Source: https://www.kbkg.com/cost-segregation-audit-guide/2-legal-framework
Timestamp: 2020-02-23 05:22:59
Document Index: 358458205

Matched Legal Cases: ['§ 1', '§ 1', '§ 1245', '§ 1', '§ 1', '§ 446', '§ 1245', '§ 1250']

Legal Framework | Audit Technqiue Guide | Cost Segregation Analysis | KBKG
2. Legal FrameworkKBKG2019-08-28T13:51:26-07:00
Composite Method: A depreciation chart provided a composite rate for buildings, including all installed building equipment. The recommended rates ranged from 1.5% per year for good quality warehouses and grain elevators to 3.5% per year for inexpensive theaters.Component Method: Taxpayers could elect to depreciate the building equipment separately from the structure itself. A list provided lives for various types of structures, ranging from 50 years for apartments, hotels, and theaters, to 75 years for grain elevators and warehouses. A separate list provided lives for over 100 items of installed building equipment, ranging from 5 to 25 years, or the life of the building.Regulation § 1.167(a)-7(a) allows taxpayers to either depreciate individual items on a separate basis or to combine assets into group accounts and depreciate the group account as a single asset. Historically, some taxpayers have interpreted this to mean that assets can be segregated into components and depreciated separately.
Treas. Reg. § 1.48-1(c) provides examples of qualifying property, and states that:
This same subsection states that "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 credit allowed by section 38.
Furthermore, all property that is in the nature of machinery (other than structural components of the building or other inherently permanent structure) shall be 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, shall be considered tangible personal property.
A structure which is essentially an item of machinery or equipment, or
A structure which houses property used as an integral part of an activity specified in section 1.48(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.
Can the property be moved and has it been moved?Is the property designed or constructed to remain permanently in place?Are there circumstances that show that the property may or will have to be moved?Is the property readily movable?How much damage will the property sustain when it is removed?How is the property affixed to land?It should also be noted, however, that moveability 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.
The manner in which an item is attached to a building or to the land
The weight and size of the item
The time and costs required to move the components
The number of personnel required in planning and executing a move
The type and quantity of equipment required for a move
The history of the item or similar items being moved
The time, cost, manpower and equipment required to reconfigure the existing space if the item is removed
Any intentions regarding the removal
Whether the item is designed to be moved
The determination of whether an asset is a structural component or tangible personal property is a facts-and-circumstances assessment.The use of cost segregation studies must be specifically applied by the taxpayer.
Allocations must be based on a "logical and objective measure" of the portion of the equipment that constitutes § 1245 property.An accurate cost segregation study may not be based on non-contemporaneous records, reconstructed data, or taxpayer's estimates or assumptions that have no supporting records.Cost segregation studies should be closely scrutinized by the field.A change in depreciation method is a change in method of accounting, requiring the consent of the Secretary or his delegate.[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. See Example 9 of Treas. Reg. § 1.446-1T(e)(2)(iii), which specifically relates to changes based on a cost segregation study. On January 28, 2004, Chief Counsel Notice CC-2004-007 was issued, setting forth Chief Counsel’s Change in Litigating Position on the application of § 446(e) to changes in computing depreciation. Examiners may contact the Change in Accounting Method Technical Advisors, for the most current information.
This chapter has provided a legal framework for distinguishing § 1245 property from§ 1250 property and for determining appropriate recovery periods. It cannot be overemphasized that the classification of assets is a factually intensive determination. Based on HCA, the recent AOD, and the 1999 Chief Counsel Advice Memorandum, the use of cost segregation studies is expected to increase. Thus, examiners need to examine and evaluate a cost segregation study in light of the applicable statutes and judicial precedent established for a similar fact pattern.