12 Sep Tax Court Rejects Conclusions of Cost Segregation Study – Amerisouth Vs. Commissioner
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This post is a brief review of Amerisouth XXXII, Ltd. v. Comm’r, T.C. Memo. 2012-67 (3/12/12) in which most of the increased depreciation deductions for an apartment complex, resulting from a cost segregation study, were denied. These are some of the facts of the case as I understand:
1. AmeriSouth hired a consulting firm to do a cost-segregation study.
2. The consulting firm calculated that about $3.4 million of AmeriSouth’s property could be depreciated over five or 15 years instead of 27.5 years.
3. AmeriSouth claimed on its tax returns that the water-distribution and sanitary sewer systems, the gas lines, and the electric wiring were eligible for 15-year depreciation.
4. AmeriSouth also claimed items of property in the other categories were eligible for five-year depreciation.
5. AmeriSouth’s depreciation deduction was increased by approximately $397,000 in 2003, $640,000 in 2004, and $375,000 in 2005.
The interesting point about this case for me is that the Tax Court could have dismissed the case but didn’t and it just seems to me that AmeriSouth could have prevailed with respect to many items had it actually gave a crap and presented evidence in court. However, AmeriSouth sold the investment property in question referred to as Garden House and stopped responding to the Tax Court or the IRS. So in my opinion there was probably something else really screwed up going on with the management of this company. Either way if you are going to have the gumption to push the envelope in regards to cost segregation depreciation be sure to plan (a.k.a. budget) for the inevitability of defending yourself against IRS allegations of misconduct.
Technically in regards to cost segregation depreciation the most important thing I learned is that the Tax Court ruled in favor of AmeriSouth on two items:
1. The clothes-dryer vents serve specific equipment, the clothes dryers. Evidently because the vents extend directly from the dryers to the outside of the building and have no connection to the apartments’ general ventilation system the vents were deemed properly classified as tangible personal property and not residential real property subject to a 27.5 year life.
2. The other interesting point was that duplex electrical outlets situated four-feet above the ground in kitchen areas was for the purpose of plugging in refrigerators, which are personal property. The interesting distinction noted by the tax court is the relationship of a component such as a refrigerator to the operation or maintenance of a building. When an item relates to a specific piece of equipment it is not a structural component of the building. So those duplex outlets were deemed tangible personal property, eligible for increased depreciation deductions.