Tax Court disallows cost segregation of apartment building components

BY ALISTAIR M. NEVIUS

In a case exploring the extent of allowable cost segregation in depreciable rental real estate, the Tax Court held that all but a small handful of items identified by the building’s owner had to be depreciated over the life of the building ( AmeriSouth XXXII, Ltd., T.C. Memo. 2012-67).

AmeriSouth, a limited partnership, bought an apartment complex in 2003 for $10.25 million. AmeriSouth commissioned a cost-segregation study and then attempted to depreciate more than 1,000 building components over five- or 15-year spans, instead of the 27.5 years applicable to rental real estate under MACRS. Using its cost-segregation method, AmeriSouth deducted $3,029,029 for depreciation in the years 2003–2005.

The IRS audited the partnership under TEFRA and disagreed with AmeriSouth’s treatment of the components; it denied $1,079,751 in deductions for those years. The case ended up in Tax Court, where the IRS also argued that AmeriSouth was attempting to depreciate some assets it did not own.

About the time the case was tried, AmeriSouth sold the apartment complex and subsequently stopped responding to communications from the court, the IRS, and even its own attorneys. The court allowed the attorneys to withdraw from the case. When AmeriSouth failed to file a post-trial brief, the court could have dismissed the case entirely, but instead it decided the case, deeming any factual matters not contested to be conceded by AmeriSouth.

The court looked in depth at the components in each of the 12 categories AmeriSouth had identified for faster depreciation: site preparation and earthwork; water distribution system; sanitary-sewer system; gas line; site electric; special HVAC; special plumbing; special electric; finish carpentry; millwork; interior windows and mirrors; and special painting.

Based on its examination of the facts, the court sided with the IRS in all but a small handful of instances, holding that most components were structural components, integral to the buildings’ operation and maintenance, and therefore depreciable over the life of the building.

The only components AmeriSouth won on were clothes dryer vents; gate components; outlets and timers relating to watering of the grounds; surveillance components (camera and TV); refrigerator, stove, and washer/dryer outlets; and cable, telephone, and data outlets.

Alistair M. Nevius ( anevius@aicpa.org ) is editor-in-chief for tax.

More from the JofA:

 Find us on Facebook  |   Follow us on Twitter  |   View JofA videos

SPONSORED REPORT

Tax reform complicates year-end tax planning

Get your clients ready for tax season with these year-end tax planning strategies, which address how to make the most of recent tax law changes, such as the new deduction for qualified business income and the cap on the deductibility of state and local taxes.

VIDEO

What RPA is and how it works

Robotic process automation is like an Excel macro that can work on multiple applications, says Danielle Supkis Cheek, CPA. RPA can complete routine, repetitive tasks such as data entry, freeing up employee time from lower-level chores.