Source: http://kbkg.com/cost-segregation-audit-guide/6-5-inherently-permanent-standard
Timestamp: 2017-06-26 05:08:57
Document Index: 787679690

Matched Legal Cases: ['§ 1245', '§ 1250', '§ 1245', '§ 167', '§ 48', '§ 1', '§ 1', '§ 48', '§ 1245', '§ 48', '§ 1', '§ 1', '§ 48', '§ 1', '§ 168', '§ 48', '§ 1', '§ 263']

Statistical Sampling | Cost Segregation | Cost Segregation Services | KBKG
6.5 Inherently Permanent Standard
The primary issue in cost segregation studies is the proper classification of assets as either § 1245 or § 1250 property. The definitions of property for purposes of §§ 1245 and 1250 are essential for determining eligibility for a number of other Code provisions (including §§ 167, 168, 179, and former § 48). Treas. Reg. § 1.1245-3 defines “tangible personal property,” “other tangible property,” “building,” and “structural component” by reference to Treas. Reg. § 1.48-1. This regulation relates to former § 48 which was enacted in 1962 along with §§ 1245 and 1250. Former § 48 allowed an investment tax credit (ITC) based on the “applicable percentage” of the investment in eligible property placed in service during the taxable year. Eligible property included tangible personal property (other than heating or air conditioning units) and other tangible property (primarily machinery and equipment used in specific business activities) that was closely integrated into the taxpayer’s trade or business. Land, buildings, structural components contained in or attached to buildings, and other inherently permanent structures generally were not eligible for ITC.
Treas. Reg. § 1.48-1(c) defines ‘tangible personal property’ as any tangible property except land and improvements thereto, such as buildings or other inherently permanent structures (including items which are structural components of such buildings or structures). Thus, buildings, swimming pools, paved parking areas, wharves and docks, bridges, and fences are not tangible personal property. Tangible personal property includes all property (other than structural components) which is contained in or attached to a building. Thus, such property as production machinery, printing presses, transportation and office equipment, refrigerators, grocery counters, testing equipment, display racks and shelves, and neon and other signs, which is contained in or attached to a building constitutes tangible personal property for purposes of the ITC. Further, all property that is in the nature of machinery (other than structural components of the building or other inherently permanent structure) is considered tangible personal property even though located outside a building. Thus, for example, a gasoline pump, hydraulic car lift or automatic vending machine, although annexed to the ground, is considered tangible personal property.
Treas. Reg. § 1.48-1(e)(1) defines a “building” as any structure or edifice enclosing a space within its walls, and usually covered by a roof, the purpose of which is, for example, to provide shelter or housing, or to provide working, office, parking, display, or sales space. The term includes, for example, structures such as apartment houses, factory and office buildings, warehouses, barns, garages, railway or bus stations, and stores. Such term includes any such structure constructed by, or for, a lessee even if such structure must be removed, or ownership of such structure reverts to the lessor, at the termination of the lease.
Specifically excluded from the definition of the term “building” are: (i) a structure which is essentially an item of machinery or equipment, or (ii) a structure which houses property used as an integral part of an activity specified in former § 48(a)(1)(B)(i) if the use of the structure is so closely related to the use of such property that the structure clearly can be expected to be replaced when the property it initially houses is replaced. Factors which indicate that a structure is closely related to the use of the property it houses include the fact that the structure is specifically designated to provide for the stress and other demands of such property and the fact that the structure could not be economically used for other purposes. Thus, the term “building” does not include such structures as oil and gas storage tanks, grain storage bins, silos, fractionating towers, blast furnaces, basic oxygen furnaces, coke ovens, brick kilns, and coal tipples.
Treas. Reg. § 1.48-1(e)(2) provides that “structural components” includes such parts of a building as walls, partitions, floors, and ceilings, as well as any permanent coverings therefor such as paneling or tiling; windows and doors; all components (whether in, on, or adjacent to the building) of a central air conditioning or heating system, including motors, compressors, pipes and ducts; plumbing and plumbing fixtures, such as sinks and bathtubs; electric wiring and lighting fixtures; chimneys; stairs, escalators, and elevators, including all components thereof; sprinkler systems; fire escapes; and other components relating to the operation or maintenance of a building.
The seminal case involving the determination of whether an asset is inherently permanent for purposes of § 168 and former § 48 is Whiteco Industries, Inc. v. Commissioner, 65 T.C. 664 (1975). The Tax Court noted that “tangible personal property” is not intended to be defined narrowly nor to follow the rules of State law where fixation to the land is a basis for distinguishing personal property from other property. Based on an analysis of prior case law, the Tax Court put forth six questions designed to ascertain whether a particular asset qualifies as tangible personal property. These questions, also referred to as the “Whiteco factors,” are:
It should be noted that movability itself is not determinative in measuring permanence. The Whiteco court held that affixation to land does not per se exclude the property from the category of tangible personal property. Inversely, in L.L. Bean, Inc. v. Commissioner, T.C. Memo. 1997-175, aff’d, 145 F.3d 53 (1st Cir. 1998), the court held that the mere fact that a structure is theoretically capable of being moved does not conclusively establish that it is not inherently permanent.
In contrast, interest is only capitalized during the production period of property. Treas. Reg. §§ 1.263A-8 through 1.263A-15 provide guidance with respect to the capitalization of interest under § 263A(f). These regulations are effective for 1995 and after, or at taxpayer’s election, 1994. For years prior to the effective date of these regulations, see Notice 88-99, 1988-2 C.B. 422, as well as the prior temporary regulations, which provide guidance with respect to the capitalization of interest.