Source: https://www.irs.gov/businesses/cost-segregation-atg-chapter-6-4-relevant-court-cases
Timestamp: 2019-04-25 23:55:22+00:00

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In addition to the legal framework presented earlier in Chapter 2, the court cases listed below provide further guidance as to whether a particular asset constitutes § 1245 property or § 1250 property. Although the issue in many of the cases below relates to whether property is eligible for the now-expired investment tax credit (ITC), the precedent that was developed to ascertain whether property constituted eligible property for purposes of ITC is equally applicable to ascertain whether property constitutes as § 1245 property for purposes of ACRS/MACRS.
Unfortunately, there are no bright-line tests for distinguishing § 1245 property from § 1250 property. Each of the cases below is factually intensive. Additionally, opinions by different courts sometimes conflict; therefore, an ultimate determination of the categorization of an asset generally cannot be based upon reading merely one case. In addition to reading all of the cases on point, one must also consider whether the Service has acquiesced to a particular position or case. Advice should be sought where the asset at issue is not specifically discussed in any of the below opinions, if one is not sure of how to categorize a specific asset, or if the opinions are vague or conflicting.
NOTE: Cost Segregation studies are often organized following the Construction Specifications Institute (CSI) MasterFormat Division system. The CSI MasterFormat system is a master list of numbers and titles classified by construction trades (concrete, electrical, plumbing, mechanical, carpentry, masonry, steel, etc.) that was developed to simplify and facilitate communication within the construction industry. The inclusion of the CSI MasterFormat Divisions in these tables is for informational purposes only and is not an endorsement of either the Construction Specifications Institute or the MasterFormat system.
Enumerates three categories of §1245 property: 1) accessory to a business; 2) non-permanence; and 3) is ornamental or decorative.
7/28/2010 PPL Corporation & Subs. v. Commissioner, 135 T.C. 176 (2010) Street Lights Street light assets did not fall with asset class 49.14 Utility Transmission and Distribution Plant, nor within asset class 00.3 Land Improvements. They fall within the residual asset class to which a 7-year recovery period.
Landmark case setting precedent that criteria developed to ascertain whether property constituted eligible property for purposes of ITC is equally applicable to ascertain whether property constitutes § 1245 property for purposes of ACRS/MACRS. In AOD 1999-008, the IRS acquiesced in part regarding definition of tangible personal property and non-acquiesced in part regarding determination of individual assets in dispute.
This is a Fourth Circuit case that follows the precedent in A.C. Monk and does not represent the predominant view of the issue.
The court determined that any items expressly listed as a building or structural component in the regulations are excluded from being tangible personal property. This approach is precedent only for the Federal Claims Court and has not been followed by other courts.
In AOD 1991-19, the IRS acquiesced to the functional allocation approach based, in part, on the Morrison case.
11/13/1986 Piggly Wiggly Southern, Inc. v. Commissioner, 803 F.2d 1572 (11th Cir. 1986), aff’g 84 T.C. 739 (1985) HVAC units (§1245) In AOD 1988-22, the IRS non-acquiesced to the court not using the sole justification test for HVAC systems.
4/28/1986 Illinois Cereal Mills, Inc. v. Commissioner, 789 F.2d 1234 (7th Cir. 1986), aff’g T.C. Memo. 1983-469, cert. denied, 479 U.S. 995 (1986) Electrical distribution system (§1245/§1250) (95%/5%) In AOD 1988-20, the IRS non-acquiesced to the use of the functional allocation approach for electrical systems. In AOD 1991-19, the IRS acquiesced to the functional allocation approach.
8/6/1984 Shoney’s South, Inc. v. Commissioner, T.C. Memo. 1984-413 Chandeliers and lanterns (§1245) In AOD 1986-48 the IRS non-acquiesced that certain lighting was decorative and thus eligible for the ITC.
Court used adaptability test for electrical systems (not functional allocation method). Opinion should be followed only in cases appealable to the Fourth Circuit.
Landmark case setting forth functional allocation method for allocating components of an electrical distribution system into §§ 1245/1250 property.
2/13/1978 Westroads, Inc. v. Commissioner, 69 T.C. 682 (1978) Elec. generating equip. (§1245) In AOD 1979-173, the IRS acquiesced to the result.
12/31/1975 Whiteco Industries, Inc. v. Commissioner, 65 T.C. 664 (1975) Outdoor signs (billboards) (§1245) Landmark case putting forth factors for determining whether property is inherently permanent. In AOD 1977-142, the Service acquiesced to the criteria set forth for determining whether property is inherently permanent.
12/3/1973 Everhart v. Commissioner, 61 T.C. 328 (1973) Sewage disposal system (§1250) Property is structural component even though not directly attached to the building.
In AOD 1972 WL 33204, the IRS recommended appeal of the Tax Court case. In AOD 1975-580, the IRS acquiesced to the Circuit Court case.
Partitions: movable sys. (§1245) Determination of structural component based on permanency test, not functional use test.
Landmark case that held that a building could be allocated into portions for purposes of the ITC. In AOD 1968 WL 16712, the IRS acquiesced in result only (not to the court’s rationale). In AOD 1972 WL 33051, the IRS acquiesced to the rationale of the court.
Div. 06 – Wood, Plastics, & Comp.
Div. 07 – Thermal & Moisture Prot.
261000 16400 Primary & secondary elec. dist. sys.
261000 16400 Secondary electric distribution sys.

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