Source: https://positivearticles.com/summary-regulatory-history-of-cost-segregation/
Timestamp: 2018-05-26 03:58:54
Document Index: 396016371

Matched Legal Cases: ['§ 168', '§ 168', '§ 1245', '§168', '§1250', '§ 1']

Blog Summary Regulatory History of Cost Segregation
When the actual cost of each individual component is available, this is a rather simple procedure. However, when only lump-sum costs are available, cost estimating techniques may be required to segregate or allocate costs to individual components of property (e.g., land, land improvements, buildings, equipment, furniture and fixtures, etc.). This type of analysis is generally called a cost segregation study, cost segregation analysis, or cost allocation study.
Revenue Ruling 66-111, 1966-1 C.B. 46 (subsequently modified by Revenue Ruling 73-410, 1973-2 C.B. 53), addressed the use of component depreciation for used real property, in light of the decision in Shainberg. The ruling concluded that When a used building is acquired for a lump sum consideration, separate components are not bought; a unified structure is purchased Accordingly, an overall useful life for the building must be determined on the basis of the building as a whole.
Revenue Ruling 68-4,1968-1 C.B. 77, concluded that the asset guideline classes outlined in Revenue Procedure 62-21 may only be used where all the assets of the guideline class (building shell and its components) are included in the same guideline class for which one overall composite life is used for computing depreciation.
If the taxpayer did not elect the ADR system, Revenue Ruling 73-410, 1973-2 C.B. 53, clarified that a taxpayer may utilize the component method of depreciating used property if a qualified appraiser “properly allocates the costs between non-depreciable land and depreciable building components as of the date of purchase.”
Congress enacted IRC Sec. 168 I 1981. The ACRS was intended to provide a less complicated method for computing depreciation (known as cost recovery by eliminating salvage value and specifying recovery periods of various classes of assets. In contrast to the elective ADR system, ACRS was mandatory and provided only five (later six) recovery periods. ACRS also allowed for a faster write-off of assets than had been allowed under previous rules.
INHERENT PERMANENCY TEST AND THE WHITECO FACTORS
Revenue Ruling 75-178, 1975-1 C.B.9 outlined several criteria to determine Sec. 1245 property classification. The classic pronouncement addressing inherent permanency was Whiteco Industries, Inc. v. Commissioner, 65 T.C. 664, 672-673 (1975). The Tax Court, based on an analysis of judicial precedent, developed six questions designed to ascertain whether a particular asset qualifies as tangible personal property. The questions were referred to as the Whiteco Factors.
It should also be noted, however, that movability is not the only determinative factor in measuring inherent permanency. In L.L. Bean, Inc. v. Comm., T.C. Memo, 1997-175, affd, 145 F.3d 53 (1st Cir. 1998), it was determined that, even though the structure could be moved, it was designed to remain permanently in place. Thus, it was determined to be an inherently permanent structure.
Due to the significant tax benefits derived from ITC-eligible property, the use of component depreciation proliferated during the 1970’s and created problems not unlike those faced today by taxpayers, practitioners, and the Service regarding cost segregation studies. The problem became so pronounced during the late 1970s that Congress disallowed component depreciation as a method of computing depreciation for buildings, simultaneously with the enactment of ACRS in the Economic Recovery Tax Act of 1981 (ERTA) [see IRC § 168(f)(1)].
In HCA, the Service took the position that certain property items were structural components of a building and that § 168(f)(1) prohibited the use of a component depreciation method for computing depreciation on buildings (including structural components). However, Judge Wells ruled that the property at issue was § 1245 property and rejected the Services argument. Accordingly, the court determined that §168(f)(1), prohibiting component depreciation, applied only to §1250 property.
[Note, however, that the recent 5th Circuit opinion in Brookshire Brothers Holding, Inc. & Subsidiaries v. Commissioner, 320 F.3d 507 (5th Cir. 2003), affg T.C. Memo. 2001-150, rehg denied (March 31, 2003), which was adverse to the Service, may impact cases in that circuit. The court affirmed the Tax Court decision that the regulations allow taxpayers to make temporal changes in their depreciation schedules, as well as changes in the classification of property, without the consent of the IRS. However, the 10th Circuit opinion in Kurzet v. Commissioner, 222 F.3d 830 (10th Cir. 2000), was favorable to the government on this issue. Clearly, the issue is unsettled. However, Treas. Reg. § 1.446-1T(e)(2)(ii)(d)(2)(i), effective for taxable years ending on or after December 30, 2003, provides that a change in the depreciation or amortization method, period of recovery, or convention of a depreciable or amortizable asset is a change in method of accounting.