Future Cost Segregation Studies May Be Affected by Tax Court Decision
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T A X U P D A T E |
February 3, 2012 |
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Future Cost Segregation Studies May Be Affected by Tax Court Decision |
For additional information and discussion on this topic, please get in touch with your regular HW&Co. professional or one of our Tax Professionals listed below. Edward C. Lowe, CPA, MAFIS Donald C. May, CPA/ABV, CVA
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The recent buzz in the cost segregation world surrounding the Peco Foods case (Peco Foods Inc. et al.) has finally been resolved. In a landmark decision this month, the Tax Court disallowed changing depreciable lives pursuant to a cost segregation study where the taxpayer had agreed to a purchase price allocation several years before. In 1995, Peco Foods, Inc. et al., entered into a purchase agreement to buy a business which qualified as an applicable asset acquisition. In the agreement, Peco and the seller agreed to allocate the purchase price among the assets being transferred. In 1999, Peco hired a company to perform a cost segregation study on the real estate portion of the acquisition. The study subdivided the assets acquired into subcomponents based upon the original appraisals. The study determined that subdividing the acquired assets into various subcomponents entitled Peco to an additional depreciation deduction of $5,258,754 over years 1998 through 2002. The IRS asserted that Peco was barred from modifying the purchase price allocation of the plants in a manner inconsistent with the original allocation schedules. The Tax Court agreed with the IRS and stated, among other things, that Peco’s decision to allocate the purchase price separately among various assets as evidence that Peco was aware of the existence of subcomponents of assets at the time they entered into the purchase agreement but choose not to allocate any purchase price to the subcomponents of the buildings. Consequently, they were prohibited from making subsequent allocations. Taxpayers contemplating the purchase of the assets of a business should arrange for the cost segregation study before the purchase agreement is entered into. |
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