Ronald Pearce and Daryl Pearce v. Department of Revenue, State of Oregon (10/31/2011) – the tax court disallowed the plaintiff’s internally prepared Cost Segregation study. Citing the IRS’s Cost Segregation Audit Technique Guide, the court described the “Rule of Thumb” methodology as insufficient, “lacking sufficient documentation to support its allocation of project costs”.
Peco Foods, Inc. & Subsidiaries v. Commissioner of Internal Revenue (1/17/2012) – the court disallowed a Cost Segregation done subsequent to a PPA. The asset acquisition contract specified an agreed allocation between buyer and seller. This included categories such as “Processing Plant Building” and “Machinery and Equipment”. The court disallowed a subsequent Cost Segregation study that tried to further allocate the “Processing Plant Building” category, arguing that (1) this would allow a tax whipsaw, (2) the PPA agreement would overrule any other allocation analysis, and (3) the PPA categories listed were clearly defined and thus do not need further analysis.
Temporary Regulations Deduction and Capitalization of Expenditures Related to Tangible Property (12/27/2011) – the IRS provides new guidelines regarding the treatment of expenditures related to building components. For improvements related to HVAC, plumbing, electrical escalators, elevators, fire protection & alarm, security, and gas distribution systems, the improvement tests (betterment, restoration/ replacements, adaptation) should be applied separately to each component rather than the building as a whole. This will likely result in more frequent capitalization of these costs, rather than their expenditure. In addition, the remaining value of building components that have been replaced may be retired.
