Gibson & Associates, Inc., Petitioner

f/l KVC 136 T.C. No. 10 UNITED STATES TAX COURT GIBSON & ASSOCIATES, INC. , Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 5863-08.

Filed February 24, 2011.

P is an engineering and heavy construction company is substantially dilapidated lor damaged from a that primarily 'erects or 'rehabilitates streets, bridges, airport runways, and other related real property (collectively, real property) .' P' s - rehabilitation services relate mainly to real property that casualty. P reported on its Federal taxable year ended June 30, 2006, "domestic production gross receipts" for a deduction under sec. 199, $63, 435 deduction under that section. the notice of deficiency that none of P's receipts qualified as DPGR.

P arlso repairs and maintains real property.

income tax return for the I.R.C., and claimed a R determined in (DPGR) eligible its receipts are that ~ Held: P's receipts are DPGR to the extent P erected or substantially renovated real property, and the extent property turns on whether P's activities with respect to each freestanding it.em of real property that operated and performed a discrete function in and of; to which P substantially renovated real i SERVED FEB 2 4 2011 (1) Materially increased the value of (2) substantially prolonged the useful itself: property, of property to a different or new use.

the real property, and/or (3) adapted the real the real life Held, further, P's activities materially increased the real property, substantially prolonged the value of the useful life of the real property to a different or new use to the extent that P's activities were not repairs (within the meaning of sec. 263(a), primary business.

the real property, and/or adapted I.R.C.), unrelated to P's Held, further, P's activities did not materially the real property, substantially increase the value of prolong the useful life of the real property, and/or the real property to a different or new use to adapt the extent that P's activities repaired or otherwise maintained real property unrelated to P's primary business.

Il Charles D. Lieser, for petitioner.

George E. Gasper, for respondent.

PARIS, Judge: Petitioner petitioned the Court to redetermine respondent's determination of a ,$21,568 deficiency in its Federal income tax for its taxable year ended June 30, 2006 (subject year).

The deficiency results from respondent's determination that petitioner may not deduct $63,435 under section 199(a)..I Respondent disallowed that deduction after determining that petitioner had no "domestic production gross Unless otherwise 'indicated, section references are to the Internal Revenue Code Nf 1986 (Code), as amended, and Rule references are to the Tax Court Rules of Practice and Procedure. Dollar amounts are rounded.

receipts".(DPGR).within the meaning of section 199(c) (4).

Petitioner reported that its DPGR totaled $26,053,570.2 Respondent now concedes that petitioner had DPGR of $13,849,246, and petitioner concedes that it incorrectly reported $259,156 of the $26,053,570 as DPGR.3 We- decide whether the remaining $11,945,168 ($26,053,570 - $13,849,246 - $259,156) , (disputed amount) is DPGR.

We hold it is to the extent stated herein.

FINDINGS OF FACT

Some facts were stipulated.

The stipulation of facts and the exhibits. submitted therewith are incorporated herein by this reference. Petitioner is a family-owned corporation that reports its income and expenses on the basis of a fiscal year ending on June 30.

Its principal place of business was in Texas when its petition was filed.

2As relevant here and discussed infra, the deduction under the lesser of a taxpayer's sec. 199(a) equals 3 percent of qualified production activities income (QPAI) or the taxpayer's taxable income (as computed without 199(a)), and a taxpayer's QPAI equals the taxpayer's DPGR less its cost of goods sold (allocable to the DPGR) plus the sum of certain expenses and other items. Petitioner's reported deduction of $63,435 equals 3 percent of income (as computed without the deduction under sec.

its reported taxable the deduction).

3Petitioner reported that to find that now asks the Court (i.e., $259,156 less than reported). Petitioner concedes explicitly that $98,455 of consider petitioner also to concede that the-remaining $160,701 is not DPGR as well. ($259,156 - $98,455) the $259,156 is not- DPGR, and we its DPGR totaled $26,053,570 but its DPGR -totaled $25,794,414 Petitioner is an ngineering and heavy highway construction company that primarily erects or rehabilitates streets, -bridges, airport runways, and o her major components or substantial structural parts of re 1 property'(primarily, infrastructure) in Texas, 'Oklahoda, Arkansas, and Kansas.

' Petitioner specializes in structural rehabilitatdon, epoxy injection,- concrete paving, bridge jacking, lead a atement, -and protective coatings.

Petitioner also maintains and repairs infrastructure and other || real property.

-Petitioner works through its employees. During the subject year, petitioner emplo pd approximately 90 individuals.

Theset employees werer mainly e gineers or heavy constructi-on workers, and petitioner paid- the over $3 million in salary and wages.

Petitioner -hired and re ained additional employees in subsequent years.

Petitioner worked n 136 construction projects during the subject year. Petitioner realized $25,892,869 of gross receipts from these projects, in luding $16,324,032 of gross receipts from State or Federal projects paid for with Federal I!

funds.⁴ Petitioner reported the $25,794,414 (and the now conceded 'A project may be -paid for with Federal funds'if the Secretary of Transporta ion concludes that the project is a cost-effective means of extending the useful life of a Federal-aid highway. U.S.C. sec. 101(a) (31) purposes of tit. 23 as dhe "Secretary of Transportation").

See 23 U.S.C. sec. 116 (2006); see also 23 (defining the word "Secretary" for (2006) !i $259,156) as DPGR and claimed a $63,435 deduction under section 199.5 Respondent determined that -petitioner could not deduct the $63,435 because petitioner had no DPGR.

Petitioner placed its construction projects into three categories.

The first category, "casualty" projects, involved work that petitioner performed on infrastructure that was significantly damaged by an act of God or by a casualty such as a fire or an overheight or an overweight vehicle hitting or traveling on a bridge.

The second category, "new construction" projects, involved work that petitioner performed primarily as a subcontractor on contractors' multimillion dollar projects involving major rehabilitation- of real property (primarily, infrastructure).

-The third category, "rehabilitation" projects, involved work that peti-tioner performed as a contractor rehabilitating dilapidated real property (primarily, infrastructure).

- Petitioner classified its projects into these three categories after reviewing the bid sheets and the other data in its files and after talking to individuals involved with the projects. Petitioner's bid sheets were papers that petitioner prepared to calculate and place a bid on a project offered to contractors (or subcontractors).

Each bid sheet SPetitioner used the percentage of completion method under sec. 460 to compute its taxable income.

contained an estimate of the amounts and types of costs that petitioner expected to incur in performing the project.

Petitioner further characterized its projects as:

(1) Substantial renovation or (2) repair or maintenance.

Petitioner characterized a project as substantial ~renovation if petitioner concluded that its work on the project:

(1) Substantially prolonged the useful life of real property; (2) materially increased the value of real property;- or (3) adapted real property to a new or different use. Petitioner categorized its construction projects as repair or maintenance if petitioner concluded that its work on the project:

(1) Was necessary to keep real property (or a component thereof) functioning on a short-term basis or (2) included cosmetic or aesthetic work.

Appendixes A, B, and C list petitioner's projects (other than 32 projects which are the subject of the parties' concessions discussed supra p. 3) as categorized by petitioner.

The appendixes show for each of those 104 remaining projects (disputed projects):

(1) The job number, (2) the general type of work that petitioner performed, (3) the final contract amount, (4) the revenue that petitioner earned for the subject year, (5) whether the project was paid for with Federal funds, and (6) petitioner's characterization of the project as repair or maintenance, substantially prolonging the useful life of real property, materially increasing the value of real property, and/or adapting real property to a different or new use.

The specific work that petitioner performed on each project is as follows:

Casualty Projects 05-1021 Petitioner performed this project for the -Texas The bridge had been critically damaged by a Department of Transportation (TxDOT). Petitioner strengthened a bridge at Highway 123 and McArthur Boulevard. fire caused by an overturned fuel the bridge was closed. Petitioner strengthened the columns and spans of reinforced polymer and structural patching. Petitioner concluded that this work substantially prolonged the useful life of value.

the bridge and materially increased its the bridge using carbon fiber truck, and most of 05-1023 Petitioner performed this project for the North Texas Tollway Authority (NTTA). Petitioner shored up an overhead emergency sign structure on the North Texas Tollway after the sign was damaged. Petitioner's work allowed the NTTA to keep the sign in place. would have been demolished absent petitioner's work. Petitioner concluded that this work substantially life of prolonged the useful the sign.

The sign 05-1025 Petitioner performed this project for the TxDOT.

The work rehabilitated damaged Petitioner worked on a bridge near Pampa, Texas, on U.S. Highway 83.- concrete beams so that the bridge could reopen to traffic and carry its design loads. Petitioner concluded that this work substantially prolonged the useful life of value.

the bridge and materially increased its 05-1029 Petitioner performed this project- for the Oklahoma Department of Transportation (ODOT). Petitioner worked on a bridge in Oklahoma County, Oklahoma, on Interstate Highway 40 over Anderson Road. damaged concrete beams so that to traffic and carry its design loads. Petitioner concluded that this work substantially prolonged the useful life of value.

The work rehabilitated the bridge could reopen the bridge and materially increased its 05-1045 Petitioner performed this project for the ODOT.

Petitioner worked on a steel bridge on U.S. Highway 64 and 129 West Avenue between Tulsa and Sand Springs, The work rehabilitated damaged concrete Oklahoma. beams so that the bridge could reopen to traffic and carry its design loads. Petitioner concluded that this work substantially prolonged the useful life of bridge and materi 11y increased its value.

the 05-1054 Petitioner performed this project for the TxDOT.

The work rehabilitated and/or replaced damaged Petitioner worked on a bridge near McKinney, Texas, Farmersville, Texas, on U.S. Highway 380 and Main Street. concrete beams so that the bridge could reopen to traffic and carry its design loads. Petitioner also performed some concrete work. Petitioner concluded that this work substantially prolonged the useful life of the bridge and materially increased its value.

in E 05-1056 Petitioner pekformed this project for the TxDOT.

Petitioner worked on a bridge on Farm-to-Market 157 over Interstate Highway 30 in Tarrant County, Texas. The work rehabilitated damaged concrete beams so that the bridge could reopen to traffic and carry its design loads. Petitioner concluded that this work substantially prolonged the useful and materially increased its value.

the bridge life of 05-1059 Petitioner performed this project for the TxDOT.

Petitioner worked on a bridge on Interstate Highway 37 and U.S. Highway 181 in Corpus Christi, Texas. work rehabilitated damaged concrete beams so that the The bridge could reopen to traffic and carry its design loads. Petitioner concluded that this work substantially prolonged the useful life of and materially increased its value.

the bridge 05-1060 - Petitioner performed this project for. the NTTA.

Petitioner worked on a highway. Petitioner's work. consisted of that this work was repair or maintenance.

"PGBT fire damage". Petitioner concluded 05-1064 Petitioner performed this project for the ODOT.

Petitioner worked on a bri'dge on Interstate Highway 40 at Choctaw Road.. The work rehabilitated damaged concrete beams so that the bridge could reopen to traffic and carry its design loads. Petitioner concluded that this work'substantially prolonged the useful value.

the bridge and materially increased its life of 05-1065 Petitioner performed this project for the TxDOT.

The work rehabilitated damaged Petitioner worked on a bridge on -Interstate Highway 35 at Corinth Street. concrete beams so that the bridge could reopen to traffic and carry its design loads. Petitioner concluded that this work substantially prolonged the useful life of value.

the bridge and materially increased its as 05-999 Petitioner performed this project for the -ODOT. Petitioner worked on a bridge at Randall Avenue and Interstate Highway 40 in Oklahoma. Petitioner sealed joints, patched the bridge deck, and retrofitted beam ends. Petitioner also removed existing lead paint (a perceived hazardous material), blasted the bridge tos remove corrosion, and applied a protective paint coating designed to prevent Petitioner concluded that this work substantially prolonged the useful life of future corrosion.

the bridge.

06-1072 Petitioner performed this project for the ODOT.

Petitioner worked on a bridge at County Road and Interstate Highway 40 in Custer County, Oklahoma. Petitioner replaced structural steel portions of load bridge to return the bridge to its original carrying capacity. Petitioner concluded that this work substantially prolonged the useful life of and materially increased its value.

the bridge the 06-1073 Petitioner performed this project for the ODOT.

Petitioner workedion a bridge at Ladd Road and Interstate Highway 35 in McClain County, Oklahoma. Petitioner's work strengthened the bridge and returned load carrying capacity. the bridge to its ,original Petitioner concluded that this work substantially prolonged the useful life of increased its value.

the bridge and materially 06-1074 Petitioner performed this project for the ODOT.

Petitioner worked, on a bridge at Interstate Highway 244 and the 23rd Street Ramp in Tulsa, Oklahoma. Petitioner strengthened the columns of resist future impact damage from derailed train cars in a nearby railroad yard. Petitioner concluded that this work substantially prolonged the useful life of bridge.

the bridge.to the e .

06-1078 Petitioner performed this project for the ODOT.

Petitioner worked on a bridge on State Highway 266 and U.S. Highway 169 in Tulsa County, Oklahoma. Petitioner rehabilitated damaged concrete beams so that the bridge could reopen to traffic and carry its design loads. Petitioner concluded that this work substantially prolonged the useful life of the bridge.

06-1084 Petitioner performed this project for the TxDOT.

Petitioner worked on a bridge on Interstate Highway 37 and Sundown Bridge in Texas. Petitioner rehabilitated damaged concrete beams so that to traffic and carry its design loads. Petitioner concluded that this work substantially prolonged the useful life of the bridge could reopen the bridge.

06-1087 Petitioner performed this project for the TxDOT.

Petitioner worked on a bridge on Interstate Highway 20 at Farm-to-Market 31 in Texas. Petitioner rehabilitated damaged concrete beams to restore the bridge's load carrying capacity. Petitioner concluded that this work.substantially prolonged the useful life of the bridge.

06-1091 Petitioner performed this project- for the TxDOT.

Petitioner worked on a bridge at Interstate Highway 30 and Jim Miller Road in Texas. Petitioner rehabilitated damaged concrete beams so that the bridge could reopen to traffic and carry its design loads. Petitioner concluded that this work substantially prolonged the useful life of.the bridge.

New Construction Projects 03-906 Petitioner performed this project for the TxDOT. Petitioner worked on a bridge at U.S. Highway 287 and the Trinity River in Texas. Petitioner raised the bridge to keep it, out of chance that the bridge could close on account of high water.or drifting debris. Petitioner concluded that this work substantially prolonged.the useful life of the bridge.

the flood plain and reduce the 03-921 Petitioner performed this project for the TxDOT. Petitioner worked on a bridge at U.S. Highways 80 and 175 in Texas. Petitioner'-s work consisted of patching the deck of work substantially prolonged the useful life of bridge driving surface.

the bridge. Petitioner concluded that this the 03-926 Petitioner performed this project for the TxDOT.

Petitioner worked on a bridge on Loop 335 in Texas. Petitioner applied an epoxy overlay designed to protect the bridge from the environment. Petitioner concluded life that this work substantially prolonged the useful of the bridge deck.

04-937 Petitioner performed this project for the City of Dallas, Texas. Petitioner worked on a blast fence at two locations at Love Field Airport in Dallas . blast fence included catwalks and port holes and was built on an old apron to allow for maintenance run-ups and a staging area for hijacked aircraft. Petitioner concluded that this work materially increased the value of the property and adapted the property to a new or different use.

The e 04-954 Petitioner performed this project for the TxDOT.

Petitioner worked on some bridge joints on Loop 360 in Travis County,.Texas. Petitioner rehabilitated pavement and joints. Petitioner concluded that this work substantially prolonged the useful life of pavement .

the 04-955 Petitioner performed this project for the TxDOT.

Petitioner worked on some bridge header joints in Williamson County; Texas. Petitioner rehabilitated of pavement and joints. Petitioner concluded that this work substantially prolonged the useful life of pavement .

the 04-956 Petitioner performed this project for the TxDOT.

Petitioner worked on a bridge on Interstate 35. in Travis County, Texas. Petitioner's work involved structural steel, head joints, and bridge deck patches. Petitioner concluded that this work involving structural steel and head joints substantially prolonged the useful life of an HMAC overlay.

Petitioner concluded that this work involving the bridge deck patches substantially prolonged the useful the bridge deck and the HMAC overlay. life of

O'4-959

Petitioner performed this project f-or the TxDOT.

Petitioner worked on a bridge on Interstate 35E in Texas. Petitioner rehabilitated concrete.pavement.so that an asphalt overlay could be installed properly. Petitioner also rehabilitated joints on the bridge. Petitioner concluded that this work substantially prolonged the useful life of bridge.

the pavement on the 04-965 Petitioner performed this project for the TxDOT.

Petitioner-worked on State Highway 205 in Texas. Petitioner added turn lanes and driveways and patched paving. Petitioner concluded that the added lanes and driveways adapted the highway to a different use. Petitioner concluded that its pavement work substantially prolonged the useful life of both the concrete pavement and the new HMAC overlay.

04-967 Petitioner performed this project for the TxDOT.

Petitioner worked on Interstate Highway 35E in Dallas, Texas. Petitioner rehabilitated concrete pavement so that an asphalt overlay could be installed properly. Petitioner also rehabilitated joints on the bridge. Petitioner concluded that this work substantially prolonged the useful life of bridge.

the pavement on the 04-968.

Petitioner performed this project for Eastfield College in Texas. Petitioner rehabilitated a failed column at a building at the college. Petitioner concluded that this work substantially increased the useful design life.

life"of the building from zero to its original 04-971 Petitioner performed this project for the Dallas/Fort Worth Airport Authority. worked on a garage ramp at_the airport. deteriorated, and petitioner rebuilt the ramp to allow for traffic to exit the garage. Petitioner concluded that - this work materially increased the value of garage ramp and adapted the ramp to a new or dif ferent use.

The ramp had Petitioner the 04-981 Petitioner performed this project for the TxDOT.

Petitioner worked on U.S. Highway 67 in Texas. Petitioner rehabilitated concrete pavement so that an asphalt overlay could be installed properly. Petitioner also rehabilitated joints on the bridge. Petitioner concluded that this work substantially prolonged the useful life of bridge.

the pavement on the 04-982 Petitioner performed this project for the TxDOT. Petitioner worked on Interstate Highway 35E in Texas. Petitioner rehabilitated concrete pavement so that an asphalt overlay could be installed properly. Petitioner also rehabilitated joints on the bridge. Petitioner concluded that this work substantially prolonged the useful life of bridge.

the pavement on the 05-1000 Petitioner performed this project for the Kansas Department of Transportation. Petitioner worked on a bridge on Interstate Highway 35 over 127th Street Wichita, Kansas. Petitioner applied an epoxy overlay designed to protect the bridge from the environment. Petitioner concluded that this work substantially prolonged the useful life of the bridge.

in 05-1002 Petitioner performed this project for the ODOT.

Petitioner worked on a bridge on State Highway 88 over Dog Creek in Rogers County, Øklahoma. Petitioner that upgraded the crash- - installed a new traffic rail worthiness rating from the old rail. Petitioner replaced the bridge deck to allow for traffic and increase the bridge's load rating. Petitioner concluded that this work substantially prolonged the useful life of the bridge, materially increased its value, and adapted the bridge to a new or different use.

05-1003 , Petitioner performed this project for the City of Dallas, Texas. Petitioner worked on the-Marsalis Avenue Bridge over the Dallas Zoo. Petitioner repainted the.deteriorating substructure, portion of walkway), applied corrosive painting after removing the old paint. Petitioner concluded that this work substantially -prolonged the useful life of replaced a the deck (including with a new pedestrian replaced a number of beams and girders, and the bridge.

05-1011 Petitioner performed this project for the Crescent in Dallas, Texas. Petitioner modified a handrail the hotel and removed and replaced concrete to Hotel at comply with the Americans with Disabilities Act of 1990 (N2A), 42 U.S.C. secs. 12101-12213 (2006). Petitioner concluded that this work adapted the property to a new or different-use.

05-1018 Petitioner performed this project for the TxDOT. Petitioner worked on.a bridge at U.S.-Highway 287 and Heritage Parkway in Texas. Petitioner rotated the bridge's bearing pads. Petitioner concluded that this work was repair or maintenance.

s 05-1019 .

Petitioner performed this project for the TxDOT.

Petitioner worked on a bridge on U.S. Highway 79 in Panola County, Texas. Petitioner rehabilitated concrete pavement so'that an asphalt overlay could- be installed properly-. Petitioner also rehabilitated joints on the bridge. Petitioner concluded that this work substantially prolonged the useful life of pavement on the bridge.

the 05-1028 Petitioner performed this project for the ODOT.

Petitioner worked on a steel bridge over Business Interstate Highway 40 in Beckham County, Oklahoma. The contractor renovated the bridge, and petitioner applied the protective coating. Petitioner also removed existing lead paint" (a perceived hazardous material) , blasted the bridge 'to remove corrosion, and applied a protective paint coating designed to prevent future corrosion. Petitioner concluded that this work substantially prolonged the useful life of and materially increased its value.

the bridge " 05-1032 Petitioner performed this project for the TxDOT. Petitioner worked on a bridge on U.S. Highway 287 in Texas. Petitioner leveled the bearing pads. Petitioner concluded that this work was repair or maint enance .

05-1036 Petitioner performed this project for the TxDOT.

the bridge to prevent damage and Petitioner worked on a bridge on Interstate Highway 20 over the Brazos River in Texas. Petitioner adjusted the bearings of rehabilitated cracks in a structural steel diaphragm to allow the bridge to carry the load for which is was originally designed. Petitioner also removed existing lead paint the bridge to remove corrosion, and applied a protective paint coating designed to prevent future corrosion. Petitioner concluded that this work substantially prolonged the useful life of and materially increased its value.

(a perceived.hazardous material), blasted the bridge 05-1037 Petitioner performed this project for the ODOT.

Petitioner worked on a bridge on U.S. Highway 270 over Caston Creek in Le Flore County, Oklahoma. Petitioner sealed joints, patched the bridge deck, and retrofitted beam ends. Petitioner concluded that this work substantially prolonged the useful life of the bridge.

05-1038 Petitioner performed.this project for the TxDOT.

Petitioner worked on the pavement on Interstate Highway 20 in.Texas. Petitioner rehabilitated concrete pavement so that an asphalt overlay could be installed properly. Petitioner also rehabilitated joints on the bridge. Petitioner concluded that this work substantially prolonged the useful on the bridge.

the pavement life of 05-1043 - Petitioner performed this project for the TxDOT.

Petitioner worked on the intersections at State Highway 356. Petitioner added left and right turn lanes to the intersections to improve traffic flow. Petitioner concluded that this work materially increased the value of the property and adapted it to a new or different use.

05-1047 Petitioner performed this project for the City of Fort Worth, Texas. Petitioner worked on the Hulen Street Bridge in Fort Worth. Petitioner sealed joints, patched the bridge deck, and retrofitted-beam ends. Petitioner concluded that this work substantially prolonged the useful life of the bridge.

05-1052 Petitioner performed this project for the City of Dallas, Texas. Petitioner worked on the aprons at two terminals at the Love Field Airport in Dallas. Petitioner upgraded the ramps to the aprons for heavier aircraft, by removing approximately 12,000 square yards of approximately 50-year-old, 13-inch pavement and replacing it with 16-inch pavement. Petitioner also replaced the existing trench drains with new drains that met applicable Federal standards. Petitioner concluded that this work substantially prolonged the the property, materially increased its useful life of value, and adapted the property to- a new or different use.

05-1057 Petitioner performed this project for the TxDOT.

Petitioner worked on a bridge on U.S. Highway 83 in Texas. Petitioner modified the bearings on the bridge to prevent damage and to maintain the bridge's load carrying capacity. , Petitioner concluded that this work substantially prolonged the useful the bridge.

life of 05-995 Petitioner performed this project for the City of Oklahoma City, Oklahoma. Petitioner worked on a bridge at Walnut Avenue in Oklahoma City. Petitioner removed (a perceived hazardous material), existing lead paint blasted the bridge to remove corrosion, and applied a protective paint coating designed to prevent corrosion. Petitioner concluded that this work substantially prolonged the useful life of the bridge.

future 06-1069 Petitioner performed this project for the Lakes of Coppell housing subdivision in Coppell, Texas. Petitioner worked on a failing retaining wall that the waterways running through the spanned the length of subdivision. The wall had'cracked and was falling into the water. Petitioner replaced the failing wall with a new retaining wall and improved the drainage behind the .Petitioner econcluded that this work wall. substantially prolonged the useful life of the subdivision and materially increased its value.

06-1071 Petitioner performed this project for the TxDOT. Petitioner worked on a bridge on U.S. Highway 290 in Texas. Petitioner installed new bridge joints to improve the life of concluded that this work substantially prolonged the useful life of the new overlay. Petitioner the property.

06-1085 Petitioner performed this project for the TxDOT.

Petitioner worked on a culvert along State Highway 121 in Texas.. Petitioner's work consisted of structural repairs and waterproofing. Petitioner concluded that this work was repair or maintenance.

06-1089 Petitioner performed this project for the TxDOT.

Petitioner worked on a bridge on Interstate Highway 30 in Texas. Petitioner rehabilitated concrete pavement~ so that an asphalt overlay could be installed properly. Petitioner concluded.that this work substantially prolonged the useful life of bridge.

the pavement on the 06-1093 Petitioner performed this project for the TxDOT. Petitioner worked on the State Highway 356/Interstate Highway 35E/U.S. Highway 75 bridge in Texas. Petitioner applied an epoxy overlay to'restore the driving surface and protect the concrete deck from future corrosion. Petitioner concluded that this work the bridge. substantially prolonged the useful life of Misc. Jobs Petitioner does not explain the jobs that it has included in this project. to argue that repair or maintenance.

the work on this project was other than We understand petitioner not Rehabilitation Projects 02-861 Petitioner performed this project for the Dallas/Forth Worth Airport Authority. Petitioner worked on pavement at Dallas/Fort Worth.Airport. Petitioner rehabilitated the pavement on the runway/taxiway. Petitioner concluded that this work substantially prolonged the useful life of runway/taxiway.

the 03-874 Petitioner performed this project for the TxDOT.

Petitioner worked on a bridge on Interstate Highway 35 and Peachtree Road in Tarrant County, Texas. Petitioner rehabilitated pavement and joints.

Petitioner concluded that this work substantially prolonged the useful life of the bridge.

03-890 Petitioner performed this project for the ODOT.

Petitioner worked on various bridges in Garvin, Lincoln, and Johnston Counties, Oklahoma, near State Highways 18, 19, and 99. Petitioner sealed joints, patched bridge decks, and retrofitted beam ends. Petitioner concluded that this work substantially lives of prolonged the useful the bridges.

> 03-902 Petitioner performed this project for the ODOT.

Petitioner worked on various bridges in Caddo and Love Counties, Oklahoma, near State Highways 32 and 58 and U.S. Highways 77 and 281. Petitioner sealed joints, patched bridge decks, and retrofitted beam ends. Petitioner-concluded that this work substantially lives of prolonged the useful the bridges.

03-915 Petitioner performed this project for the TxDOT.

Petitioner worked on a bridge on Interstate Highway 635 in Texas. Petitioner rehabilitated pavement and joints so that an asphalt overlay could be installed properly. Petitioner concluded that this work substantially prolonged the useful life of the bridge.

04-950 Petitioner performed this project for the ODOT.

Petitioner worked'on bridges at U.S. Highways 39 and 77 in Cleveland and McClain Counties, Oklahoma. bridges were rapidly deteriorating, and petitioner replaced the concrete decks and floor beams of the bridges. Petitioner's work allowed the load restrictions for truck traffic to be lifted. Petitioner concluded that this work substantially prolonged the-useful lives of increased their values, and adapted the bridges to new or different uses.

the bridges, materially The 04-951 Petitioner performed this project for the ODOT. Petitioner worked on various bridges in Oklahoma at State Highways 14, 15, and 136. Petitioner removed existing lead paint (a perceived hazardous material), blasted the bridges to remove corrosion, and applied protective paint coatings designed to prevent future corrosion. Petitioner concluded that this work substantially prolonged the useful and materially increased their values.

life of the bridges 04-958 Petitioner performed this project for the ODOT.

Petitioner worked on a bridge at State Highway 151 and Keystone Dam in Tulsa County, Oklahoma. Traffic had fallen through the bridge's deck, and concrete from the pavement had fallen down into the operating mechanisms of the hoist. Petitioner rehabilitated the concrete pavement of guardrail. Petitioner concluded that this work substantially extended the useful life of and materially increased its value.

the bridge dam and rehabilitated a the bridge 04-960 Petitioner performed this project for the ODOT.

Petitioner worked on a bridge at State Highway 54 over Calvary Creek in Washita County, Oklahoma. Petitioner added structural steel increased the weight of on the bridge. Petitioner concluded that this work substantially prolonged the useful and adapted it to a new or, different use.

loads that trucks could carry to the bridge beams which the bridge life of 04-961 ' * Petitioner performed this project for the ODOT.

Petitioner worked on a bridge at State Highway 54 over Horse & Deer Creeks in Custer County, Oklahoma. Petitioner added structural steel which increased the weight of carry on the bridge. - Petitioner concluded that this work substantially prolonged the useful life of the - bridge and adapted it to a new or different use.

loads that trucks could • to the bridge beads 04-969 Petitioner performed.this project for the ODOT. Petitioner worked on four bridges on county roads in Oklahoma. Petitioner sealed joints, patched the decks of the bridges, and retrofitted beam ends. Petitioner concluded that this.work substantially prolonged the useful the bridges.

lives of 04-970 Petitioner performed this project for the ODOT.

Petitioner worked on seven bridges in Oklahoma. Petitioner sealed joints, patched the decks of bridges, and retrofitted beam ends. Petitioner concluded that this work substantially prolonged the useful the bridges.

lives of the 04-983 .

Petitioner performed this project for the Town of Addison, Texas. Petitioner worked on pavement on a bridge on Belt Line Road in Addison. Petitioner rehabilitated pavement and joints so that an asphalt overlay could be installed properly. Petitioner concluded that this work substantially prolonged the useful the bridge.

life of 04-985 Petitioner performed this project for the ODOT.

Petitioner worked on a bridge at State Highway 151 and Keystone Dam in Tulsa County, Oklahoma. Petitioner rehabilitated concrete pavement across the dam and applied a sealant. Petitioner concluded that this work substantially prolonged the useful and materially increased its value.

the bridge life of 04-986 Petitioner performed this -project for the ODOT. Petitioner worked on a bridge at State Highway 1 and Gaines Creek in Oklahoma. Petitioner rehabilitated the structural steel, applied a protective paint coating designed to prevent future corrosion. Petitioner concluded that this work substantially prolonged the useful and adapted it to a new or different use.

removed old corroded steel, and the bridge life of 04-987 Petitioner performed this project for the ODOT.

Petitioner worked on a bridge at State Highway·99 over State Highway 3 and Creek in Pontotoc'County, Oklahoma. Petitioner sealed joints, patched the bridge deck, and retrofitted beam ends. Petitioner concluded that this work substantially prolonged the useful life of bridge.

the 05-1004 Petitioner performed this project for the ODOT.

the bridges, and retrofitted beam Petitioner worked on various steel bridges at i Interstate Highway 44 at 12th and 19th Streets in Oklahoma County, Oklahoma. Petitioner sealed joints, patched the decks of ends. Petitioner also removed existing lead paint (a perceived hazardous material), blasted the bridges to remove corrosion, and applied protective paint coatings designed to prevent concluded that this work substantially prolonged the the bridges and materially increased useful their value.

future corrosion. Petitioner lives of 05-1006 Petitioner performed this project for the NTTA.

Petitioner cleaned and sealed pavement prevent that this work substantially prolonged the useful of the intrusion of water. Petitioner concluded the existing pavement.

joints to life '05-1009 Petitioner performed this project for the TxDOT.

Petitioner rehabilitated concrete traffic barrier walls. Petitioner concluded that this work substantially prolonged the usefuÍ life of barrier walls.

the traffic 05-1013 Petitioner performed this project for the TxDOT. Petitioner worked on a bridge at State Highway 15 and the Brazos River in Texas. Petitioner repositioned the rocker bearing assemblies and installed new stiffeners so that the bridge would not self-destruct.

(A stiffener, sometimes called a gusset plate, accessory to a steel structure that restrains a distortion of some or all of the steel.) Petitioner concluded that this work substantially prolonged the useful life of the bridge.

is an 05-1017 Petitioner performed this project for the TxDOT.

Petitioner worked on a bridge on or at Interstate Highway 35 in Austin (Travis County), Texas. joints on the bridge were coming loose and the steel was sticking up in the traffic. Petitioner rehabilitated the joints and the steel. would have been closed without this work. Petitioner concluded that this work substantially prolonged the useful life of the bridge.

The bridge The armor 05-1020 Petitioner performed this project for the ODOT.

Petitioner worked on a bridge in Oklahoma. Petitioner rehabilitated pavement and joints so that an asphalt overlay could be ïnstalled properly. Petitioner concluded that this work substantially 'prolonged the useful life of the bridge.

05-1022 Petitioner performed this project for the TxDOT. Petitioner worked on a bridge at U.S. Highway 277 and Valley Creek in Abilene, Texas. Petitioner replaced the bearing pads on the bridge. Petitioner concluded that this work substantially prolonged the useful life of the bridge.

05-1024 - Petitioner performed this project for the TxDOT.

Petitioner worked on a bridge at U.S. Highway 59 in Lufkin, Texas. Petitioner rehabilitated the bridge joints. Petitioner concluded that this work substantially prolonged the useful life of and materially increased its value.

the bridge 05-1033 Petitioner performed this project for the NTTA.

Petitioner.worked on pavement. Petitioner routed and sealed cracks in the pavement intrusion. Petitioner concluded that this work substantially prolonged the useful life of pavement.

to prevent moisture the 05-1046 Petitioner performed this project for the TxDOT.

the railing and the deck. Petitioner cleaned Petitioner worked on a bridge on U.S. Highway 75 in Grayson County, Texas. Work was also performed on parts of and sealed joints, patched the bridge deck, and retrofitted beam ends. Petitioner concluded that this work substantially prolonged the-useful , bridge.

life of the 05-1048 Petitioner performed this project for the ODOT.

Petitioner worked on a bridge at Interstate Highways 40 and 44 in Oklahoma County, Oklahoma. Petitioner removed existing lead paint material), blasted the bridge to remove corrosion, and applied a protective paint coating designed to- prevent future corrosion. Petitioner-also rehabilitated part of the bridge. Petitioner concluded that this work substantially prolonged the useful life of the bridge and materially increased its value.

(a perceived hazardous the deck of 05-1049 Petitioner performed this project for the ODOT.

Petitioner worked on a bridge at Interstate Highways 35 and 44 in Comanche and Garvin Counties, Oklahoma. Petitioner sealed joints, patched the bridge deck; and retrofitted beam ends. Petitioner also removed existing lead paint (a perceived hazardous material), blasted the bridge to remove corrosion, and applied a protective paint coating designed to prevent future corrosion. Petitioner concluded that this works substantially prolonged the useful life of . and materially increased its value.

the bridge -- 26 - 05-1050 Pètitione~r performed' thi's project- for -the: ODOT .

Petitionerzworked on ta bridge ingBeckham County,. Oklahoma? Petitioner sealed 'joints, - patched thet bridge deck, and reti-ofitted beam ends. Petitioner also (a perceived hazardous n . removed existing-lead paint material) , blasted the bridge to remove corrosion, - and applied a protective paint coating designed to prevent future corrosion. Petitioner, concluded that this work substantially prolonged the useful life of and materially increased its .value . 4 the bridge 05-1051 Petitionersperformed thisa roject for the,City_ of Forth Worph, Texas. Petitioner worked on a bridge .on Rive side' Drive ' in Fort 'Worth. (a perceived hazardous material) , existing lead paint blasted the bridge to remove corrosion, and applied,.a protective: paigt coating designed to prevent corrosion;. Petitioner concluded that this work substantiálly prolonged the useful life of and materially increased its value.

- Petitioner , removed the bridge future 05-1061 Petitioner performed this project-for the ODOT.

The expansion Petitioner worked on a bridge at Interstate Highway 35 and 'the Canadian River in Oklahoma. joints-had failed; lallowing the bridges dedk.to spall and deteriorate andaallowing salttand/or:water to get to the slab substructure. industry, surface defect and as a~ verb to the breaking up of a material rehabilitated the deck and the joints. Petitioner concluded that this work substantially extended the, useful life of - the bridge .

the word."spaall" as a noun refers - to a to create a surface defect.)- (In the construction -Petitioner M Petitioner performe~d thi.s project for- the TxDOT Petitioner worked on a bridge at.Loop 1,and Gaines Creek in ,Tex'as.: The bearing pads had failed,s and petit-ioner raised the:bridge, and-sinstalled new and updated pads to keep the brigige from destroying itself .

, Petitioner concluded that this work substantially life of prolonged the useful the bridge.

05-1063 Petitioner performed this project for the NTTA. Petitioner changed the bearing pads on the Mountain Creek Lake Bridge to prevent damage at.the beam/bearing seat substantially prolonged the useful life of interface. Petitioner concluded that this work the bridge.

05-996 Petitioner performed this project for the City of Tulsa, Oklahoma. Petitioner worked on the Tulsa Oklahoma Civic Center. Petitioner rehabilitated and waterproofed the deck of concluded that this work substantially prolonged the useful life of the civic center. Petitioner the civic center.

05-997 Petitioner performed this project for the TxDOT.

Petitioner worked on a bridge on Interstate Highway 10. Petitioner removed and replaced failing expansion joints that -were allowing the bridge deck to deteriorate and letting moisture into the substructure. Petitioner concluded that this work substantially prolonged the useful life of increased its value.

the bridge and materially 06-1067 Petitioner performed this project for the TxDOT. Petitioner*worked on a bridge at U.S. Highway 69 and Choctaw Creek in Texas. Petitioner sealed joints, patched the bridge deck, and retrofitted beam ends. Petitioner also,removed existing lead paint perceived hazardous material), blasted the bridge to remove corrosion, and applied a protective paint coating designed to prevent Petitioner concluded that this work substantially prolonged the useful life of increased its value.

future corrosion.

the bridge and materially (a 06-1068 Petitioner performed this project for the ODOT.

Petitioner worked on a bridge at State Highway 58 over the Washita River in Caddo County, Oklahoma. Petitioner sealed joints, patched the bridge deck, and retrofitted beam ends. Petitioner concluded that this work substantially prolonged the useful bridge.

life of the 06-1070 Petitioner performed this project for the City of Oklahoma City, Oklahoma. Petitioner worked on the Oklahoma City Grandstand. their supports were failing in various sections of the grandstand, and petitioner rehabilitated those joints. Without the grandstand would have been unusable and continuing to self-destruct. Petitioner concluded that this work substantially extended the useful The expansion joints and the rehabilitation, the structure.

life of 06-1075 Petitioner performed this project for.the TxDOT.

Petitioner worked on a bridge at State Highways 82 and 87 in Texas. Petitioner strengthened and retrofitted the structural components to help the bridge regain and maintain its design loads carrying capacity. Petitioner concluded that this work substantially prolonged the useful life of the bridge.

06-1076 Petitioner performed this project for the City of Lawton, Oklahoma. Petitioner worked on a bridge at Gore Boulevard and Cashe Road in Oklahoma. Petitioner sealed joints, patched the bridge deck, and retrofitted beam ends. Petitioner concluded. that this work substantially prolonged the useful life of and materially increased its value.

the bridge 06-1079 Petitioner performed this project for the ODOT.

Petitioner worked on a bridge at U.S. Highways 62 and 74 in Oklahoma and Logan Counties, Oklahoma. Petitioner sealed joints, patched the bridge deck, and retrofitted beam ends. Petitioner concluded that this work substantially prolonged the useful bridge.

life of the 06-1080 Petitioner performed this project for the City rof Dallas, Texas. Petitioner reconfigured the streetscapes on Field,'St. Paul, and Harwood Streets to provide better pedestrian movement and safety. Petitioner concluded that this.work materially increased the value of property to a new or different use.

the property and adapted the 06-1081 Petitioner performed this project for the City of Oklahoma City, Oklahoma., Petitioner worked on a bridge at Cimarron Road over Interstate Highway 40 in Oklahoma City. Petitioner sealed joints, patched the bridge deck, and retrofitted beam ends. Petitioner concluded that this work substantially prolonged the useful life of the bridge.

06-1082 Petitioner performed this project for the City of Oklahoma "City, Oklahoma. Petitioner worked on the Rockwell Avenue Bridge in Oklahoma City. Petitioner sealed joints, patched the bridge deck, and retrofitted beam ends. Petitioner concluded that this work substantially prolonged the useful life of the bridge.

06-1088 Petitioner performed this project for the ODOT.

Petitioner worked on the Rockwell Avenue Bridge in Oklahoma. Petitioner sealed joints, patched the bridge deck, and retrofitted beam ends. Petitioner concluded that this work substantially prolonged the useful life of the bridge.

06-1090 Petitioner performed this project for the NTTA.

Petitioner worked on the entrance to a building in' Plano, Texas." Petitioner modified the entrance to comply with the ADA. Petitioner concluded that this work substantially prolonged the useful life of property, materially increased its value, and adapted the property to a new or different use.

the 06-1094 Petitioner performed this project for the NTTA.

Petitioner rehabilitated concrete pavement and joints' on a bridge so that an asphalt overlay could.be installed properly. Petitioner concluded that this work substantially prolonged the useful life of the bridge.

06-1095 Petitioner performed this project for CPS Energy.

increasing the load carrying capacity of Petitioner rehabilitated an old trolley bridge on Mission Road, the bridge to allow for trucks. Petitioner concluded that this work substantially prolonged the useful life of the bridge, materially increased its value, and ' adapted the bridge to a new or different use.

06-1096 Petitioner performed this project for the TxDOT.

Petitioner worked on a bridge on Interstate Highway 20 in Texas. Petitioner sealed joints, patched the bridge deck, and retrofitted beam ends. Petitioner concluded that this work substantially prolonged the useful life of the bridge.

I. Background

OPINION

We decide whether the disputed amount is DPGR.

The parties agree that the disputed amount is DPGR to the extent that petitioner performed work on projects that erected or substantially renovated real property.

In addition, the parties agree that petitioner's work substantially renovated real property to the extent that:

(1). The work renovated a major - 31-- component or substantial structural part of real property and (2) the renovations materially increased the value of the real property, substantially prolonged the usefulalife of the real property, and/or adapted the real-property to a different or new use.

Further, the. parties do not dispute that petitioner's work met the'first prong of this two-part substantial renovation test.'

Our decision therefore turns.on whether petitioner's work erected property or, to the extent it did not, met the secónd prong of the test.?

Petitioner argues that it- "erected" or "substantially renovated" real property and therefore the disputed amount is' DPGR. Respondent argues that petitioner's'work falls outside of the meanings of those terms and therefore the disputed amount is not DPGR.

We agree with petitioner.

6Respondent concedes in his opening brief that petitioner's the first prong but advances no argument Each of work on the bridges met as to petitioner's work on the other types of property. those other types of property is "real property" within the meaning of sec. 199 because it is either a building or other property that property for an indefinite period. Income Tax Regs.; see also sec. 1.263A-8(c) (3), Furthermore, we find in the record that petitioner's work on these other types of property renovated a major component or a substantial structural part of that property. all of the properties in dispute meet two-part test.

is and ordinarily will remain affixed to real See sec. 1.199-3(m) (2)(i), the first prong of this We conclude that Income Tax Regs.

7Hereinafter, we use the term "disputed projects" to refer , to the 104 projects discussed supra p. 6, projects that petitioner characterizes as repair or maintenance.

less the 5 of those II. Burden of Proof Respondent determined that none of the disputed amount is DPGR, and respondent's determination is presumed correct.

See Welch v: Helvering, 290 U.S. 111, 115 (1933); see also Interstate Transit Lines v. Commissioner, 319 U.S. 590, 593 (1943) (stating that deductions are.a matter of legislative grace for which taxpayers must prove their entitlement); cf. Helvering v. Bliss, 293 U.S. 144, 150-151 (1934) (stating that tax provisions should not be narrowly construed where, as here, they are "liberalizations of the law in the taxpayer's favor, * * * begotten from motives of public, policy").

A taxpayer generally must prove the Commissioner's determination wrong in order to prevail., See Rule 142(a). Section 7491(a), however, sometimes placess the burden of proof upon the Commissioner.

The record allows us to decide-this case without regard to which party bears the burden of proof.

We proceed to do so.

We need not 'and do not decide which party bears the burden of proof.

III. Section 199 A. Applicable Text

Our substantive analysis begins with the relevant text of section 199.

(We set forth that text in appendix D.) Section 199(a) allows a corporate taxpayer such as petitioner to deduct a percentage (equal to 3 percent for the subject year) of the - lesser of (1) its qualified production activities income or -- 33 - (2) its taxable income (as computed without regard to the deduction under section 199(a)). Section 199(b) (1) limits that deduction to 50 percent of the wages that the taxpayer pays during the year. Section 199(c).(1) defines the term "qualified production activities income" as the taxpayer's DPGR less the sum of its cost of goods sold (allocable to the DPGR) plus certain expenses and other items. Section 199(c) (4) (A) (ii) provides that DPGR includes a taxpayer's gross receipts from the construction of real property performed in the United States if the taxpayer is engaged in the active conduct.of a construction business and the gross receipts are derived in the ordinary course of that business.

Section 199 does not define the phrase "construction of real property" as its appears in section 199(c) (4) (A) (ii), and it is the meaning of that phrase that is the focus of our analysis.

The parties do not dispute that petitioner is entitled to a deduction under section 199(a) to the extent that petitioner's work on the disputed-projects falls within the meaning'of that phrase. Nor do the parties dispute that petitioner's work will fall within the meaning of that phrase if the work "erected" or "substantially renovated" real property within the meaning of section 1.199-3-(m), Income Tax Regs.

B. Legislative History Section 199 was added to the Code by the American Jobs Creation Act of 2004 (AJCA), Pub. L. 108-357, sec. 102(a), 118.

Stat. 1424, to give domestic manufacturers a tax. deduction for certain domestic production activities.

The conferees noted that then-present law did not reduce a corporate taxpayer's income tax for income from domestic activities and stated that section 199 would provide such a reduction in certain cases.

See H. Conf.

Rept. 108-755, at 265-275 (2004).

The conferees stated that "construction activities performed in the United States" was one of those cases, that "activities that are directly related to the erection or substantial renovation of residential and commercial buildings and.infrastructure" were "construction activities", and that "structural improvements, but not mere cosmetic changes, such as painting" were "substantial renovation".

Id. at 271 & n.26.

The name of the AJCA and the statute's wage limitation on the amount of the deduction under section 199(a) indicate that Congress intended that section 199 create jobs in the United States and otherwise strengthen the U.S. economy.

IV. Guidance

From the Commissioner and From the Secretary - A. Notice 2005-14 On January 19, 2005, the Commissioner released Notice 2005-14, 2005-1 C.B. 498, to provide "interim guidance" on section 199.

The notice stated that the Secretary was currently developing regulations- under section 199 and that taxpayers could rely on the interim-guidance until the regulations were issued.

Id. sec. 1, 2005-1-C.B. at- 502.

As relevant here, Notice 2005-14, sec. 4.04(11) (a) and (b), 2005-1 C.B. at 520, stated that "The term 'construction' means the construction or erection of real property" and that to erect or Activities constituting construction include activities performed in connection with a project substantially renovate real property, but do not include tangential services such as hauling trash and debris, and delivering materials, even if the tangential services are essential for construction. . if the taxpayer performing construction also, However, in connection with the construction project, provides tangential services such as delivering materials to the construction site and removing its construction debris, the gross receipts derived from the tangential services are DPGR. landscaping) and painting are activities constituting construction only if these activities are performed in connection with other activities (whether or not by the same taxpayer) substantial renovation of real property.

that constitute the erection or * Improving land (for example, grading and, * * Notice 2005-14, sec. 4.04(11) (d), 2005-1 C.B. at 520, stated that the "term 'substantial renovation' means the renovation of a major component or substantial structural part of real property that materially increases the value of the property, substantially prolongs the useful life of the property, or adapts the property to a new or different use." Notice 2005-14, sec.

3.04(11) (d), 2005-1 C.B. at 511, explained as to that meaning:

The Service and Treasury Department believe that the standard to be applied in determining whether there has been a substantial renovation of real property is the standard applied under § 263(a) to determine whether a l taxpayer's.activities result in permanent or betterments of property, such that the cost of activities must be capitalized * definition of forth in the notice is] consistent with the rules under § 263(a) * the term substantial renovation as set [and that the improvements the * * * * B.

2005 Proposed Regulations On November 4, 2005, the Secretary published proposed regulations under section 199.

See secs. 1.199-0 through 1.199-8, Proposed Income Tax Regs., 70 Fed. Reg. 67240 (Nov. 4, 2005).. The proposed regulations stated that the final regulations, when published, would apply to taxable years beginning after December 31, 2004.

See sec. 1.199-8(g), Proposed Income Tax Regs.,370 Fed. Reg. 67276 (Nov. 4, 2005).

The proposed regulations stated that taxpayers could rely on the proposed regulations and/or the interim guidance set forth in Notice 2005-14, supra, until the final regulations were published in the Federal Register.

See id.

The definition of the word "construction" in the proposed regulations was similar to its definition in Notice 2005-14, supra. Section 1.199-3(1) (1) (i) and (2), Proposed Income Tax Regs., 70 Fed. Reg. 67254, 67255 (Nov. 4, 2005), stated that "The term construction means the construction or erection of real property" and Activities constituting construction include activities performed in connection with a project to erect or substantially renovate real property, but do not include tangential services such as hauling trash and debris, and del-ivering materials, even if the tangential services are essential for construction. However, if the taxpayer performing construction also, in.connection with the construction project, provides tangential services such as delivering materials to the construction site and removing its construction debris, the gross receipts derived from the tangential services Improvements to land that are not are DPGR. capitalized to the land (for example, landscaping) and painting are activities constituting-construction only if these activities are performed in connection with other activities (whether or not by the same taxpayer) that constitute the erection or substantial renovation of real property * * * The proposed regulations also followed the definition of the term "substantial renovation" set forth in Notice 2005-14, supra.

Section 1.199-3(1) (4), Proposed Income Tax Regs., 70 Fed. Reg.

67255 (Nov. 4, 2005), stated that the "term substantial renovation means the renovation of a major component or substantial structural part-of,real property that materially increases the value 'of the property, substantially prolongs the useful life of the property, or adapts the property to a new-or different use." While this -definition adopted some of the grounds for capitalization under section 263(a) and the regulations thereunder, see sec. 1.263(a)-1(b), Income Tax Regs.

(stating that an expense is generally -a capital expenditure if the expense adds to the value or substantially prolongs the useful life of property owned by the taxpayer or adapts the property to a new or different use), the proposed regulations did not explicitly adopt all of those grounds.

The proposed- regulations, for example, did not explicitly adopt the standard - ,38 - of section 1. 263 (a) -2 (a)a, Income Tax -Regs .a athat "The a cost -of acquisition, construc tion a or eerectiontóf abuildings , machinery and equipment, furniture and fixtures, rand similar property.

having a useful 11ife asubstantially beyond the ataxable year". is a capital expenditure .7 -See salso INDOPCO, -Inc v . Commiss ioner , 503 U;S. 79, 87-89 (1992) (holding ,that an expenditure that produces a significant future benefit is a capitalrexpenditure under section 263 (a) ) .

C.

'2006 Final" Regulations a e On.June T, 2006, the Secretary-published finalaregulations a under section 199. ¿See secs: -1.199-0 throughe¹:199-9, Income Tax Regs., 71 Fed. Reg. 31283 (June.¹, 2006)a.

The afinal regulations are applicable to taxable years,beginning on or after June 1, 2006: Seeesec. 'r.199-8(i) (1), Income Tax Regs. 2The final • regulations also - stated, however that a taxpayer could rely on the final regulati_onsafor taxable years beginning before May 18, 2006, provided that' the taxpayer followed all gf those :final regulations .

See id.

- The - f~inal regulations tstated that y taxpayers who do not rely. on the final regulations for taxable years 'beginning before,r June 1, 2006, may rely ori the proposed a regulations-and/or the interim guidance set forth in Notice 2005- 14, e supra.

See id.e 3 Thetfinal regulations stated that "The ,term.constructione nieansa activities, and services rela'ting tout-he _ construction or r 39 - erection of real property".

Sec. 1.199-3(m) (i) (1), Income Tax Regs.

The final regulations also stated:

Activities constituting construction are activities performed in connection with a project to erect or substantially renovate «r~eal property * * * * * * Activities constituting construction do not include tangential services such as hauling trash and debris, and delivering materials, even if the tangential services are essential for construction. However, if the taxpayer performing construction also, in connection with the construction project, provides tangential services such as delivering materials to the construction site and removing its construction debris, then the gross receipts derived from the tangential services are DPGR.

* * * Improvements to land that are not capitalizable to the land (for example, and painting are activities constituting construction only if these activities are performed in connection with other activities (whether or not by the same taxpayer) renovation of real property * that constitute the erection or substantial * * landscaping) [Sec. 1.199-3 (m) (2), Income Tax Regs.]

The final regulations further stated (as did Notice 2005-14, supra, and the proposed regulations) that "the term substantial renovation means the renovation of a major component or substantial structural part of real property that materially increases the value of the property, substantially prolongs the useful life of the property, or adapts the property to a new or different use."

Sec. 1.199-3(m) (5), Income Tax Regs.

The final regulations, like the proposed regulations, did not explicitly adopt other grounds for capitalization under section 263(a) and the regulations thereunder.

V. Expert Testimony A. Overview

Each party relies on expert testimony to support its or his view that petitioner's work is or is not the erection or substantial renovation of real property. Petitioner called two individuals to testify as experts on engineering in the context of petitioner's business. Respondent called one individual to testify as an expert on construction engineering and construction management.

The Court recognized each of the three individuals as an expert.

The Court also received into evidence each individual's written report (as supplemented, in the cases of the individuals called by petitioner).

See Rule 143(g) (stating that an expert witness shall.submit to the Court.a written report that serves as his or her direct testimony).

B. Petitioner's Experts 1. Mr. Gibson William E. Gibson (Mr. Gibson) was one of petitioner's experts. Mr. Gibson is a licensed professional engineer, and he earned a bachelor of science degree in civil engineering in 1966 and a master of business administration degree in management in 1968.

He has worked with highway and bridge construction for over 40 years, he has worked with structural rehabilitation for over 20 years, and he works currently for petitioner as its chief executive officer." Mr. Gibson is an active member of many associations/societies of engineers, and he or petitioner has received numerous awards for his or its work in the field of construction.

He has advised Federal and State highway .

departments on the construction of bridges-and of other infrastructure.

Mr. Gibson is familiar with the specific work that' petitioner performed on each of its projects.

~ He reinforced that familiarity by examining petitioner's documents relating to the projects and by visiting a substantial number of the jobsites.

He classified the projects into the following groups:

(1) Those projects which extended the useful life of real property by more than 3 years; (2) those projects which increased the value of real property by more than 5 percent of the component being worked upon; (3) those projects that adapted the property or component to a new or different use; and (4) those projects that were part of new construction.

He characterized the remaining projects which did not fall into one of these four categories as routine maintenance or repairs.

Mr. Gibson concluded from his analysis that petitioner's work on over 95 percent of the disputed projects was substantial renovation within the meaning of the final regulations and their "Mr. Gibson also has a significant financial interest in petitioner.

- 42.- predecessors. His report, as supplemented, supported his conclusion with vast amounts of data and with many diagrams, charts, and pictures depicting the specific construction work petitioner-performed. His report, as supplemented, further supported his conclusion with detailed bid sheets for the projects and with articles and treatises relating to pavement preservation, the extension of the useful life of roads and bridges, the improvement of the condition of bridges, and bridge management.

2. Mr. Smith Douglas L. Smith (Mr. Smith) was petitioner's other expert.

Mr. Smith is a licensed professional engineer, and he earned a bachelor of science degree in civil engineering in 1983 and a master of science degree in civil engineering in 1985.

He has worked with building or infrastructure construction for over 18 years, and he is an active member of various societies of engineers.

He currently works for a consulting, engineering, architectural, and material science firm that is unrelated to petitioner.

He and the firm specialize in investigating and repairing infrastructure that fails to meet performance expectations because of deterioration, collapse,, or the like.

The firm's main clients are State highway departments and the Federal Government.

Mr. Smith reviewed all of the disputed projects, including 24 in depth (which represented most of petitioner's gross.

receipts for the subject year), and he visited 11 of the job sites.

He scrutinized the projects'and bid sheets, and he spoke to persons who worked on the projects.

He concluded that petitioner's work on the disputed projects often was required by deterioration caused by the owner's failure to properly maintain the real property and that rehabilitation of the real property, as opposed to repair, was essential to the survival of the real property; He concluded that the bridge joints that petitioner rehabilitated had deteriorated before petitioner's work,. that -the deteriorated joints were harming other parts of the bridges, and that petitioner had to tailor its work to protect the structure of the bridges prospectively.

He concluded that some of petitioner's work, e.g.', replacement of bearing pads, was necessitated by design defects in the originally installed parts and was not routine maintenance.

He concluded that petitioner's work on pavement in job No. 02-861 (and in another job not in - dispute) substantially prolonged the useful life of the pavement and increased its value.

C. Respondent's Expert Respondent's expert was Jeff Ronspies (Mr. Ronspies). Mr.

Ronspies received a bachelor of science degree in civil engineering in 1995 and a juris doctorate in 2006.

He worked as | an-engineer from -1995"through 2004,*eandshe-worked as an attorney for a year and'a,half during 2006 andr2007.

FrodrAuguàt 20Ó7 to date, he has worked eas,a gen'eral engineer for the-Internals Revenue -Service, primarily "Gather[ï'ng] 'facts -related to fixed asset and intangible asset audits a[and] Draft [ing] -reports".used int administrative appeal of,audits, -and rebuttals to:taxpayer - protests of, proposed tax adjustments." ··Mr.; Ronspies is not a licensed engineer, he is ~not a current member of any engineering; society and he has never published a paper on engineering.e-Nor has.M⁶. Ronspies ever worked as an engineer on-a construc,tion - project involving b idges, roads, or other infrastructure,. other than in his role as an overseer of a firm's basic- painting operations.

'Mr. Ronspies'reviewed the bid calculations and the descriptions of all of petitioner's ,projects, and he -visited 10 of the tjob sites (all within -the Dallas/Fort Worth metropolitan a-rea).

t He concluded that 29 of petitioner's 13,6 projects - qualified as substantial renovation of real property within the meaningrof -the final regulations, and: these 29 projects became :

(and are) the subject of respondent's concession. Mr. Ronspies concluded that the remaining projects (i.e., the sdisputed .

projects splus the projects petitioner conceded) were eithér repair or maintenance or "accounting.anomalies".

- The "accounting anoma·lies", Mr. aRonspies stated;- were ,proj.ects with no receipts, or job costs for the subject year. Mr. Ronspies explained that he characterized projects as repair or maintenance because petitioner worked on only part of a structure, leaving the rest of the structure to deteriorate at the same rate as before. Mr.

Ronspies opined that the.useful life of a structure as a whole does not change if work is performed on only part of the structure.

D. General Rules Applicable to-Expert Testimony : Expert testimony is admissible where it assists the Court to understand the evidence or.to determine a fact in issue.

See Fed. R. Evid. 702; see also ASAT, Inc. v. Commissioner; 108 T.C.

147, 168 (1997).

The testimony of an expert does-not assist the Court when the testimony merely expresses a legal conclusion.

See Alumax, Inc. v. Commissioner, 109 T.C. 133, 171 (1997), affd.

165 F.3d 822 (11th Cir.-1999). Determining whether expert testimony is helpful to the Court is a matter within the Court's sound discretion.

See Laureys v. Commissioner, 92 T.C. 101, 127 (1989).

We have broad discretion to evaluate the cogency of an expert's analysis.

Sometimes, an.expert will help us decide a case.

See, e.g., Trans City Life Ins. Co. v. Commissioner, 106 T.C. 274, 302 (1996). Other times, he or she will not.

See, e.g., Estate of Scanlan v. Commissioner,,T.C. Memo. 1996-331, affd. without published opinion 116 F.3d 1476 (5th Cir. 1997).

- 46-- We weighran ~expert'setestimony in theslight of his"or her qualifications .and-with, duerregardator all - other credible evîdence in the record'.

. We may embrace or reject an expert's opinion'in toto, or wesmay pick and choose the 'portions of the opinion we:e choosexto adopt.

See Helverin(‡ v. Natl·.2Grocefi Co.

304 U.S.

282, 294-295 (1938);; Silverman VD.Commissioner,- 538 F.2d 927; 933 (2d Cir. 1976), affg. T.C. Memo. 1974-285; IT&S of Iowa, Inc:- v• Commissioner, 97 T.C. 496; 508 (1991) ; Parker-v. Commissioner, 86 T . C . 547, 562 ,(198 6 ) .

We - are not bound by an expert ' s . opinion and wiùì.reject. an exper.tis opinion .to the extent that"it is .

contrary to thei judgment we form on the basis of our understanding of the. record as a whole.

See Orth .v.

Commissioner, 813 -F..2d 837, 842 (7th Cir. 1987) , affg. Lio v.

Commiséioner, .85 "T.C. 56 (1985) ; Silverman v. Commissioner, supra at 933; IT&S of Iowa, Inc. v. Commissioner, supra at 508; Chiu;v.

Commissioner, 84 'T..C. 722, 734 (1985) .

VI.

,Standards "of Substantial Renovation A. Applicable Guidance Section 199 (c) (4) (A) (ii) states that DPGR is derived _from the "aonstruction 'of real property .performed in the United States",--but tsectiorì,199 does not define the word "construction".

Petitioner "relies in part upoñ the,final regulations to aésert that -its -work on. the-disputed projects quali_fies as construction because -those projects.involvedrerecting or substantially a i renovating real property.

« Petitioner also relies upon the final regulations to assert that some of its work substantially renovated real property because petitioner renovated a major component or substantial structural part of real property and that workematerially increased the value of the property, substantially prolonged the useful life of the property, or adapted the property to a new or different use.

By their terms, the final regulations are not necessarily applicable to this case because the subject year began before June 1, 2006.

The final regulations, however, allow a taxpayer such as petitioner to rely upon those regulations for taxable years beginning before May 18, 2006.

See sec. 1.199-8(i) (1), Income Tax Regs. Petitioner relies on portions of the final regulations to support its position. Petitioner's reliance on portions of the final regulations means those regulations are applicable to this case in their entirety.

See id. Petitioner's reliance on portions of the final regulations also means that the other above-discussed guidance from the Secretary and from the Commissioner is not directly applicable to this case.

B. Overview We proceed to decide the meaning of the phrases "materially increases the value of the property", "substantially prolongs the useful life of the property", and "adapts the property to a new or different use", as used in section 1.199-3 (m) (5), Income Tax Regs.

These phrases had their genesis in the capitalization rules set forth in section 263(a) and the regulations thereunder.

See Notice 2005-14, sec. 3.04(11) (d); see also sec. 1.263(a)- 1(b), Income Tax Regs.

The increased value, prolonged useful life, and adapted use standards contained in those phrases are measured by reference to the "real property" (here, primari-ly infrastructure), inclusive of all of its components and parts.

See sec. 1.199-3(m) (3) and (4), Income Tax Regs.,9 see also sec.

1.199-3 (m) (5), Income Tax Regs.

(using the words "the property" in reference to the words "real property").

"Sec. 1.199-3(m), Income Tax Regs"., defines the terms "real property" and "infrastructure" as follows:

(3) Definition of real property.--The term real property means buildings (including items that are inherently structural components of such buildings), permanent structures (as defined in § 1.263A-8(c) (3)) other than machinery (as defined in § 1.263A-8(c) (4)) (including items that are structural components of such inherently permanent structures), land improvements, oil and gas wells, and infrastructure (as defined in paragraph (m) (4) of this section). (m) (3), structural components of buildings and inherently permanent structures include property such as walls, partitions, doors, wiring, plumbing, central air conditioning and heating systems, pipes and ducts, elevators and escalators, and other similar property.

* For purposes of this paragraph inherently permanent * * (4) Definition of infrastructure.--The term infrastructure includes roads, power lines, water systems, railroad spurs, communications facilities, sewers, sidewalks, cable, and wiring. The term also includes inherently permanent oil and gas platforms.

The words "real property", in turne are best understood to refer to each freestanding item of real-property that operates and performs a discrete function in and of ,itself. Cf. Smith v.

Commissioner,.300 F.3d 1023, -1030 (9th Cir. 2002) (holding that aluminum reduction -cells were sufficiently freestanding to constitute units of property separate and apart from the interconnected cell lines in aluminum smelting facility, for purposes of characterizing the expense of replacing the cell linings as a repair), affg. Vanalco, Inc. v. Commissioner, T.C.

Memo. 1999-265; Ingram Indus., Inc. v. Commissioner, T.C. Memo.

2000-323-(holding that tugboat engines were not treated separately from tugboats in determining whether engine repair , costs were capital expenditures); sec. 1.263A-10(b) (1), Income Tax Regs.

(stating that a unit of real property includes any" components of real-property owned by the taxpayer that are functionally interdependent):

Thus, the relevant property that we analyze to measure whether a standard of substantial renovation is met is generálly each building-, bridge, or other permanent structure on which petitioner worked.

As the expert testimony in this case shows, each of the bridges'and the other real property at issue normally is constructed with a number of major interrelated components any on'e of which is critical to the property's overall functionality, and the separate components of the property'generally do not perform a discrete function in the - 50 -- setting- of othe property as a whole thattwould aallow the component to operate and be used.by fitselft.

To théicontrary, the placing - in service of one compõneñt 3(i.e.+,- the readiness and avai'l'ability off -that- component for .iter specif ic use).

is fsgenerálly:dependent -on the placing in serviceadf the otherecomponentsrof the bridgetor a the othere real property. n M.

C. Repairs s « · .

.

e The capitalization rules of sectiont 263 (a) and the regu ations thereunder. do not treat an expense to repair property as ra, öapital expenditure Such an expense is not a capit al e expenditure because¿it fails to increase the avalue or prolong the useful life "of the property (or adapt the proþerty: to a different or new use) .

See' Plainf ield-Union Water - Co . v. - Commissioner,

Instead; the · rep,air, gènerally keeps .

the property ïn-its ordinarily efficient- operating. condition over the -useful life for .which it was acquired.

See Ill. -Merchs.

°In Plainfield-Uniõh Wa-ter Co. v. Commissioner, 39, T.C.

the taxpayer claiméd deductions for the cleaning 333, 338 (1962) , and lining of .cement pipe which restored the original water- carrying' aap'acity of were repairs because the taxpayer ,continued to use the property in 'its riormal coürse of business 'and the useful life "of main was not enlianced.

increased, .nor was it,s strength or capacity 'The Court noted thét a repair returns property to the pipes. The'Court held thát the'expenses the water Id.'

he state it .was before the condition necessi,tating the expenditùré' afose and does not maké the prop~erty more valuablé, more useful, or longer lived. capital èxpeifditurd únder sec . 26;3 (a) generälly results in a longer lasting.increas,e in the longevity, utility, or worth of the proÿerty. Commissioner, 108 T.C. 265, 279-28g (199"/) .

Id.; see also Norweåt Corp. & Subá.~~v.

Id. . The Court noted that a Trust Co. v. Commissioner, 4 B.T.A-. 103, 106 (1926); see also sec. 1.162-4, Income Tax Regs.

(stating that. "incidental repairs" do not "materially add to the value of the property" or "appreciably prolong its 1-ife, but keep it in an ordinarily efficient operating condition" and that "Repairs in the nature.of replacements, to the extent that they arrest deterioration and appreciably prolong the life of the property, shall * * * be capitalized"). Whether an expense is a repair is a factual determination that turns on a finding that the work did or did not prolong the life of the property, increase its value, or make it adaptable to a ditfferent use.

See R.R. Hensler, Inc. v.

Commissioner, 73 T.C. 168, 178-182 (1979).

Sometimes, an expense that would otherwise be characterized as a repair may be characterized as a capital expenditure if the expense is part of the property's rehabilitation, modernization, and improvement.

See United States v. Wehrli, 400 F.2d 686, 689-690 (10th Cir. 1968); Jones v. Commissioner, 242 F.2d 616 (5th Cir. 1957), affg. 24 T.C. 563 (1955).

Such may be so even if the property was not completely out of service or in total disrepair.

See Norwest Corp. & Subs. v. Commissioner," 108 T.C.

265, 279-280 (1997) (holding that the costs of removing asbestos-containing materials must be capitalized because they were part of a general plan of rehabilitation and renovation that improved the building); see also Bank of Houston v. Commissioner, T.C. Memo. 1960-110.

In addition, the Secretary has proposed a , regulation under which an expense is a capital expenditure, rather than a repair, where the property has deteriorated to a state of disrepair and is no longer functional for its intended use and the expense returns the property to its former ordinarily efficient operating condition.

See sec. 1.263(a)-3(e) (2) (iv), Proposed Income Tax Regs., 73 Fed. Reg. 12859 (Mar. 10, 2008).

D. Substantial Renovation Standards 1. Materially Increases the Value A taxpayer's receipts may be DPGR if the receipts are attributable to renovations that materially increase the value of real property.

See sec. 1.199-3 (m) (5), Income Tax Regs.

Respondent asserts that a material increase in the value of real property in the context of public works projects requires that the functional value of the property increase on account of the project.

We agree.

See Plainfield-Union Water Co. v.

Commissioner, supra at 338.

Each of petitioner's projects may have materially increased the value of the underlying real property only to the extent that the. project led to a more permanent increment in the longevity, utility, or worth of the property.

Such a permanent increment may have occurred, for example, if the project rehabilitated a critical component of the property, thus making the rehabilitation tantamount to replacing the property as a whole.

An increase in value following a casualty is measured by comparing the value of the real property after the project with the value of the real property before the casualty.

See R.R.

Hensler, Inc. v..Commissioner, supra at 180-182.

An increase in value in other cases is measured by comparing the value of the real property after the project with the value of the real property before the project.

See Plainfield-Union Water Co. v.

Commissioner, supra at 337.

In all cases, any increase in value must be "material" to qualify the receipts as DPGR.

2. Substantially Prolongs the Useful Life A project may-substantially prolong the useful life of property if the project rehabilitates a critical and functional component of the property and.gives the property a new life expectancy.

See Smith v. Commissioner, 300 F.3d 1.023 (9th Cir.

2002).

The replacement of a component that is so integral to the overall functioning of property effectively confers a new lifespan on the property equivalent to the life of the component.

Id. at.1033.

The useful life of property may be substantially prolonged where the useful life of the property as a whole was increased or the replacement of a component effectively increased the useful life of the property.

An increase in useful life following a casualty is measured by comparing the useful life of the real property after the project with the remaining useful life of the real property before the casualty.

See R.R. Hensler, Inc. v. Commissioner, supra at 180-182.

An increase in useful life in other cases is measured by comparing the useful life of the real property after the project with the remaining useful life of the'real property before the project.

See Plainfield-Union Water Co. v.

Commissioner, 39 T.C. at 337; Ill. Merahs. Trust Co. v.

Commissioner, .4 B.T.A. at 106.

In all cases, any prolonging of useful lifem must be "substantial" to qualify the receipts as

DPGR.

3., Adapts the Property to a New or Different Use Property is adapted to a new or different use if the use of the property after the project is not-consistent with the taxpayer's intended use of the property before the project.

As the parties acknowledge, and we agree, such an adaption often corresponds to a material increase in value or to a substantial prolonging of useful life.

If a project qualifies as a substantial renovation under either one of the other two standards, it is not necessary to determine whether the property also is adapted for a new or different use.

Job No. 05-1011 is the only project that petitioner characterized as adapting property to a new or different use without substantially prolonging the useful life of the property or materially increasing its value.

There, petitioner was paid approximately $30,000 to modify a handrail (and to remove and to replace concrete) to comply with the ADA. Petitioner concluded that this work adapted the property to a,new or different use.

We agree. Petitioner's modification of the handrail allowed access to the property by those persons to whom the ADA applied, and the handrail could not have been so used without the modifications.

We sustain petitioner's conclusion that this project qualified under section 1-99 without further specific * discussion of this project.

VII. Characterization of Remaining Projects A. Overview

We now consider whether petitioner's work on the remaining disputed projects was the erection or substantial renovation of real property.

We do so on a project by project basis. - We are aided by the testimony of Messrs". Gibson and Smith, both of whom are licensed, well-credentialéd, and knowledgeable longtime prominent professional engineers in the fields of highway and bridge construction and structural rehabilitation.

We heard them and perceived them to be more knowledgeable and reliable than Mr.

Ronspies on the matter at hand, and we find the testimony of Messrs. Gibson and Smith to be sincere and most persuasive."

"Of course, we recognize that the interests of petitioner and Mr. Gibson overlap in that he is petitioner's chief executive officer and has a significant financial We have taken those considerations into account of his testimony and have concluded that his testimony was sincere and credible.

interest in this matter.

in our evaluation Mr. Ronspies, on thee other hand, ' lacks sany practical experiences in roads and . bridge a construc t ion., - and we dec line' to . ac capt his testimony ont that subjecteto the extent thatrit, conflicts with the testimony of Messrs.

,Gibson and Smith.

-We.note .as to Mr.

Ronspies 3 that he ult imately agreed - that .7 ofepet it ioner ' s 10 m bridge .projects that: he visited. qualified under 'section7199^ and - acknowledged thatchis-opinion as to the qualification of petitioner's remainirig projects might haveschanged hadshe:visited them as well.

Petitioner asserts .that its work on each disputed' project erected real property.or-substantially renovated real property.

We -agree.: Petitioner terected real.property in job Nos. 04-937 (a blast fence) , 04-965 (additional lanes and driveways) , 04-971 (a ramp) 05-1002 (a- traffic rail and .a bridge deck), 05-1043 ; (additional turn lanes), and 06-1069- (a retaining wall) .9 In, the other projects, petitioner:

. (1) Renovated major components or substantial structural parts of infrastructu,re; (2) addressed design errors or construction flaws by restòring infrastructure - to perfqrm efficient-ly as intended; (3) allowed infrastructure to be put back in service after damage or severe deterioration; -(4)a returned a major cornponent from a deteriorated state, either from age, exposure, or casualty loss, to its former operational Mr. Ronspies ,now agrees that job No. 04-937 -qualifies under sec. 199.

efficiency; (5) abated environmental hazards, e.g., by remóving or encapsulating lead paint; and/or (6) brought infrastructure into compliance with laws such as the ADA. Petitioner'.s work on these other projects effected the renovation of a major component or substantial structural part of real property, and we conclude from our description of each project (as set-forth in our findings of fact and in appendixes A, B, and C) and our consideration of the expert testimony of Messrs. Gibson and Smith that the work materially increased-the value of the real property and/or substantially prolonged the useful life of the real property.

B. Conclusions as to Specific Projects 1. Casualty Projects - The 18 casualty projects in dispute involved petitioner's work on damaged infrastructure (mainly bridges) that either were completely inoperativ'e "(e.g., not.open to traffic) or not fully operative. Petitioner restored the integrity of the infrastructure through substantial structural rehabilitation that allowed the infrastructure to function as intended for many years thereafter. Much of the infrastructure was of little to-no use without petitioner's:work. Petitioner's final contract amount for each project ranged from $11,500 to $640,994.

We conclude from the record at hand that the functionality and dollar values of the real property underlying most of the casualty projects increased substantially on account of petitioner's work.

We also conclude that for those projects, and for each of the other casualty projects for which petitioner does not assert a material increase in value (specifically, job Nos.

05-1023, 05-999, 06-1074, 06-1078, 06-1084, 06-1087, and 06-1091), that petitioner's work substantially prolonged the useful life of the infrastructure.

2.

New Construction-and Rehabilitation Projects The remaining 80 projects in dispute (i.e., the 86 remaining projects in dispute less the 6 projects that erected real property) involved work that petitioner performed primarily as a subcontractor, which petitioner ,calls "New Construction", and work that petitioner performed as a contractor rehabilitating dilapidated real property, which petitioner calls "Rehabilitation Projects". While petitioner places these projects into two categories primarily on the basis of its role as a contractor or a subcontractor,.we do not.do similarly.

Each project ultimately involves the rehabilitation of dilapidated real property, and.we do not think the characterization of petitioner's work is any different just because petitioner performed its work as a contractor versus a subcontractor.

To be sure, petitioner's work on the "new projects" was just as new as its work on the "rehabilitation projects".

Petitioner concluded that its work on each of these projects substantially prolonged the useful life of the underlying real property.

We agree." That real property (typically bridges) had deteriorated to a state of disrepair on account of a lack of proper maintenance, and the real property was no longer functioning as intended. Petitioner significantly improved and solidified the integrity of the dilapidated bridges and the other real property through petitioner's renovation and redesign of major structural components thereof (e.g., beams and joints), and petitioner performed other -services such as corrosion protection, pavement rehabilitation, and expansive joint rehabilitation.

Petitioner's work enhanced the operating condition of the real property for many years into the future..Mr. Gibson concluded · that each of these projects increased the useful life of the real property by more than 3 years, and we find that conclusion persuasive taking into account the specialized work petitioner did on each project and the final contract amounts (ranging from $3,990 to $2,748,957) for these projects."

"Petitioner also concluded that projects materially increased the value of property. agreement with petitioner's primary conclusion.

We need not consider this conclusion given our its work on 16 of the underlying real these "As to one of the projects in issue, job No. 03-921, petitioner's sole work was "patching" the deck of While this work in and of maintenance, petitioner performed this work as a subcontractor on a larger project that rehabilitated the bridge. Given the itself would appear to be routine the bridge.

(continued...)

a C., :Additional Rationalet for AlltPio†ects n - .60 -- . Respondent rargues that petitioner';s work :on -the càsualt y e proj ects I"merely-brought :the -bridges back to .their, normal operating condition" and 'that .petiti'oner' s work on the new construction-and rehabilitation" projects was routine maintenance.

We ndisagree . Petitione'r' s. work on many of, thesproj ec ts was .a e 2 critical and ess_ential: to the we'll-beingsand future.operation of the s truc ture s underlyinge the proj ect s ... .Pe t it ioner , f or -example , removed> and replaced athe -joints on abridges because the old joints were -failing from lack sof proper maintenance and threatening the.

structure of each og the bridges as a whole. Similarly, petitioner replaced damaged or deteriorated beams -with new beams to give the bridge its requisite support.

Likewise, -petitioner rehabilitated a b-eam using: specialized materials and procedures such as epoxy, heat, and mechanical force.

Mr. Gibson explained that petitioner performed six types of specialized work on the disputed projects and that this work either (or both) substantially prolonged the useful life. of the a structure underlying the project or materially. increased, its value. Mr.4Gibson listed thiá- work as córroâion protection, concrete structural enovation, steel structural renovation .

( .a continued) additional facts that pe.titioner's final contract amount for this job was $105, 646 and that the job was paid for with Federalz a funds, we conclude that.petitioner's work was part of a a the bri<‡ge and classify it as such. substantial renovation of pavement rehabi-litation, implementation of structure redesign, and expansion joint rehabilitation.

He described each of these types of work as follows:

The from-rust, a second Corrosion protection:

Involves the removal of all rust- and corrosion onethe existing structural steel components and then the application of a three ecoat corrosion - protection system to the structure. three coat process involves a base layer of zinc to protect the steel epoxy layer to protect the base layer, and a final UV layer to protect the epoxy layer. The deteriorated steel beam ends must be removed and replaced before the cleaning and painting takes place. portion of deck of generally allows the load carrying capacity of a bridge to be increased to its original limits and extends the useful life of structure.

the beam beneath a joint in the , (A beam end is the This protection the bridge.)

the Concrete structural renovation:

Involves a structural renovation of a concrete bridge. Without bridge does not designed (e.g., traffic).

function as originally some lanes must be closed to the renovation, the Steel structural renovation:

Involves a the renovation, structural renovation of steel on a bridge. the bridge does not Without function as originally designed (e.g., some lanes must be closed to traffic). This.work life of extends the useful the bridge.

Pavement rehabilitation: joint and spall rehabilitation of pavement of a bridge. the useful life of years.

This process extends the bridge by 10 to 15 Involves the the Implementation of structure redesign:

Involves three different types.of projects. The first type involves the strengthening of - 6 2 - s t ruc turals s t ee l, . the replacement lo f , spal-le'd a concrete, the installation of new bearing c p'ads, an'd-the painting of theobridges (The - flex, and vibrat e without a bearings on a bridge allow the bridge to expand, contract, transfer-of the resulting,stress into adj acent :suppor;t elements . ); eThes second type involves othe r replacement of.' an ~cild abridge : by. -a:new, longer,- and wider bridge. eThis is a e done by -removing -the old bridge deck, adding shear -connectors to the steel stringers (too increase the l'oad carrying -capacity) p - cleaning and painting the bridge, .moving the new bridge 'into position, and pouring concrete to serve as ther deck of (A stringer is as steel 'beam spannitig lengthwise in a' bridge.) einvo'lvesaraising sa. bridge to increase the clearance betw.een the bottom of the bridge and the roadway below.

The thirditype .

the bridge.

Expansion joint: rehabilitation ¯ This involve s a rehab~ilitat ing de teriorated expansion joints to increase the useful life of the bridge.

'Mr. Ronspieš opined that petitioner's swork was primarily routine maintenance, and he identified the following types of work performed by .petitioner as routine maintenance:

(1) Joint replacement (because, he stated, joints do not -have the expected life of the concrete or structural steel bridge -spans, and it is recommended that joints be greplaced regularly) ;.

(2) e rehabilitation or replacement of bridge bearings (because, he stated, this work i typically performed as part of ,a scheduled maintenance pi-ogram) ; (3) patching.of concrete -or asphalt by removing deteriorated concrete and replacing it with new material (because, he stated, therpat ch material does:;not increase ,the life of the surrounding material); (4) painting (because, he stated, this work is typically performed as part of a scheduled maintenance program); and (5) installing stiffeners and other structural steel (because, he stated, this work does not increase the capacity of the bridge).

:We'disagree that these categories of work, as performed by petitioner, are routine maintenance.

Mr. Gibson visited many of the job sites of the disputed projects, and he was the individual who was most familiar:.with the specific work that petitioner performed.

He testified persuasively as to the type, extent, and significance of the work that petitioner performed on each project.

He testified persuasively that Mr. Ronspies failed to understand ther type, extent, and significance of the work that petitioner performed on the projects.

In addition, Mr. Gibson explained that the bridges on which petitioner worked were dilapidated because they had not been properly maintained and that petitioner could not simply repair the bridges but had- to ~rehabilitate the bridges significantly.

He also explained that petitioner's addition of a protective "For example, Mr., Ronspies viewed job No. 05-1028 as a simple paint job, and he viewed job No. 06-1089 as isolated asphalt repairs and some new expansion joints. Mr. Ronspies' view was blurred as to both jobs. paid petitioner approximately $266,000 to remove a perceived hazardous material, the TxDOT apply a protective paint coating., paid petitioner approximately- $65,000 to rehabilitate the joint and spall of pavement.

to blast a bridge to remove corrosion, and to In the former job, In the latten job, the ODOT coating to a bridge is significantly different and more sophisticated and extensive than the outdated basic type of painting job with which Mr. Ronspies was familiar." Bridges, Mr. Gibson stated, used to be painted with materials that have now been established to be hazardous to the environment and to human health, and the trend in the last decade or two has been to apply a protective coating to a bridge instead of simply painting it.

He explained that the protective coating is designed to last approximately 20 or more years without any additional maintenance and that failing to coat can cause beams to rust, thus resulting in the bridge not being usable anymore. His testimony was echoed in many regards by Mr. Smith's testimony.

As respondent would have it, the rehabilitation of one or more components of real property would be a repair unless all of the property's major components were replaced.

Such is so, Mr.

Ronspies stated, even if the new component was (or components were) superior to the old component(s).

We disagree with this view. First, as discussed supra pp. 50-52, we do not understand such a principle to apply to repairs in general.

Second, petitioner concludes (and we agree) that petitioner's renovation of major components often extended the useful life of the "Mr. Ronspies worked for a limited time as an overseer of a construction company's painting operations.. Those operations were the basic type of painting that Mr. Gibson opined was routine maintenance and was not Mr. Gibson stated was a substantial renovation.

the contemporary painting that structures as a whole on account of the intricate interaction of all of the components. Petitioner's work on a part of a structure resulted in a more permanent increment in the longevity,. utility, and worth of the structure as a whole which, in turn, increased the useful life of the overall structure.

See Smith v. Commissioner, 300 F.3d'at 1033-1034. Third, Messrs; Gibson and Smith opined persuasively that a bridge usually does not deteriorate evenly throughout its-life but that certain sections of the bridge deteriorate faster than others on account of their location on the bridge and their exposure to the weather, among other reasons.

Fourth, Mr. Smith explained that a repair of infrastructure or other similar real property is typically an expense that the designer anticipated as part of the property's regularly scheduled maintenance program and that such maintenance was not done here'.

He stated that the lack of normal or routine maintenance and the resulting deterioration of a single component of infrastructure may make the overall infrastructure unusable because it is unsafe.

He stated that work such as petitioner.'s which is aimed specifically at components of infrastructure that -have been allowed to deteriorate to a state of disrepair therefore significantly prolongs the useful life of the infrastructure as a whole.

Respondent argues that petitioner cannot prevail because it has not established with any specificity that its work materially I 66 - increased "the value or substantially prolonged, the:useful life of the disputed property.

-We disagree Although-'the redord may not allow us to pinpoint «the ekact increasesain-väluelor usefulalife on account of petitioner's work, suffice it toisayathat he record -supports petitioner's conclúsionethat thesapplicable standards were:met for reach disputed project.n 'The-bid.sheetà show the scope of petitioner's work and the dollarramountsrof its projects, and petitioner'is:useeof ;the-3-year and:5-percent benchmarks is areasonable -in the rsetting at hand to eätablish that peti idner's work -substanttially, increased thes value,'cap.acity, efficiency,, strenggh, and/or quality of each of the items of real property underlying the idisputed projects.

All the same, Mr. Gibson, on behalf of petitioner, analyhed each project and-ascertained whether the work on teach project a - materially, increased the value of property -or substantially.

prolonged its useful-life.

(We have included in'our.description of each project petitioner's conclusion.as to whether the project materially increased the value.of property and/or substantially prolonged its useful life.)

He explained that maintenance projects are anticipated by the designer, and included ins aan regularly .scheduled maintenance, plan fand considered when determining the:life.of the structure.

He ,explained that regularly.scheduled ymaintenance was lacking-as.·to many>of- the "The same is true as to a material increase in us'eful life.

structures underlying the disputed projects.

He explained that the value of a bridge declines from $400,000 to zero over 40 years if it has little or no maintenance, but with $200,000 of rehabilitation work after 30 years, the value increases from $100,000 to $300,000 and the life of the bridge is extended from 40 years to 60 years.

He concluded that petitioner's major rehabilitation work on a bridge increased each bridge's value by the cost of the rehabilitation work and prolonged the bridge's useful life by 20 years.

We accept that rationale and understand it to apply with equal strength to petitioner's nonbridge properties as well.

VIII. Conclusion

We conclude that petitioner's projects qualify under section 199 to the extent stated herein." All arguments for a different conclusion have been considered, and those arguments not discussed herein have been rejected as without merit.

To take into account the parties' concessions, Decision will be entered under Rule 155.

"Our conclusion is consistent with the legislative intent for sec. 199 (e.g., petitioner hired additional employees in years after the subject years) and with 23 U.S.C. sec. 116 (2006) (the Secretary of Transportation presumably concluded that petitioner's projects subject means of extending the useful to that title were a cost-effective lives of Federal-aid highways).

APPENDIX A

Casualty Projects Job No. General Type of Work 05-1021 Bridge rehabilitation 05-1023 Highway sign shoring 05-1025 Bridge rehabilitation 05-1029 BEidge rehabilitation 05-1045 Bridge rehabilitation 05-1054 Bridge rehabilitation 05-1056 Bridge rehabilitation 05-1059 Bridge rehabilitation 05-1060 Highway repair 05-1064 Bridge rehabilitation 05-1065 Bridge rehabilitation Bridge rehabilitation 05-999 06-1072 Bridge rehabilitation 06 1073 Bridge rehabilitation 06-1074 Bridge rehabilitation 06-1078 Bridge rehabilitation 06-1084 Bridge rehabilitation 06-1087 Bridge rehabilitation 06-1091 Bridge rehabilitation Final Contract Revenue Earned Amount in Subject Year RM UL V $640,994 22,114 77,240 28,200 395,337 49,000 31,935 43,200 398,234 141,785 73,000 79,668 40,853 25,884 24,901 24,900 39,830 112,000 11,500 # $347,837 17,114 77,240 28,200 395,337 49,000 31,935 43,200 398,234 140,850 73,000 6,000 40,053 25,784 24,910 24,025 39,830 1,950 11,500 1,775,999 ' - - - - - - - - - - - - - - - - - - - * * * * * * * * - * * * * * * * * * * * - * * * * * * - * * - * * - - - - - DU - - - - - - - - - - - - - - - - - - - #: Project paid for with Federal funds RM: Repair or maintenance UL: Substantially prolonged useful.life of real property V: Materially increased value of real property DU: Adapted real property to different or new use *: Category or categories to which petitioner assigned project"

APPENDIX B '

New Construction Projects Job No. General Type of Work Final Contract . Amount Revenue Earned in Subject Year RM UL V DU Bridge work Bridge work Bridge work Bridge work Bridge work Bridge work Bridge work Highway work Bridge work Building work 03-906 03-921 03-926 04-937 Built blast fence 04-954 04-955 04-956 04-959 04-965 04-967 04-968 04-971 Built airport ramp Bridge work 04-981 04-982 Bridge work 05-1000 Bridge work 05-1002 Bridge work 05-1003 Bridge work 05-1011 Modified handrail 05-1018 Bridge work 05-1019 Bridge work - 05-1028 Bridge work 05-1032 Bridge work 05-1036 Bridge 'work 05-1037 Bridge work 05-1038 Bridge work 05-1043 Highway work 05-1047 Bridge work 05-1052 Airport terminal work 05-1057 Bridge work Bridge work 05-995 06-1069 Built retaining wall 06-1071 Bridge work 06-1085 Culvert work 06-1089 Bridge work 06-1093 Bridge work Misc $85,014 # 105,646 # 62,050 # 2,323,112 # 77,313 # 73,868 # 178,661 # 504,241 # 357,883 # 153,863 # 112,536 406,322 250,166 # 483,936 # 41,456 # 140,094 1,391,452 29,985 41,992 # 264,204 266,800 # 11,328 # 422,372 # 178,360 # 169,012 # 747,602 # 122,000 2,261,192 # 57,100 # 86,606 154,273 64,530 # 45,823 65,592 # 908,143 # 329,273 $20,000 (2,405) 159,340 (5,480) (1,484) 66,072 442,948 41,456 1,034,097 27,485 37,992 264,204 6,000 11,328 35,290 110,825 110,700 25,280 122,000 1,944,968 86,606 154,273 11,000 45,823 58,425 2,000 329,273 5,138,617 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - * - - - * * * - * * * * * * * * * * * * * - - * * - * * * - * * * * * * - * * - - - - * - - - - * - - * - - - * - - - - * * - - * - * - - * - - - - - - - - * - - - - * - - * - - - * - * - - - - - - * - * - - - - - - - - #: Project paid for with Federal funds RM: Repair or maintenance ' UL: Substantially prolonged useful life of real property V: Materially increased value of real property DU: Adapted real property to different or new use *: Category or categories to which petitioner assigned project APPENDIX * Ca Rehabilitatione Pro-jects, ; Job No.

-General Type of Work Final Contract Amount" Revenue Earned in Subject Year RM UL V DU 02 -861 Airport . pavement work. Bridge .work 03 -874 Bridge work 03-890 Bridge work 03-902 Bridge work 03-915 Bridge work 04-950 Bridge work 04-951 Bridge work 04-958 Bridge work 04-960 Bridge wofk 04-961 Bridge work 04-969 Bridge work 04-970 Bridge Nork 04-98:3 Brei dge work 0 4 - 985 04-986 Bridge work Bridge work 04-987 05-1004 Bridge work 05-1006 Pavement wor 05-1009 Trafficibarrier wall. 05-1013 Bridge work . 05-1017' Bridge work 05-1420 Bridge work 05-1022 Bridge work 05-1024 Bridge work 05-10.33 Pavement work 05-1046 Bridge work, 05-1048 Bridge work 05-1049 Bridge work 05-1050 Bridge work 05-1051 Bridge work 05-1061 Bridge work 05-1062 Bridge work 05-1063 Bridge ork 05-996 Work on Civic center 05-997. Bridge work 06-1067 Bridge work 06-1068 Bridge work 06-1070 Work on grandst'and 06-1075 Bridge work 06-1076 Bridge work 06-1079 Bridge work 06-1080 Streetscape work 06-1081 Bridge work 06-1082 Bridge work 06-1088 Bridge work 06-1090 Modifi'ed entranãeway 06-1094 Bridge work 06-1095 Highway work 06-1096 Bridge work $2, 011, 996 # 356,500 # 159, 722 # 291, 789 # 653 , 395 # 2 481, 935 # 179,000 # 620,622 # 47,870 173, 378 48,086 # 534,083 # 3,990 535, 148 # 161,819 19,981 # 145,174 # 719, 924 294, 863 18,600 174,716 724, 352 # 24,868 167, 198 116, 815 294,788 959,694 # 543, 670 # 537, 943 # 256,122 ,370,929 # 64,649 , 1,180,258 99, 901 432, 030 37,079 51,179 23,400 950,931 # 89,298 434,498 # - 2,748,957 # .

131,147 123,4222 549,490 # 24,971 1,102,617 159,375 3219 910 .

$21, 810 (1, 885) 18 , 00 0 79, 520 -0 -7-,0- 2, 260 140,659 65, 259 .- 7,713 540, 103 236, 185 18,600 174,_716 681 101 21,368 167, 198 116, 815 294,788 97,531 53, 478 327, 661 256,122 164,449 6k,649 784,069 2, 336 159, 935 37,079 23,400 163,395 89,298 3,,000 67,269 122, 892 3,000 24,971 1,000 5,030,552 .

-¯ - - o- - - n - - * * * - - - - - * - * - - - - * - * * * ** * * * * * * - * * - * * ,* * * * * s* * * * * * * * * - * * * * * - * - * - - * - * * * * * - * - * - * * -* - * - * * .- - * - * * * - * * * - * - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - !

- r - * - - * * - - - - * - - - - - - - - - - - - - - - - - - . - - - - - - - * - - - * - * - #: Project paid for with Federal funds RM: Repair or maintenance UL: Substantially prolonged useful life of real property V: Materially increased value of real property DU: Adapted real property to different or new use *: Category or categories to which petitioner assigned project -'72 -

APPENDIX D

SEC. 199 .

IN~COME ATTRIÎ3UTAB E TO DOl ES IC PRODU T ON ACTIV];TIEŠ.

(a) Allowance of Deduction.-- (1) In general.--There shall be allowed as a deduction an amount equal of the lesser of-- to 9 percent (A) the qualified production the taxpayer activities income of for the taxable year, or (B) taxable income (determined for without regard to this section) the taxable year.

(2) Phasein. ---In the case of any taxable year beginning after 2004 and before 20103 paragraph (1) shall be applied by substituting for the percentage contained therein the transition percentage determined under the following table:

For taxable years beginning in:

The transition percentage is:

2005 or 2006 2007, 2008, or 2009 (b) Deduction Limited to Wages Paid. -E (1) In general.--The amount of the deduction allowable under subsection (a) for any taxable year shall not exceed 50 percent of taxable year.

the taxpayer for the the W-2 wages of * *2 * . * * * * (c) Qualified Production Activities Income.--For purposes of this section-- (1) In general.--The term "qualified production activities income" for any taxable • year means an amount equal any) of-- to the excess (if (A) the taxpayer's domestic production gross receipts for such taxable year, over (lB) the sum of-- (i) the cost of goods sold that are allocable to such receipts, and (ii) other expenses, losses, or deductions (other than the deduction allowed under this section), which are properly allocable to such receipts.

* * * * (4) Domestic production gross receipts.-- (A) In general.--The term "domestic production gross receipts" means the gross receipts of from-- the taxpayer which are derived * * * * * * * (ii) in the case of a taxpayer engaged in the active conduct of a construction trade or business, construction of real property performed in the United States by the taxpayer in the ordinary course of such * trade or business * *

39. T .5C. 333, 338 '(1962) .