Two recent cases made ‘headlines’ in the cost segregation industry
The first case against Peco Foods, Inc. (TC Memo 2012-18) found that the allocations from a cost segregation study were not allowed because the taxpayer had agreed to allocate the assets differently in the purchase contract, specifying that the allocation was binding for all purposes, including tax books.
Most purchase agreements I see do not have specific property allocations, and that is a good thing.
Please consider this case a lesson when you are involved in a purchase negotiation. If a seller requests a very specific allocation, it may not be in your best interest. Always consult with your attorney and tax professional before obligating yourself to a contract that could have a tax impact on you.
The second case against AmeriSouth XXXII, Ltd. (TC Memo 2012-67) denied accelerated depreciation on many components of an apartment complex that are frequently considered personal property in most other types of buildings.
One interesting factor in this case is that the owners recently sold the property and no longer had a reason to spend additional money to defend their case. If depreciation was disallowed and taxes assessed, their basis in the sale would increase and their taxes on the gain decrease, having little effect on the net tax. To the owners, it just wasn’t worth the hassle anymore.
I’m sure many of the items that were disallowed from the study could have been defended, and most such items have passed muster in previous landmark cases. Certainly some of the allocations in the AmeriSouth study may have been aggressive and would have been difficult to defend, but we are considering this case as a whole to be less than precedent-setting.
That being said, we are seeing a lot of recent push back in the industry on apartment cabinetry and other assets that the IRS deems to be necessary for the buildings to operate as apartments rather than simply as buildings. It is a good idea going forward to consider the IRS’s recent scrutiny on apartment cost segregation studies when deciding how aggressive to be. We do still have cases to back up our allocations, and there are several cases that have not yet been settled, but we understand that as more cases close, these positions may have to change.
Cathy A. Harris, CPA, is the National Director of The Cost Segregation Group, a division of Wall, Einhorn & Chernitzer, PC. She is one of the authors of the book, Practical Guide to Cost Segregation (published by CCH) and is a certified member of the American Society of Cost Segregation Professionals (ASCSP) where she holds the office of Secretary and serves on the Testing and Technical Standards committees. Harris has more than 12 years’ experience in the cost segregation industry.