United States

Inherently permanent structures versus machinery clarified

IRS guidance addresses definition of construction of real property


On Sept. 16, 2016, the IRS released a technical advice memorandum (TAM 201638022) addressing the substantial renovation of real property, which qualifies as an inherently permanent structure containing structural components in the nature of machinery, for purposes of determining a taxpayer’s domestic production activities deduction (DPAD). This is important guidance for construction companies that perform work on projects involving inherently permanent structures that contain structural components in the nature of machinery.


The heavily redacted TAM is a response to the IRS Large Business and International (LB&I) division and the taxpayer’s request for technical advice on the DPAD qualification of gross receipts related to the taxpayer’s projects. The taxpayer is a construction contractor, conducting business on a regular and ongoing basis and involves various activities through all phases of construction with specific activities varying from project to project. The gross receipts at issue in the TAM are those derived from the taxpayer’s projects that relate to the substantial renovation, construction or erection of the taxpayer’s produced structures.

The modified TAM does not disclose what type of structures the taxpayer produces. However, it does note that the taxpayer does not receive income from the sale of the units but rather gross receipts are received from projects that involve installation or replacement of components of the units at the sites. The TAM addresses two types of projects that the taxpayer engages in, one involving singularly installed units affixed to real property, the other involving tandem pairs of units affixed to real property at higher elevations. Both sets of projects involve units that weigh hundreds or thousands of tons and, as such, are required to be attached to concrete foundations and supports. The units have a useful life of several decades, as long as the required maintenance is performed. Generally, the units remain affixed to the real property for the duration of their useful lives until they are abandoned in place.


Section 199 allows for a deduction for taxpayer’s that have qualified production activities income (QPAI) for a taxable year. To calculate QPAI, a taxpayer must first determine its domestic production gross receipts (DPGR). For taxpayers engaged in the active conduct of a construction trade or business, the gross receipts derived from the construction of real property performed in the United States in the ordinary course of business is considered DPGR.

The section 199 regulations define real property to include inherently permanent structures (as defined in Reg. section 1.263A-8(c)(3)) other than machinery (as defined in Reg. section 1.263A-8(c)(4)). Property is an inherently permanent structure if it is affixed to real property and ordinarily remains affixed for an indefinite period of time. Property may be affixed to real property by weight alone.


In the TAM, the IRS limits its analysis to whether the taxpayer’s units are considered real property under Reg. section 1.199-3(m)(3). Both the taxpayer and LB&I agree that if the units are real property then the taxpayer’s activities constitute construction activities, the gross receipts of which would qualify as DPGR so long as the taxpayer meets the other DPAD requirements. In order for the taxpayer’s units to be considered real property, they must be inherently permanent structures as defined by Reg. section 1.263A-8(c)(3). Further, Reg. section 1.263A-8(c)(4) provides that a structure that is essentially machinery or property in the nature of machinery is not an inherently permanent structure and is not real property. However, in the case of an inherently permanent structure that includes property in the nature of machinery as a structural component, the property in the nature of machinery is real property.  The IRS states in the TAM that inherently permanent structures and machinery are mutually exclusive categories of property and that the regulation that defines machinery was not meant to establish an additional requirement. As a result, the IRS said, if the taxpayer’s units satisfy the inherently permanent structure definition, then they are real property for purposes of the DPAD.

The IRS uses the two prong definition of inherently permanent structures to determine if the taxpayer’s units are real property. First, the structure must be affixed to real property and second, the structure must ordinarily remain affixed for an indefinite period of time. The IRS noted that this first prong, being affixed, can be satisfied on weight alone. Applying the taxpayer’s facts to the law, the IRS found that the taxpayer satisfied the first prong of the definition on weight alone, the units weighing hundreds or thousands of tons, but also because the units were attached to concrete foundations and support work through welding, bolting or other affixation.

For the second prong of the definition, that the units ordinarily remain affixed for an indefinite period of time, the IRS uses a reasonable interpretation of ‘indefinite’ as it is not expressly defined in the regulation. The IRS defines indefinite to mean the useful life of the affixed property. Using this definition, the IRS determines that the taxpayer satisfies the second prong of the inherently permanent structure definition because the units ordinarily remain affixed to the real property for the duration of their useful lives. The IRS also reasons that the units remain affixed to the real property for the duration of the period during which they remain operational and afterward are generally abandoned in place. The IRS therefore determined that because both prongs of the inherently permanent structures definition were met, the taxpayer’s units satisfy the definition of real property under the section 199 regulations.

The IRS states that the conclusion that the taxpayer’s units are inherently permanent structures is not impacted by the machinery rules of Reg. section 1.263A-8(c)(4). The IRS notes that inherently permanent structures that include property in the nature of machinery as a structural component is still real property under Reg. section 1.263A-8(c)(4)(i). Furthermore, Reg. section 1.263A-8(c)(4)(ii) clarifies that property can be an inherently permanent structure, and not machinery, even if it is necessary to operate or use it with machinery.


Technical advice memorandums are not allowed to be used or cited as precedent. However, TAM 201638022 provides insight as to how the IRS might rule in a similar situation. This TAM address numerous areas of law and can be easily misinterpreted due to the vast amount of redactions it contains. Taxpayers are encouraged to speak with their tax advisors to determine when and how to best apply the results of this TAM.


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