provide a penalty, to be assessed in the form of an excise tax that may not be more than 100% of the amount involved in the correction of operational errors found upon plan audit. CONCLUSION The NRF respectfully requests that the Committee include in 1995 tax legislation provisions that would provide acceptable methodologies for estimating a retailer's inventory shrinkage; provide a 10-year recovery period for commercial improvement property; and modify sanctions for failure to comply with qualified plan requirements. We look forward to the opportunity to work with the Committee in developing these three legislative proposals. In addition to the two-prong test, the Coordinated Issue Paper provides that the IRS will not challenge the 15-year depreciation period "[i]f an island marketer's building has 1,400 sq. ft. or less...." Efforts by Racetrac, SIGMA, NACS, and other industry representatives to persuade the IRS from adopting its new position on the depreciation of gasoline convenience store buildings have been unsuccessful, notwithstanding the fact that the Technical and Miscellaneous Revenue Act of 1988 repealed the Treasury Department's authority to change any Asset Class Life. The IRS' new position is wrong for technical and policy reasons. It reads into Asset Class 57.1 a primary-use requirement that does not exist, and it is contrary to economic reality. Asset Class 57.1 provides, in relevant part, that it "[i]cludes section 1250 assets, including service station buildings and depreciable land improvements, whether section 1250 property or section 1245 property, used in the marketing of petroleum and petroleum products." The phrase " including service station buildings and depreciable land improvements, whether section 1250 property or 1245 property," is illustrative. It does not restrict the general rule that Asset Class 57.1 includes section 1250 assets used in the marketing of petroleum and petroleum products. This point was made clear in the recent United States Tax Court decision in JFM, Inc. and Subsidiaries v. Commissioner, T.C. Memo 1994-239, involving the appropriate depreciation period of gasoline pump canopies, in which the court said "[i]t is clear that classes 57.0 and 57.1 were intended to cover all possible types of real and personal property used in the marketing of petroleum products...." Emphasis supplied. There is nothing indicating that a primary-use requirement should be incorporated into Asset Class 57.1, and the IRS is technically wrong in its new application of Asset Class 57.1. Even if Asset Class 57.1 incorporated a primary-use requirement, the IRS' adoption of the two-prong mechanical test to determine primary use is overly restrictive and unreasonable. Racetrac, like most petroleum marketers, has been in the business of marketing petroleum products for many years -- this is its primary business. No sane person would ever mistake a Racetrac outlet or other typical retail motor fuel outlet for a small grocery store or typical convenience store. These retail motor fuel outlets have a number of gasoline pumps, a large canopy over the gasoline pumps, and large signs informing the driving public of the price of gasoline- all clearly visible from a distance. What causes a person to drive into a retail motor fuel outlet is the desire to purchase gasoline (or diesel fuel) at the price stated on the sign. While there the driver may clean the windshield, check the oil, water, and tires, purchase windshield wiper blades and washer fluid, oil, and antifreeze, if needed, and use the rest rooms - all services in the traditional service station sense. Even though he or she may purchase a soda, cigarettes, or some other item, his or her primary reason for driving into the retail motor fuel outlet is to buy gasoline and service, albeit self-service, his or her automobile. The typical retail motor fuel outlet has evolved into a somewhat larger outlet with a greater variety of products as a result of customer demand, and any marketer who does not respond to customer wants will soon find itself uncompetitive and eventually out of business. Customer demand for additional services and products, however, does not change the establishment from a petroleum marketing facility nor does the customer lose his or her identity as a retail gasoline customer. As with the retail gasoline customer, the retail motor fuel outlet's primary reason for having the building at the location is to sell gasoline and other petroleum related products. The availability of non-petroleum products is merely a convenience to the drivers. I recently confirmed this directly with our customers by conducting numerous surveys of our customers asking them what first attracted them to our outlets and what was the principal use of our outlets. The overwhelming response from our customers was that they were attracted to us as a gasoline marketer and they were there to buy gasoline. As a gasoline customer, however, they were also, in many cases, wanting to get a drink or snack while refueling, rather than having to make a second stop. Determining primary use in these cases is not a function of a mechanical test, but simple common sense. The IRS places importance on the fact that gasoline convenience store buildings do not have mechanics to service the automobiles. The reason many retail motor fuel outlets do not have mechanics is that automobiles need far less maintenance today than they did a decade ago. In fact, many automobile manufacturers now claim that they build cars that can be driven 100,000 miles before they need a tuneup, and tires with 60,000 mile warranties are common. The fact that automobiles need less servicing today does not alter the fact that a retail motor fuel outlet's primary reason for its existence and the use of its building is the marketing of petroleum products. In addition to being technically incorrect, the IRS position ignores economic reality. The economic realities of the petroleum marketing industry are very different from the economic realities of the grocery store industry, and equating the economics associated with a building used in the petroleum marketing industry to the economics associated with a building used in the grocery store industry or fast food industry is misplaced. For more than twenty years, Federal, state, and local governments have adopted tighter and tighter controls on businesses that extract, produce, transport, store, and sell petroleum products. These controls have focused on both energy conservation and environmental concerns. The typical owner of a small grocery store spends little time or money worrying about the Clean Air Act, the Clean Water Act, or the Resource Conservation and Recovery Act. On the other hand, I can attest to the fact that the owner of a retail motor fuel outlet spends a tremendous amount of time and tens of thousands of dollars worrying about and complying with the many rules and regulations that affect the zoning of a site for petroleum marketing, delivery of petroleum products, the storage tanks, the dispensing pumps, the recycling of used oil, the reporting of gasoline and diesel fuel spills, and many, many other issues. Moreover, selling real property that was once the site of a retail motor fuel outlet is far more difficult than selling real property that was the site of a small grocery store. These factors directly affect the economic and useful life of buildings located at retail motor fuel outlets. A survey conducted by the national accounting firm of Grant Thornton shows that retail motor fuel outlet buildings have an average economic useful life of 12 years, whether or not food products are marketed at the outlet. This relatively short economic useful life is a function of the need to constantly relocate, renovate, or rebuild to respond to commercial demands and regulatory requirements. This is not a recent phenomena. In fact, the economic life of retail motor fuel outlet buildings has remained constant for more than 70 years. As early as 1925, the Board of Tax Appeals found an oil service station to have a 12 1/2-year useful life. Moberly Oil Co. v. Commissioner, 3 B.T.A. 163 (1925). In 1944, the Tax Court found the physical useful life of a gasoline station to be 15 years, and its economic useful life to be only 10 years. Austin v. Commissioner, 3 TCM (CCH) 1106 (1944). The new position of the IRS is wrong as a technical matter and it is wrong as a policy matter. Without assistance from Congress, petroleum marketers will be forced into time consuming and costly litigation with the IRS. An issue that clearly demonstrates the unreasonableness of the IRS in this area is the depreciation of canopies, which I mentioned earlier. Most canopies today are readily moveable, and therefore, qualify for 5-year depreciation under Asset Class 57.0. The IRS insists on requiring canopies to be depreciated over 15 years, even though the United States Tax Court clearly held in JFM, Inc. and Subsidiaries, supra, that canopies that are not inherently permanent are depreciable over 5 years. The IRS agents examining Racetrac refuse to follow the JFM case, even though Racetrac has clearly demonstrated that its The petroleum marketing industry is not asking Congress for something new or different. We are simply asking that the IRS not change the longstanding and well-established depreciation period for retail fuel outlet buildings. The IRS agents we have dealt with have conceded that their position may be extreme. Racetrac agrees and asks Congress to help us with this problem. Thank you, Mr. Chairman, and Members of the Committee for the opportunity to comment on these important issues. [The prepared statement follows:] STATEMENT OF ROBERT J. DUMBACHER CHIEF FINANCIAL OFFICER, RACETRAC PETROLEUM, INC. ON BEHALF OF NATIONAL ASSOCIATION OF CONVENIENCE STORES AND SOCIETY OF INDEPENDENT GASOLINE MARKETERS OF AMERICA Mr. Chairman and members of the Committee: I am Robert J. Dumbacher. I am the Chief Financial Officer of Racetrac Petroleum, Inc., a position I have held for the past twelve years. Racetrac is a petroleum marketer with outlets from Virginia to Florida to Texas, covering 13 states. We employing 2,300 people, and have recently celebrated our sixtieth year of serving the petroleum and motoring needs of American drivers. Thank you for this opportunity to appear on behalf of Racetrac and the Society of Independent Gasoline Marketers of America ("SIGMA") and the National Association of Convenience Stores ("NACS"), two national trade associations representing more than 2,000 petroleum marketers. I am testifying today on the depreciation of buildings located at retail motor fuel outlets. This is an issue of great importance to petroleum marketers, and of particular importance to Racetrac. The Internal Revenue Service ("IRS") is currently examining Racetrac, and the two issues that have consumed most of my time during this examination are the depreciation periods for the buildings and canopies located at our retail motor fuel outlets. This is especially frustrating because there should be no question about the proper depreciation of these assets. For many years, the depreciation period for retail motor fuel outlet buildings was clear - 15 years. This 15-year period is currently set forth in Asset Class 57.1 of Revenue Procedure 87-56, 1987-2 C.B. 674, issued by the IRS. About five years ago, however, IRS agents began challenging the 15-year depreciation period for buildings at retail motor fuel outlets where food and other non-petroleum goods were being sold, arguing that such buildings are non-residential real property depreciable over 31.5 years (now 39 years). The IRS refers to these buildings as gasoline convenience store buildings. These challenges, which are contrary to Asset Class 57.1 and case law, were not the independent acts of IRS agents, but the result of a coordinated effort by the IRS National Office. With the release of a Coordinated Issue Paper earlier this year, the IRS made clear its position that gasoline convenience store buildings must be deprecated over 39 years unless certain limited requirements are met. To support its position, the IRS gives the following reasons: (1) Typically, only about 10 to 20 percent of the gasoline convenience (2) The building contains none of the features typically associated with (3) The building is a fully adaptable retail building that competes with The Coordinated Issue Paper contains an exception that allows a gasoline station convenience store building to come within the meaning of Asset Class 57.1, thereby qualifying for the 15-year depreciation period, if it is primarily used in petroleum marketing. A two-prong test is used for determining whether a building is primarily used in petroleum marketing. Under this test, a building meets the primary-use requirement only if: (1) (2) 50 percent or more of the gross revenues "generated by the C-store" 50 percent or more of the floor space in the building (including rest |