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stipulations of facts, and stipulation of exhibits are
incorporated herein by this reference. Petitioner is a Maine
corporation with its principal place of business in Freeport,
Maine. Petitioner is an accrual basis, calendar year taxpayer.
For its taxable year ended December 31, 1987, petitioner elected
under section 1362(a) to be taxed as an S corporation.
Petitioner is a retailer of outdoor sporting specialty
goods, including both apparel and sporting equipment. Petitioner
purchases merchandise from various vendors and manufacturers and
sells merchandise principally through a nationwide and
international catalog distribution system. Petitioner requires a
substantial reserve inventory of merchandise, which is shipped to
petitioner's distribution center located in Freeport, Maine.
As part of the expansion of its distribution center in 1986,
petitioner placed in service a storage facility (the Reserve
Facility) and a shipping building (the 1986 Shipping Building),
which contains a mezzanine (the Mezzanine System).3
Reserve Facility
The Reserve Facility is a large storage facility which
houses quantities of bulk merchandise in long rows of floor-to-
ceiling racks. Petitioner began construction of the Reserve
3Only the Mezzanine System and the Reserve Facility are in
issue here.
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