Academic journal article Journal of Accountancy

Highway Repairs Are Domestic Production Property

Academic journal article Journal of Accountancy

Highway Repairs Are Domestic Production Property

Article excerpt

The Tax Court held that a taxpayer's receipts from highway construction projects were domestic production gross receipts (DPGR) permitting the taxpayer to claim a domestic production activities deduction. The court held that the taxpayer's work substantially renovated real property, since it materially increased the property's value, substantially prolonged its useful life or adapted the property to a new use.

IRC [section] 199 permits taxpayers with DPGR to take a deduction equal to 9% (3% in 2005 and 2006 and 6% in 2007 through 2009) of the lesser of qualified production activities income or taxable income before the deduction. DPGR includes receipts from the construction of real property, defined as the erection or substantial renovation of buildings, structural components and infrastructure, in the United States. Treas. Reg. [section] 1.1993(m)(5) defines "substantial renovation" as "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."

Gibson and Associates Inc., an engineering and heavy construction company in Texas, builds or renovates infrastructure in Texas, Oklahoma, Arkansas and Kansas. For the tax year ended June 30, 2006, Gibson reported $26,053,570 of DPGR from 136 construction projects, claiming a domestic production activities deduction of $63,435. The IRS disallowed the entire deduction, claiming Gibson had no DPGR for the tax year. Gibson petitioned the Tax Court where, after concessions by both sides, nearly $12 million of the DPGR originally reported by Gibson remained in dispute.

Both parties presented expert witnesses to argue for or against the taxpayer's contention that the disputed projects substantially renovated the property William E. …

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