October 25, 2012
Professor Raymond Placid
AmeriSouth XXXII, LTD., et al. v. Commissioner, 67 T.C. Memo. (2012) FACTS
AmeriSouth XXXII, Ltd. acquired the Garden House Apartments in Mesquite, Texas in 2003 for $10.25 million. According to its owner, Ruel Hamilton, AmeriSouth is a general partner in about 50 partnerships, and AmeriSouth Texas established AmeriSouth XXXII in 2003 to buy the aforementioned complex. The complex was constructed in 1970, sits on over 16 acres of land with more than 40 buildings. Mr. Hamilton also owns AmeriSouth Management, L.P., which is responsible for the maintenance of a portion of the complexes. Roughly 70 of the 366 units are fully furnished. Even those units that are unfurnished are equipped with dishwashers are garbage disposals. The complex has the necessary infrastructure of sanitary sewers, water pipes, electric and gas lines. These run from the public street across from the property to the buildings. When AmeriSouth purchased Garden House, they undertook a $2 million renovation of the units that replaced the cabinets, countertops, dishwashers, garbage disposals, vent hoods and kitchen sinks. AmeriSouth hired MS Consultants to do a cost-segregation study. Although the AmeriSouth had originally listed Garden House as a 27.5 year property in its records, MS advised the company to depreciate some of the items replaced in the renovation (such as sinks, electrical wiring, outlets and paint) independently from the buildings they were attached to. AmeriSouth claimed that the water distribution, sanitary-sewer systems, gas lines and electric were eligible for 15 year depreciation, while many of the items replaced in the renovation were eligible for 5 year depreciation. This would allow AmeriSouth to depreciate $3.4 million of the property over 5 or 15 years instead of 27.5, thereby increasing their depreciation deduction by roughly $397,000 in 2003, $640,000 in 2004, and $375,000 in 2005. In total, MS claimed that it would lower AmeriSouth’s tax burden by approximately $730,000 from 2003-2007. When this case reached tax court, the IRS commissioner’s opinion was that some of the items AmeriSouth wanted to depreciate were parts of a whole building that could only be depreciated over 27.5 years, other assets were not depreciable at all, and that some of the filings sought to depreciate assets that AmeriSouth did not even own. He denied deductions in the amounts of $314,996 in 2003, $508,977 in 2004 and $255,778 in 2005. ISSUE
Would AmeriSouth’s cost segregation depreciation calculation, either in whole or in part, be permissible on their tax return? ANALYSIS
AmeriSouth XXXII, LTD. used a cost-segregation study to calculate depreciation deduction on its 2003 tax return. Cost-segregation is a cash flow improvement strategy that accelerates depreciation deductions to reduce or eliminate Federal and State income taxes. Cost-segregation studies are an engineering-based approach to identifying assets within a building that can be reclassified into a much shorter depreciation class than the building itself. Real estate properties, and everything in them except movable furniture and equipment, are generally depreciated using a straight-line method over 39 years (27.5 years for residential rental property). The cost-segregation study maximizes the inherent tax benefit of real estate by identifying, quantifying and segregating the personal property and land improvement components of the property, resulting in depreciable lives of 5, 7, and 15 years using accelerated depreciation. AMERISOUTH XXXII, LTD., AMERISOUTH TEXAS III, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent case was filed at the Fifth Circuit court in Dallas, Texas, which was AmeriSouth’s principal place of business. The commissioner filed the case claiming misuse of cost-segregation study. The case was heard at Tax Court by the Judge Holmes. The...
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