Knowing When You Can and Cannot Benefit From a Cost Segregation Study

The U.S. Tax Court recently disallowed a taxpayer’s attempt to utilize a cost segregation study to modify costs that were allocated to assets under a purchase price allocation agreement that was entered into by the purchaser and seller at the time of acquisition. In this case, (Peco Foods Inc. et al., TC Memo 2012-18), Peco made modifications to its purchase price allocation in an attempt to secure accelerated depreciation deductions through the use of a cost segregation study.

Internal Revenue Code (IRC) Section 1060 provides that if the transferee and transferor agree in writing as to the allocation of any consideration, or as to the fair market value (FMV) of any of the assets, the agreement is binding on both the transferee and transferor unless the Internal Revenue Service (IRS) determines that the allocation (or FMV) is not appropriate.

Peco acquired two poultry processing plants in the 90s. In each case, the asset purchase agreements included a schedule allocating the purchase price among various assets. Each agreement stated that Peco and the transferor agreed to allocate the purchase price among the assets “for all purposes (including financial accounting and tax purposes)” in accordance with the allocation schedule.

Subsequent to the purchases, Peco hired a company to perform a cost segregation study of the plants. The study subdivided the assets acquired by Peco into subcomponents based on appraisals of both plants. The study determined that subdividing the acquired assets into various subcomponents entitled Peco to an additional depreciation deduction of $5,258,754 from 1998 through 2002.

The IRS asserted that IRC Section 1060 barred Peco from modifying the purchase price allocations of the plants in a manner inconsistent with the original allocation schedules.

The U.S. Tax Court sided with the IRS and rejected Peco's argument that IRC Section 1060 did not prohibit it from making a determination of the useful lives of assets acquired in the acquisitions that was inconsistent with the original allocation schedules.

If you would like to discuss the alternatives that might be available to avoid the IRS disallowing the results of a potential cost segregation study, such as performing the study before a purchase price allocation is finalized, contact Gennaro J. DiBello or Mark DiPietrantonio.

© 2012 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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