Rev. Rul. 80-151

ISSUE

Are outdoor advertising displays tangible personal property for purposes of the investment tax credit?

FACTS

The taxpayer is in the business of erecting, maintaining, and renting, but not selling, outdoor advertising displays. These sign structures vary in cost, size, materials of construction, and complexity and are located on sites that have been purchased or leased. Of the many types of advertising displays used in taxpayer's business, structure X and structure Y, discussed herein, are representative of two types of sign structures that are classified differently for investment credit purposes.

Structure X--This sign assembly consists of a single sign face nailed to a wooden support frame and attached to wooden poles 30 feet in length. The sign face, made of exterior grade plywood, is 12 by 32 feet in size and 5/16 inch in thickness. The poles are set in the ground and are secured in place with a ring of concrete. Dismantling and moving a sign structure of this type is a relatively quick and easy process. After the sign face and frame are removed, the poles are then pulled from the ground by the use of a truck mounted winch.

The taxpayer makes a practice of erecting signs of this type only after a contract, usually for a period of three years, has been entered into with an advertiser. However, in many cases, the contracts are renewed. The contracts permit the movement of the signs to new locations, in the event: (1) the view of the sign becomes obstructed, (2) a location is no longer available because, for example, a change takes place in the ownership of the leased property, or (3) the ground lease requires the taxpayer to move its signs in the event the owner of the land terminates the lease. Frequently it is necessary to remove and renovate the sign assembly after the initial contract period because of rotted, decayed, or damaged wood. The taxpayer's experience with this type of sign indicates that it normally remains in one location for a period of 5 years or less. Thus, these sign structures are designed and installed in such a manner so as to be easily moved.

Structure Y--This sign assembly has one illuminated 25 by 80 foot rectangular display panel that is attached to a welded steel frame. The frame is bolted to the top of a steel support column that is 5 feet in diameter. The overall height of the sign and its support structure is 74 feet. The steel support column is bolted to a steel reinforced concrete foundation fully embedded in the soil to a depth of 5 feet. Design specifications for this sign structure were based on an assumed maximum wind of 100 miles per hour. The sign is located on property leased for a period of one year with automatic extensions unless terminated by either party on 30-days written notice served prior to the end of any lease period.

None of these structures has ever been moved and the oldest has been in place for 18 years. Even though the location site is subject to a one year renewable lease, it is anticipated that the sign structures will remain in place for an indeterminate number of years. The advertising space is sold by the taxpayer for periods of varying duration.

LAW AND ANALYSIS

Reconsideration has been given to Rev. Rul. 68-62, 1968-1 C.B. 365, which considered whether certain outdoor advertising displays are "section 1245 property" within the meaning of section 1245 of the Internal Revenue Code.

Rev. Rul. 68-62 provides that outdoor advertising displays, commonly known as "billboards," are inherently permanent structures by their nature and use and are not, therefore, tangible personal property within the meaning of section 1.1245-3(b) of the Income Tax Regulations. That revenue ruling also states that the business of advertising a client's products and services is not one of the specified qualifying activities in section 1245(a)(3) of the Code. Therefore, the taxpayer's outdoor advertising displays were held not to be section 1245 property. The displays were held to be "real property" and therefore "section 1250 property" for purposes of determining gain or loss for dispositions of such property. Tangible personal property is defined the same for purposes of section 38 and section 1245. See section 1.1245-3(b)(1).

The United States Tax Court, in Whiteco Industries, Inc. v. Commissioner, 65 T.C. 664 (1975), acq., page 1, this Bulletin, held that the outdoor advertising displays at issue in that case were tangible personal property rather than inherently permanent structures and thus qualified for the investment tax credit. The displays were constructed entirely of wood, were leased to customers for a term, on the average, of 3 to 5 years, and were erected, in general, on property not owned by the taxpayer. In making its determination, the court applied criteria in the form of the following questions to be considered in deciding whether property (other than items in the nature of machinery) is to be classified as tangible personal property: (1) Is the property capable of being moved, and has it in fact been moved? (2) Is the property designed or constructed to remain permanently in place? (3) Are there circumstances that tend to show the expected or intended length of affixation, that is, are there circumstances that show the property may or will have to be moved? (4) How substantial a job is removal of the property, and how time-consuming is it? (5) How much damage will the property sustain upon its removal? (6) What is the manner of affixation of the property to the land?

The Internal Revenue Service will apply the criteria set forth by the tax court in Whiteco in determining whether outdoor advertising displays are tangible personal property. Outdoor advertising displays will not be categorically treated as being either tangible personal property or inherently permanent structures. Rather, the criteria set forth by the tax court in Whiteco will be applied on a case-by-case basis.

Each of the questions set forth by the court in Whiteco has been considered to determine whether sign structures X and Y should be treated as tangible personal property:

(1) The evidence indicates that structure X-type signs are capable of being moved and have in fact been moved. However, taxpayer's structure Y-type signs have never been moved and the economics of moving such signs make it impractical.

(2) Structure X-type signs are not designed or constructed to last permanently and it is anticipated that they will be removed and require substantial renovation within 5 years. Structure Y-type sign structures, on the other hand, are designed to remain in place for an indeterminate number of years. Even though the location sites for these structures are subject to renewable short-term leases, the sites have been selected so that it is unlikely that the signs will have to be moved or removed at the expiration of the lease term.

(3) As indicated above, a structure X-type sign is erected only after a contract has been entered into with an advertiser. The taxpayer's experience indicates that there can be numerous situations that would require the sign to be removed at, or prior to, the expiration of the contract. The sign may have to be moved because the owner of the leased land does not renew the lease, or the owner exercises the option to develop the land, or because there is a change in location of the road or the occurrence of some other condition that makes the position of the sign no longer desirable. For structure Y, however, a location site was selected that is expected to be available to the taxpayer for an extended period of time. The economics of constructing, erecting, and removing this type of sign structure requires that careful consideration be given to the prospect for long-term availability and viability of the site for advertising purposes.

(4) The disassembly and removal of a structure X-type sign is a relatively quick and easy process. All that is needed is a truck with a winch and some small hand tools. The removal of a structure Y-type sign, on the other hand, would be a substantial operation. Although the taxpayer has not had to remove a sign structure of this kind, it is clear that special crane and transportation equipment would be required. The taxpayer will also have to sever the steel support column into smaller sections for ease of transportation.

(5) The taxpayer has been able to move structure X signs with little or no damage to the support structure. Except in those cases in which the wood has deteriorated, only the sign faces require occasional replacement when the sign structure is moved. For a structure Y-type sign, however, the concrete foundation would be abandoned and the steel support column will have to be cut into smaller sections for ease of transportation.

(6) The poles of a structure X-type sign are placed in the ground and require little additional foundation support. Such poles can easily be removed from the ground, and as a matter of practice, they are so moved. Structure Y on the other hand has been designed to withstand 100-mile-per-hour winds and is bolted to a steel reinforced concrete foundation that is fully embedded in the soil. This structure would be extremely difficult to move.

HOLDING

1. The outdoor advertising displays described above as structure X are tangible personal property and qualify as section 38 property.

2. The outdoor advertising displays described above as structure Y are inherently permanent structures and do not qualify as section 38 property.

3. Section 1033(g)(3) of the Code permits a taxpayer to elect to treat property that constitutes an oudoor advertising display as real property for purposes of nonrecognition of gain on involuntary conversions, effective for taxable years beginning after December 31, 1970. This election is not permissible with respect to property that has been treated as tangible personal property subject to the investment credit or additional first-year depreciation.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 68-62 is revoked.