In Stine, LLC, No. 2:13-cv-03224 (W.D. La. 1/27/15), a retailer's store buildings were considered "placed in service" for federal tax depreciation purposes when they were "substantially complete"—rather than when they subsequently were "open for business"—resulting in the taxpayer's being able to take an accelerated depreciation deduction for the buildings. This decision highlights the importance of properly identifying an asset's placed-in-service date.
Stine involved a Louisiana-based retailer that sells home building materials and supplies. The taxpayer built two stores that were considered nonresidential real property. By Dec. 31, 2008, the taxpayer had received limited certificates of occupancy, hired employees, and begun preparing the stores for opening. The taxpayer took the position that the store buildings were placed in service during 2008 and, accordingly, claimed the 50% accelerated depreciation deduction under the Gulf Opportunity Zone Act of 2005, P.L. 109-135 (GO Zone Act), for qualified property placed in service by Dec. 31, 2008. This depreciation deduction created a loss for 2008 that the taxpayer carried back to 2003, 2004, and 2005, resulting in a refund.
The IRS denied the deduction and assessed additional taxes, including the paid refund, of more than $2 million, arguing that the buildings had not been placed in service before the 2008 GO Zone deadline.
The Court's Analysis and Conclusion
The taxpayer argued that the buildings were placed in service in 2008 because they were substantially complete and ready and available for their intended use (i.e., to house and secure shelving, racks, and merchandise) in that year. The IRS contended that to be placed in service, the stores had to be open for business, and because they were not open for business until 2009, they were not placed in service in 2008. The U.S. District Court for the Western District of Louisiana sided with the taxpayer.
The IRS cited several cases to support its argument that the buildings had not yet been placed in service (e.g., Piggly Wiggly Southern, Inc., 84 T.C. 739 (1985)). However, the court distinguished each of the cases the IRS cited, primarily because they dealt with equipment, not buildings. The court stated that there is a "marked difference in a building as opposed to equipment and how the tax courts determine when these assets are placed in service" (Stine, slip op. at 8).
The court found that the regulations supported the taxpayer's position. The court pointed to Regs. Sec. 1.167(a)-11(e)(1)(i), which states that property is first placed in service when it is "first placed in a condition or state of readiness and availability for a specifically assigned function, whether in a trade or business, in the production of income, in a tax-exempt activity, or in a personal activity." In the context of a taxpayer-constructed or -reconstructed building used to house machinery and equipment, this means that the building ordinarily is considered placed in service on the date construction, reconstruction, or erection is "substantially complete and the building is in a condition or state of readiness and availability." In addition, Prop. Regs. Sec. 1.168-2(e)(3) specifically states that a building will be considered placed in service when a significant portion of the building "is made available for use in a finished condition." The court also noted that other IRS guidance and Tax Court precedent supported the taxpayer's position. As the court stated, "[t]he government's position is that the building must be open for business. The tax law cases, regulations, revenue rulings and tax guides say otherwise" (Stine, slip op. at 9).
With respect to the buildings, the court found that for 2008 the taxpayer had presented "undisputed . . . evidence that the buildings had been issued certificates of occupancy; they were substantially complete, and were fully functional to house and secure shelving, racks and merchandise" (id.). Therefore, it concluded that the taxpayer had placed the buildings in service in 2008 and was entitled to the GO Zone accelerated depreciation deduction.
Whether real or personal tangible property is at issue, the placed-in-service date is important because it determines when depreciation may begin for federal tax purposes. That date also may determine which depreciation convention applies (e.g., midquarter convention). The placed-in-service date can be particularly important when there is a placed-in-service deadline associated with a special accelerated depreciation provision, such as the GO Zone provision in Stine.
Annette Smith is a partner with PricewaterhouseCoopers LLP, Washington National Tax Services, in Washington.
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