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cost segregation IRS ATG audit techniques Chapter 6.4
Cost segregation is similar to a concept previously known as component depreciation. The result of cost segregation is to reduce federal taxes for owners of real estate, particularly in the first 5 years of ownership. For individuals, limited partnerships and limited liability corporations, cost segregation also tends to convert income taxed at 35% (ordinary income rates) to 15% (capital gains rate).
The basis of cost segregation is that some real estate components and personal property have a shorter life than the shell and primary components of a building and should be depreciated over a shorter period of time. Cost segregation is typically performed by appraisers (or engineers in some cases). The IRS recommends that owners who break out short life property obtain a cost segregation study from an independent third party.
Articles on cost segregation are available within this site. This paragraph and the two preceding paragraphs were prepared by O’Connor & Associates. The Audit Techniques Guide (ATG) was prepared by the IRS (Internal Revenue Service).
Chapter 6.4 - Relevant Court Cases
Note: Each chapter in this Audit Techinques Guide (ATG) can be printed individually. Please follow the links at the beginning or end of this chapter to return to either the previous chapter or to proceed to the next chapter or select a chapter from the Table or Contents on the left of this page.
Chapter 6.3 | Chapter 6.5 APPENDIX - CHAPTER 6.4 - RELEVANT COURT CASES
INTRODUCTION
This chapter is intended to assist examiners in determining whether certain assets constitute § 1245 or § 1250 property. In addition to the legal framework presented in Chapter 2, the court cases listed below provide further guidance. Although the issue in many of the cited cases below relates to ITC, these cases remain important in determining whether property constitutes § 1245 property for purposes of ACRS and constitutes tangible personal property for purposes of MACRS. Hospital Corporation of America and Subsidiaries v. Commissioner, 109 T.C. 21, 54-55 (1997), acq. on this issue and nonacq. on other issues, 1999-2 C.B. xvi.
Unfortunately, there are no bright-line tests for distinguishing § 1245 property from § 1250 property. All of the cases are factually intensive and quite often the opinions of the courts conflict. Therefore, the examiner’s ultimate determination generally cannot be based merely upon reading one case. In addition to reading all the cases on point, the Service’s position must be reviewed and followed; as well, the examiner must also consider whether the Service has acquiesced to a particular position or case.
ARRANGEMENT OF INFORMATION
This chapter contains three attachments to assist examiners in locating pertinent cases that address specific assets:
Case Citations for the Relevant Court Cases;
Table by Case Name (Asset Descriptions by §§ 1245/1250 determinations); and
Table by CSI Master Format Division (Case Name & Asset Description by §§ 1245/1250 determinations)
back to the top CASE CITATIONS
- AC Monk
A.C. Monk & Co. v. United States, No. 78-126-CIV-4, 1981 U.S. Dist. LEXIS 17764 (E.D.N.C. Mar. 30, 1981), aff’d in part, rev’d in part, vacated and rem’d, 686 F.2d 1058 (4th Cir. 1982), on remand, 577 F. Supp. 4 (E.D.N.C. 1983).
- Albertson’s
Albertson’s v. Commissioner, 94-1 U.S. Tax Cas. (CCH) P50,016; 73 A.F.T.R.2nd (RIA) 558 (9th Cir. 1993); rev’g. 95 T.C. 415 (1990).
- Bod-Nol
Boddie-Noelle Enters. v. United States, 96-2 USTC ¶ 50,627 (Fed. Cl. 1996), aff’d without published opinion, 132 F. 3d 54 (Fed. Cir. 1997).
- Centr Citrus
Central Citrus Co. v. Commissioner, 58 T.C. 365 (1972).
- Circle K
Circle K Corp. v. Commissioner, T.C. Memo. 1982-298.
- Cons Freight
Consolidated Freightways, Inc. v. Commissioner, 74 T. C. 768 (1980), aff’d in part and rev’d in part, 708 F.2d 1385 (9th Cir. 1983).
Consolidated Freightways, Inc. v. United States, 79-2 USTC ¶ 9440 (Ct. Cl. 1979).
Consolidated Freightways, Inc. v. United States, 620 F.2d 862 (Ct. Cl. 1980).
- Dixie Man
Dixie Manor, Inc. v. United States, 79-2 USTC ¶ 9469 (W.D. Ky. 1979), aff’d, 81-1 USTC 9332 (6th Cir. 1981).
- Duaine
Duaine v. Commissioner, T.C. Memo. 1985-39.
- Grinalds
Grinalds v. Commissioner, T.C. Memo. 1993-66.
- HCA
Hospital Corp. of Am. & Subs. v. Commissioner, 109 T. C. 21 (1997), acq. in part and nonacq. in part, 1999-2 C.B. xvi.
- Ill Cereal
Illinois Cereal Mills, Inc. v. Commissioner, T.C. Memo. 1983-469, aff’d, 789 F.2d 1234 (7th Cir. 1986), cert. denied, 479 U.S. 995 (1986).
- King Radio
King Radio Corp. v. United States, 486 F.2d 1091 (10th Cir. 1973), aff’g D.C. No. KC-3320).
- La Petite
La Petite Academy v. United States, 95-1 USTC ¶ 50,193 (W.D. Mo. 1995), aff’d in unpublished opinion, 72 F.3d 133 (8th Cir. 1995).
- LL Bean
L.L. Bean, Inc. v. Commissioner, T.C. Memo. 1997-175, aff’d, 145 F.3d 53 (1st Cir. 1998).
- Mallinckrodt
Mallinckrodt, Inc. v. Commissioner, T.C. Memo. 1984-532, aff’d, 778 F.2d 402 (8th Cir. 1985).
- McManus
McManus v. United States, 700 F. Supp. 994 (W.D. Wis. 1987), aff’d, 863 F.2d 491 (7th Cir. 1988).
- Metro
Metro Nat’l Corp. v. Commissioner, T.C. Memo. 1987-38.
- Minot Fed
Minot Fed. Sav. & Loan Ass’n v. United States, 313 F. Supp. 294 (D.N.D. 1970), aff’d, 435 F.2d 1368 (8th Cir. 1970).
- Morrison
Morrison, Inc. v. Commissioner, T.C. Memo. 1986-129, aff’d, 891 F.2d 857 (11th Cir. 1990).
- Munford
Munford, Inc. v. Commissioner, 87 T.C. 463 (1986), aff’d, 849 F.2d 1398 (11th Cir. 1988).
- Piggly Wiggly
Piggly Wiggly Southern, Inc. v. Commissioner, 84 T.C. 739 (1985), aff’d, 803 F.2d 1572 (11th Cir. 1986), nonacq., 1988-2 C.B. 1.
- Publix
Publix Supermarkets, Inc. v. United States, 92-1 USTC ¶ 50,240 (Cl. Ct. 1992).
- Schrum
Schrum v. Commissioner, T.C. Memo. 1993-124, aff’d in part and vacated in part, rem’d, 33 F.3d 426 (4th Cir. 1994), on remand, T.C. Memo. 1995-103, aff’d in part and vacated in part without published opinion, 114 F.3d 1177 (4th Cir. 1997).
- Scott Paper
Scott Paper Co. v. Commissioner, 74 T.C. 137 (1980).
- Shoney’s
Shoney’s South, Inc. v. Commissioner, T.C. Memo. 1984-413, action on dec., 1986-048 (September 19, 1986).
- TI
Texas Instruments Inc. v. Commissioner, T.C. Memo. 1992-306.
- Walgreen
Walgreen Co. & Subs. v. Commissioner, 103 T.C. 582 (1994), rev’d, rem’d, 68 F.3d 1006 (7th Cir. 1995), supplemental op., T.C. Memo. 1996-374.
- Westroads
Westroads, Inc. v. Commissioner, 69 T.C. 682 (1978), acq., 1979-2 C.B. 2.
- Whiteco
Whiteco Industries, Inc. v. Commissioner, 65 T.C. 664 (1975), acq., 1980-2 C.B. 2.
back to the top TABLE BY CASE NAME
|
Case Name |
Master Format Division |
Asset Description |
1245 |
1250 |
|
AC Monk |
15700 |
Louvered Wall to Boiler |
X |
|
|
|
03000 |
Truck Apron |
X |
|
|
|
10800 |
Lavatory Furnishings |
|
X |
|
|
15300 |
Fire Hose Stations |
|
X |
|
|
13120 |
Special Rooms |
X |
|
|
|
13120 |
Storage Sheds |
X |
|
|
|
16400 |
Elec. Dist. to lights & machines |
|
X |
|
|
03000 |
Concrete RR dock |
|
X |
|
|
13030 |
Green storage room |
|
X |
|
Albertson’s |
15700 |
HVAC system |
|
X |
|
|
05100 |
Raised roof |
|
X |
|
Bod-Nol |
09500 |
Suspended Ceilings |
|
X |
|
|
06170 |
Ext. Mansard-Marlite roof panels |
|
X |
|
|
16400 |
Electrical to equipment |
|
X |
|
|
15400 |
Plumbing to equipment |
|
X |
|
|
15700 |
Kitchen HVAC |
|
X |
|
|
08830 |
Decorative Mirror |
|
X |
|
|
08582 |
Carousel drive-up window unit |
|
X |
|
Centr Citrus |
15700 |
Blowers |
X |
|
|
|
15700 |
Coolers |
X |
|
|
|
16400 |
Elec. dead front panel |
|
X |
|
|
16300 |
Elec. Transformer to facilities |
|
X |
|
|
16400 |
Elec. Gutter plus ends & cutting |
X |
|
|
|
16400 |
Elec. Dist: adapters/relays/fuse |
X |
|
|
|
16140 |
30 amp. Switch |
X |
|
|
|
16300 |
Elec. Transformer for sweet rm |
X |
|
|
|
16140 |
Elec. Outlets |
X |
X |
|
|
16510 |
Fluorescent fixtures |
X |
X |
|
|
16510 |
Spotlight and flood lamps |
X |
X |
|
|
16510 |
Moisture-proof lamps |
X |
|
|
|
16300 |
Elec. Transformer for damper |
X |
|
|
|
16510 |
Ballast lights |
X |
|
|
Circle K |
13030 |
Cold storage rm. |
|
X |
|
|
15700 |
Air conditioning units (roof) |
|
X |
|
Cons Freight |
03000 |
Raised concrete loading dock |
|
X |
|
|
08330 |
Overhead doors |
|
X |
|
|
16510 |
Light fixtures - mercury vapor |
|
X |
|
|
02825 |
Dock fence |
X |
|
|
Dixie Man |
15700 |
Air conditioning/Heating (roof) |
|
X |
|
|
09250 |
Rm partition (drywall/wood stud) |
|
X |
|
Duaine |
03100 |
Concrete slab behind counter |
|
X |
|
|
09300 |
Floor tile |
|
X |
|
|
09300 |
Wall tile |
|
X |
|
|
15100 |
Water lines to cooking table,etc |
X |
|
|
|
15100 |
Gas lines to cooking elements |
X |
|
|
|
15100 |
Connecting fixtures to appliance |
X |
|
|
|
15100 |
Copper drain lines from refrig. |
X |
|
|
|
16510 |
Ornamental light fixtures |
|
X |
|
|
16140 |
Elec. Outlets to equip. |
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grinalds |
15700 |
Air conditioning units |
|
X |
|
|
09250 |
Partitions (cubical type) |
|
X |
|
|
09250 |
Walls (interior) |
|
X |
|
|
10800 |
Walls (restroom) |
|
X |
|
|
15400 |
Plumbing – restroom |
|
X |
|
|
16200 |
Elec. Conduit & Recep. – Restrm |
|
X |
|
HCA |
16300 |
Primary & secondary elec. dist. |
X |
X |
|
|
16400 |
Branch elec. dist. |
X |
X |
|
|
16200 |
Branch elec. – TV equip. |
X |
|
|
|
16700 |
Telephone wiring, jacks |
X |
|
|
|
16200 |
Elec. Wiring – inter-com equip. |
X |
|
|
|
09680 |
Carpeting |
X |
|
|
|
09720 |
Vinyl wall covering |
X |
|
|
|
09600 |
Vinyl wall covering |
X |
|
|
|
15400 |
Kitchen water pipe, grease trap |
X |
|
|
|
15400 |
Plumbing for x-ray |
X |
|
|
|
15850 |
Kitchen hood & exhaust sys. |
X |
|
|
|
05720 |
Patient corridor handrails |
X |
|
|
|
16510 |
Over-bed recessed lights |
|
X |
|
|
10650 |
Accordion doors/partitions |
X |
|
|
|
10800 |
Bathroom acces., plastic mirrors |
|
X |
|
|
09510 |
Acoustical ceiling tile |
|
X |
|
|
15510 |
Steam boilers & acces. |
|
X |
|
Ill Cereal |
16400 |
Elec. Distribution system (95%) |
X |
|
|
King Radio |
10630 |
Partitions (ceiling height) |
X |
|
|
|
10630 |
Glazed partitions |
X |
|
|
|
10630 |
Movable partition sys. |
X |
|
|
LL Bean |
13140 |
Storage rack sys. (supp. roof) |
|
X |
|
|
03000 |
Super-flat concrete slab |
|
X |
|
|
13140 |
Roofing & wall panels |
|
X |
|
|
16400 |
Electrical system |
|
X |
|
|
15300 |
Sprinkler system |
|
X |
|
|
15764 |
Heating/ventilation system |
|
X |
|
|
13138 |
Mezzanine system |
|
X |
|
La Petite |
09250 |
Wall panels-porc.enamel/gyp.bd) |
|
X |
|
|
06170 |
Mansard roof |
|
X |
|
|
02825 |
Playground fence |
|
X |
|
|
16520 |
Exterior façade lighting sys. |
|
X |
|
|
15300 |
Fire protection sys. |
|
X |
|
|
15300 |
Heat & smoke detectors |
|
X |
|
|
16530 |
Emergency lights |
|
X |
|
|
10426 |
Illum. Exterior signs |
|
X |
|
|
10800 |
Child’s restrm./handicap cabinet |
|
X |
|
|
11442 |
Grease trap to counter |
|
X |
|
|
16200 |
Elec. Service to counter |
|
X |
|
|
02825 |
Dumpster encl: fence & concrete |
|
X |
|
|
15780 |
Thermal recov. Sys.–water heater |
|
X |
|
|
08300 |
Doors(kitchen, by-pass, Dutch) |
|
X |
|
Mallinckrodt |
09250 |
Partitions (gyp. drywall) |
|
X |
|
McManus |
13120 |
Ten unit hangar bldg. |
|
X |
|
|
08344 |
Hangar doors |
|
X |
|
|
08970 |
Glass/door storefront partitions |
X |
|
|
|
10800 |
Toilet partitions |
|
X |
|
|
09510 |
False ceilings & grids |
|
X |
|
|
16510 |
Lay-in lighting facilities |
|
X |
|
|
16520 |
Exterior security lighting |
X |
|
|
|
16510 |
Grow lights |
X |
|
|
|
16510 |
Accent decor lighting (exterior) |
X |
|
|
|
06400 |
Cabinets (plastics & hardware) |
X |
|
|
|
02810 |
Sprinkler heads |
|
X |
|
Minot Fed |
10630 |
Pre-manuf. Wall partitions |
X |
|
|
|
08100 |
Door units (in partitions) |
X |
|
|
Morrison |
16530 |
Emergency lighting |
X |
|
|
|
16440 |
Kitchen panel boards |
X |
|
|
|
15400 |
Kitchen hand sinks |
|
X |
|
|
15400 |
Kitchen water piping |
X |
|
|
|
08380 |
Eliason doors |
X |
|
|
|
10800 |
Restroom accessories |
|
X |
|
|
16500 |
Décor window treatment |
X |
|
|
|
06440 |
Lattice millwork |
X |
|
|
|
06400 |
Vanity cabinets & counters |
|
X |
|
|
09250 |
Customer line screen |
X |
|
|
|
03000 |
Serving line concrete curb |
|
X |
|
|
15780 |
Kitchen heat recovery unit |
X | |
 |
TABLE OF CASES BY CSI
|
CSI Master Format Division |
Asset Description |
Property Type: |
|
Case Name |
|
|
1245 |
1250 |
|
Division 02 – Sitework |
|
|
|
Metro |
02810 |
Sprinkler heads |
|
X |
|
TI |
02825 |
Security fencing |
X |
|
|
La Petite |
02825 |
Dumpster Encl. (fence & concrete) |
|
X |
|
La Petite |
02825 |
Playground fence |
|
X |
|
Cons Freight |
02825 |
Dock fence |
X |
|
|
TI |
02930 |
Interior landscaping |
X |
|
|
TI |
02930 |
Exterior landscaping |
|
X |
|
|
|
|
|
|
|
Division 03 – Concrete |
|
|
|
TI |
03000 |
Concrete floor & supp. columns |
X |
|
|
TI |
03000 |
Concrete ground fl. & wood deck |
|
X |
|
AC Monk |
03000 |
Concrete RR dock |
|
X |
|
AC Monk |
03000 |
Truck apron |
X |
|
|
Morrison |
03000 |
Floors: cooler/freezer/garbage rm |
|
X |
|
Cons Freight |
03000 |
Raised concrete loading dock |
|
X |
|
Morrison |
03000 |
Serving line concrete curb |
|
X |
|
LL Bean |
03000 |
Super-flat concrete slab |
|
X |
|
Munford |
03000 |
Truck loading platform |
|
X |
|
TI |
03000 |
Waste treatment facilities |
X |
|
|
Munford |
03000 |
Rail loading platform |
|
X |
|
Duaine |
03100 |
Concrete slab behind counter |
|
X |
|
|
|
|
|
|
|
Division 04 – Masonry |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Division 05 – Metals |
|
|
|
|
|
|
|
|
|
AC Monk |
05100 |
Raised roof |
|
X |
|
McManus |
05300 |
Metal partitions |
|
X |
|
HCA |
05720 |
Patient corridor handrails |
X |
|
|
|
|
|
|
|
|
Division 06 – Wood & Plastics |
|
|
|
Bod-Nol |
06170 |
Exterior Mansard-Marlite roof panels |
|
X |
|
La Petite |
06170 |
Mansard Roof |
|
X |
|
Metro |
06400 |
Cabinets (plastics & hardware) |
X |
|
|
Walgreen |
06400 |
Millwork, metal work, trim |
|
X |
|
Morrison |
06400 |
Vanity cabinets & counters |
|
X |
|
Morrison |
06440 |
Lattice millwork |
X |
|
|
Division 08 – Doors & Window | | |
