to the Act states that property used in the retail
gasoline trade is depreciated under section 168 using a 15-year recovery period and the
150-percent declining balance method (emphasis added).

Accordingly, we conclude that sales of gasoline and/or diesel fuel are required in order
for a building that possesses the traditional attributes of a service station to be a
“service station building” within the meaning of asset class 57.1 of Rev. Proc. 87-56.

Taxpayer argues that fuel sales are not required. In support of its position, Taxpayer
cites to the 1995 CIP, the 1997 CIP, the Senate Committee Report to the Act, and CCA
201123001. However, in all of these cases, the facilities sold fuel.

Each of the Properties is essentially a truck dealership that sells and leases trucks in
combination with providing financing, insurance, repair services, body shop services,
POSTF-122634-14 11

and selling parts and accessories. While some of the services provided at each of the
Properties are comparable with services provided at a traditional service station and B
sells petroleum products (such as, oil) at each of the Properties, B does not sell fuel at
any of the Properties. Because sales of fuel (gasoline and/or diesel fuel) are an
essential element of a traditional service station, we conclude that the Properties are not
service station buildings for purposes of asset class 57.1 of Rev. Proc. 87-56.

We next determine if the Properties are primarily used in the marketing of petroleum
and petroleum products.

As discussed above under whether the Properties are retail motor fuels outlets, we
believe that B primarily uses each of the Properties to sell and lease trucks, sell truck
parts, and provide truck maintenance and repair services. Accordingly, each of the
Properties is not section 1250 property primarily used in the marketing of petroleum and
petroleum products.

Because the Properties are not retail motor fuels outlets under section 168(e)(3)(E)(iii)
and are not includible in asset class 57.1 of Rev. Proc. 87-56, the Properties are
nonresidential real property under section 168(e).

CASE DEVELOPMENT, HAZARDS AND OTHER CONSIDERATIONS
POSTF-122634-14 12

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Please call Douglas Kim at (202) 317-7005 if you have any further questions.