EisnerAmper Blog

Greg Bryant, Managing Partner, Bedford Strategies and Solutions

While the title of this article probably invokes a response from the reader such as “well – that’s a no-brainer,” that is exactly what happened in the case of AmeriSouth XXXII, Ltd v. Commissioner of Internal Revenue. The recently released T.C. Memo 2012-67 has caused quite a stir within the accounting and cost segregation community.

Background

AmeriSouth acquired an apartment complex in 2003 for $10.25 million. Immediately following acquisition, AmeriSouth proceeded to renovate the property, incurring costs in the area of $2.0 million. AmeriSouth engaged the services of a cost segregation firm that took the position that $3.4 million could be classified in 5- and 15-year lives for depreciation purposes. The IRS disagreed with the taxpayer’s position and the taxpayer filed a petition to challenge the Commissioner’s adjustments.

Shortly thereafter, AmeriSouth sold the property and stopped communicating with the court as well as its own attorneys. The situation became so bad that the court permitted the AmeriSouth attorneys to withdraw from the case. When asked to file a post-trial brief, AmeriSouth ignored the request. Perhaps they assumed that everything would just “go away.” Unfortunately for AmeriSouth, that would not be the case and the process went on without them.

Court’s Observations

On the surface, it would appear as if the cost segregation consultant made some serious errors and was overly aggressive with some of their interpretations in conducting the cost segregation study. Further, according to the Court, the consultant did not demonstrate sufficient evaluation, validation or substantiation of many assets they called “special use.” The Court also considered the IRS expert witness as being more reliable than the taxpayer’s consultant in recreating costs using the consultant’s own work papers (which strangely were not entered into evidence) citing that it was an attempt to undermine the Commissioner’s characterization of what they held.

The Details

The consultant missed the mark on many assets and did not provide the appropriate level of detail upon which to provide a convincing argument to the Tax Court. Some items include the following:
• Water distribution systems
• Sanitary sewers
• Site electric
• “Special HVAC and Plumbing”
• Interior Millwork
• “Special Painting”

Bedford’s Observation and Commentary

In several instances, the cost segregation consultant made some serious errors with their interpretation of relevant tax law, court cases and Revenue Procedures in preparing their study and assigned incorrect recovery periods to certain assets. Other than these errors, this case underscores the importance of engineering-based studies conducted and written by the same qualified individual. Cost segregation scope and methodology is critical – especially on acquired properties, as was the case in AmeriSouth.

Additional documentation supporting the consultant’s position regarding “special electrical” might have included actual photographs of electrical panels, and devices with actual load-based electrical calculations might have provided a more defensible position. Similarly, photographic documentation and specific delineation of appliance connections could have supported those assets having 5-year lives. Concise and accurate descriptions of these assets are always beneficial. Simply labeling something as being “special” has no relevance whatsoever.

While it is difficult to determine the credentials of the person who conducted the on-site evaluation and ensuing engineering analyses (if any), it is safe to assume that the report did not stand up to IRS scrutiny as written. Given the taxpayer’s unwillingness to follow procedures, coupled with series of events that lead up to this decision, it is no wonder that the IRS got exactly what they wanted. The good news is that a comprehensive cost segregation study conducted by a qualified individual will be able to withstand any scrutiny by the IRS. Of course, when challenged by the IRS, the taxpayer and their consultant should actually have an opportunity for their day in court. The results could have been different on a number of items had AmeriSouth actually shown up.

Our thanks to Greg and our friends at Bedford Strategies and Solutions for allowing us to use this blog post. www.bedfordteam.com 

By:  Aninda Dhar

In his recently released fiscal 2013 budget, President Obama proposed to reform and expand the low-income housing tax credit (LIHTC).  Under the plan, LIHTC projects would be allowed to elect an average-income criterion and permit a 30% basis increase for projects:

•  involving preservation, recapitalization and rehabilitation of existing housing; 
• demonstrating a serious backlog of capital needs or deferred maintenance; 
• involving housing that was previously financed with federal funds or benefitted from LIHTC; and 
•  due to federal support, subject to a long-term use agreement limiting occupancy to low-income households. 

Further, the budget makes LIHTC attractive to REITS by allowing a REIT that receives LIHTCs to designate some of the dividends it distributes as tax-exempt.   If this component of the budget is enacted, we envision LIHTC-based projects becoming more attractive to REITs and, accordingly, these REITs becoming more attractive to investors in tandem.   

By:  Aninda Dhar 

In February, the IRS released Notice 2012-22 which relates to the deduction for energy efficient commercial buildings under S. 179D, modifying Notice 2008-40, which clarified and modified Notice 2006-52.  The new Notice provides revised energy savings percentages that taxpayers may use to qualify for a partial deduction, rather than the full deduction, under S. 179D.

As background, S. 179D permits an owner or lessee of a commercial building to deduct a part or all of the cost of energy efficient commercial building property the taxpayer places in service.  Per statute, “energy efficient commercial building property” is depreciable property that satisfies that following:

•  “is installed on or in any building that is located in the United States and is within the scope of Standard 90.2001;” 
•  “is installed as part of the interior lighting systems; the heating, cooling, ventilation, and hot water systems; or the building envelope;” and
•  “is certified that the interior lighting systems, heating, cooling, ventilation, and hot water systems, and the building envelope that have been incorporated into the building, or that the taxpayer plans to incorporate into the building subsequent to the installation of such property, will reduce the total annual energy and power costs with respect to the combined usage of the building’s heating, cooling, ventilation, hot water, and interior lighting systems by 50 percent or more as compared to a Reference Building that meets the minimum requires of Standard 90.1-2001.”

Meeting these requirements permits a taxpayer to take the full deduction permitted – which cannot exceed the excess (if any) of (i) the product of $1.80 and the square footage of the building, over (ii) the aggregate amount of the S. 179D deductions allowed with respect to the building for all prior taxable years.

Property that would be classified as an energy efficient commercial building property but for failing to achieve the above-cited 50 percent benchmark may be classified as a “partially qualifying building property” if it is installed as part of a system that satisfies the applicable energy savings percentage found in applicable Notices.  Notice 2006-52 provided a 16 2/3 percent applicable energy savings percentage for each of the three systems (lighting system; heating, cooling, ventilation, and hot water system; and building envelope) and Notice 2008-40 adjusted these percentages and is applicable to buildings placed in service between December 31, 2008 and December 31, 2013 (overlapping with new Notice 2012-22).  The energy savings percentages under Notice 2008-40 were 20 percent for interior lightings systems; 20 percent heating, cooling, ventilation, and hot water systems; and 10 percent for the building envelope.

Under the current Notice, the applicable energy savings percentage for heating, cooling, ventilation and hot water systems is 15 percent, 25 percent for interior lighting system and 10 percent for the building envelope.  The energy savings percentages is available to buildings placed in service after the effective date of the Notice.  If S. 179D is extended beyond December 31, 2013, in the absence of other changes to the statute, the energy savings percentages set forth in Notice 2012-22 must be used.  Until December 31, 2013, taxpayers may use the percentages provided in Notice 2008-40 or the percentages in Notice 2012-12. 

The partial deduction for each system is limited to $.60 per square foot and the sum of all partial S. 179D deductions claimed cannot exceed the excess (if any) of (i) the product of $1.80 and the square footage of the building, over (ii) the aggregate amount of the S. 179D deductions allowed with respect to the building for all prior taxable years.

Complete text of Notice 2012-22 may be found here.