Tax Court

Tax Court disallows cost segregation of apartment buildings in AmeriSouth XXXII, Ltd., TC Memo 2012-67, issued in March, 2012.

Cost segregation studies performed on depreciable real estate give taxpayers a basis for depreciating certain components of the properties over much shorter depreciable lives than 27.5 years for residential real property and 39 years for nonresidential real property.  If there is any meaningful interest rate to use to present value the accelerated tax savings, the results of a cost segregation study are quite valuable to taxpayers.  As you might guess, the IRS has some reservations about cost segregation.   It took issue with AmeriSouth, a Dallas-based company, about its cost segregation results on its Garden House Apartments, located in Mesquite, Texas and owned by its partnership AmeriSouth XXXII, Ltd.

From this new case, we are reminded of or learn several things.  First, bad facts make bad law.  Second, pigs get fat and hogs get slaughtered. Third, Tax Court Judge Holmes (or one of his law clerks) is a funny person.

Bad facts make bad law.  AmeriSouth didn’t show up for the trial – definitely a bad fact.  By the time this case was tried, AmeriSouth XXXII had sold the property.   It did not answer court summons and orders.  Its attorneys withdrew.  The court could have dismissed the case entirely, but instead decided the case, deeming any factual matters not contested to be conceded by AmeriSouth.   The court sided with the IRS in almost all of its contentions and held that most components were structural components, integral to an apartment building’s operation and maintenance, and therefore depreciable over the life of the building – 27.5 years.

Pigs get fat and hogs get slaughtered.  At least some commentators have said that the cost segregation study was overly aggressive, even by the normally aggressive standards of cost segregators.  The IRS had plenty to pick on.

I suppose that Judge Holmes had some time on his hands, since he did not have to weigh many factual arguments.  He used that extra time to write quite an entertaining opinion; even a casual reader, let alone a tax nerd like me, would get a number of laughs.  For example, at the beginning of the opinion, Judge Holmes says:  “We are tempted to say [the benefit of shorter depreciable lives] is why AmeriSouth throws in everything but the kitchen sink to support its argument – except it actually throws in a few hundred kitchen sinks, urging us to classify them as “special plumbing,” depreciable over a much shorter period than apartment buildings.”  Well, I thought it was funny.

The upshot of this case is that the IRS has something, if only a memorandum decision, that it can rely on to go after cost segregation studies of apartment buildings.  Be forewarned.




One thought on “Tax Court disallows cost segregation of apartment buildings in AmeriSouth XXXII, Ltd., TC Memo 2012-67, issued in March, 2012.

  1. Your are absolutely right on this Tax Court case. The firm that performed the study was heavy handed on the classification of assets, lacked the proper analysis and methodology, and most of all did not have the supporting case law or other citations to back up the claims. In addition, the ownership issue of the “multi-termed” assets was never determined, the electrical load calculations did not strictly follow what Scott and other court cases (as well as the ATG on Cost Segregation) deemed proper.
    I posted comments on many Linkedin groups with further comments. There are individuals and organizations posting more erroneous facts and interpretations about the case, including the statement that TC Memo decisions may not be cited a precedent. A little formal Tax Court procedures training might be in order for that posting.

    For those of us who have been practicing cost segregation for 30-40 years and have been requested by the National Office to give guidance on cost segregation publications (ATG and Directives) I can only state that this case reflects on the cost segregation industry. Not the whole industry, just those who lack proper training, experience, educational background and just plain common sense. Yes, those practitioners should be forewarned about what they do, and all the chest beating and claims they make on their websites need to be “re-visited”.

    Claiming to have done tens of thousands of studies (yeah right!!) and following the ATG, coupled with the claims of being experts by virtue of initials behind your name is false bravado. Taxpayers should take note of this study before they engage the services of any cost segregation firm. You get what you pay for.

    The Judge had a field day on this case, as did the Service. Your observation about pigs and hogs is right on point.


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