Legal Precedents for Cost Segregation
http://www.irs.gov/businesses/article/0,,id=134133,00.html
1959 Shainberg vs. Commissioner, 33 T.C. 241: The courts ruled on the validity of using the component method for tax depreciation on new construction.
1973 Revenue Ruling 73-410 clarified that a taxpayer may separately depreciate parts of used property if a qualified appraiser properly allocates the costs between non-depreciable land and depreciable building components as of the date of purchase.
1975 Whiteco Industries, Inc. vs. Commissioner, 109 T.C. 21 Court, based on an analysis of judicial precedent, developed six questions designed to ascertain whether a particular asset qualifies as tangible personal property.
1979 Letter Ruling 7941002: This ruling allowed tax payers to use third party cost segregation studies for the allocation of certain costs in new buildings as either assets that qualify for ITC, or costs properly treated as parts of the structural components.
1986 Investment Tax Credit (ITC) is repealed and the new MACRS recovery periods for building depreciation are increased dramatically for property placed in service after
1986 Residential property: increased to 27 1/2 years. Commercial Property: increased to 31 1/2 years and increased again to 39 years in 1993.
1987 Revenue Procedure 87-56. The wide gap in MACRS recovery periods provides a strong incentive to reallocate costs of buildings placed in service as far back as 1/1/1987. Revenue Procedure 87-56 provides class lives and recovery periods for assets.
1999 Hospital Corporation of America (HCA) vs. Commissioner: This landmark ruling for cost segregation established the validity of using the ITC ruling to determine whether property could be considered tangible property. The tax dollars at stake were $700,000,000.
http://www.irs.gov/businesses/article/0,,id=134133,00.html#16
1999 The IRS released Legal Memorandum 1992-1045 in which the IRS agreed not to contest the (HCA) reclassification of building costs into different asset categories that result in shorter depreciable lives.
1999 In Action on Decision (AOD) #CC-1999-008, the IRS acquiesced to the application of ITC principles in the HCA case. Later that year, the IRS Chief Counsel issued further guidance (CCA 19992145) supporting the use of Cost Segregation Studies.
2002 Revenue Procedure 2002-9
• Automatic IRS consent of change from one method of depreciation to another
• 3115 Form must be filed with current year return, including extensions
• No automatic review process
• No filing fee
2002 Revenue Procedure 2002-19 Beneficial Section 481(a) adjustments are taken into account in the year of change rather than being spread over four years.
2004 IRS issues Audit Techniques Guide: Outlines the criteria of a quality Cost Segregation Study and provides direction to IRS field agents when reviewing a report that does not employ the methods suggested in the Audit Techniques Guide.
http://www.irs.gov/businesses/article/0,,id=134180,00.html
2004 Revenue Procedure 04-11 This revenue procedure provides an automatic consent procedure allowing a taxpayer to make a change in method of accounting under § 446(e) of the Internal Revenue Code for depreciable or amortizable property after its disposition.
http://www.unclefed.com/Tax-Bulls/2004/rp04-11.pdf
2004 American Job Creation Act: Changed the recovery period of qualified leasehold improvements and certain restaurant expenditures from 39 years to 15 years.
http://www.house.gov/jct/x-41-04.pdf
