Cost Segregation Studies | eNewsletter: June 2008

The Age Old Question:
Is it a building or personal property? (Part I)

Written by Steven D. Beaucaire, MST
Vice President, Tax - Bedford Capital Consulting

While on the surface tax code looks like one vast sea of numbers, the truth is, "language" is the name of the game. When determining the proper depreciation treatment for a structure, it is definition that pulls weight with the IRS. Having this knowledge can be financially beneficial to the taxpayer because knowing whether a structure is defined as a building or as personal property can mean the difference between 39-year depreciation and 5 or 7-year depreciation.

In determining whether a structure is a building, the courts have developed two tests from the investment tax credit regulations (Reg. §1.1245-3(c)(2); Reg. §1.48-1) and prior case law:

1. the "inherent permanency" test and

2. the "appearance and function" test

These tests must be applied concurrently because a structure is not considered a building by most courts if it fails either test. For the purpose of this article, the focus will be on the "inherent permanency" test.

Reg. §1.48-1(c) provides, in part, that "the term 'tangible personal property' means any tangible property except land and improvements thereto, such as buildings or other inherently permanent structures (including items, which are structural components of such buildings or structures)". In applying the permanency test, the courts frequently consider the following factors developed by the Tax Court in the Whiteco Industries case. (65 TC 664, (1975), acq. 1980-2 C.B. 2.):

1. Is the property capable of being moved, and has it in fact been moved?

2. Is the property designed or constructed to remain permanently in place?

3. Are there circumstances that tend to show the expected or intended
length of affixation?

4. How substantial a job is removal of the property and how time-
consuming is it?

5. How much damage will the property sustain upon its removal?

6. What is the manner of affixation of the property to the land?

What does all this mean to the taxpayer? Based on the preceding regulation, most courts have ruled that a structure cannot be considered a building unless it is "inherently permanent". Thus, in general, if a structure can be readily disassembled and moved to a new location, it will be considered personal property and not a building (real property). To offer an example, a small metal shed for storing tools, which can be disassembled and reassembled at another location, should be considered personal property under the permanency test. This, however, is a simple case, easily resolved in the taxpayer's favor. The application of the rule to larger and more expensive structures, which are necessarily more permanent in nature, is often more difficult and will be subject to closer IRS scrutiny. Two cases that demonstrate the complexities are as follows:

Ø Fox Photo (Fox Photo, Inc., 60 TCM 85) - This case involved
prefabricated one-hour photo labs erected on small parking lots.
The labs were 24 feet wide, 28 feet long and 12 feet high.
Although the labs looked like a building and were affixed to
a concrete foundation, they were designed to be moved from
one location to another by transporting 1/2 of the structure
at a time on a flatbed truck. Some structures were moved
and the cost was less than the cost of a replacement. The
case was decided in favor of the taxpayer.

Ø L.L. Bean (L.L. Bean, CA-1, 98-1, USTC ¶50, 454) - In contrast,
a specially designed warehouse for storing bulk merchandise
(500' x 190' and 57' high) was considered permanent even
though the taxpayer produced evidence that a similar structure
had been disassembled, moved (approximately 350 feet), and
reassembled over a period of 3 months. This case illustrates
that even if a structure can be moved, it is not necessarily
conclusive evidence that it is not inherently permanent. As the
court in this case noted, the fact that the London Bridge was
disassembled and moved from England to the United States
does not negate the inherent permanency of that structure.

As demonstrated in the variety of cases presented, determining the definition of "building" versus the definition of "personal property" can be very complex. Working with knowledgeable professionals can be the best way to keep the advantage in tax matters, and a cost segregation study conducted by an experienced engineer is an important part of the process. Next time, the "appearance and function" test will be addressed to further that advantage.

	Request Proposal Calculate Savings CPE Courses For more information about our CPE courses call 800.257.8962 or visit www.bedfordcap.com Locations Atlanta, GA Bedford, NH (HQ) Charlotte, NC Cleveland, OH Los Angeles, CA New York, NY Orlando, FL Philadelphia, PA Phoenix, AZ Seattle, WA			The Age Old Question: Is it a building or personal property? (Part I) Written by Steven D. Beaucaire, MST Vice President, Tax - Bedford Capital Consulting While on the surface tax code looks like one vast sea of numbers, the truth is, "language" is the name of the game. When determining the proper depreciation treatment for a structure, it is definition that pulls weight with the IRS. Having this knowledge can be financially beneficial to the taxpayer because knowing whether a structure is defined as a building or as personal property can mean the difference between 39-year depreciation and 5 or 7-year depreciation. In determining whether a structure is a building, the courts have developed two tests from the investment tax credit regulations (Reg. §1.1245-3(c)(2); Reg. §1.48-1) and prior case law: 1. the "inherent permanency" test and 2. the "appearance and function" test These tests must be applied concurrently because a structure is not considered a building by most courts if it fails either test. For the purpose of this article, the focus will be on the "inherent permanency" test. Reg. §1.48-1(c) provides, in part, that "the term 'tangible personal property' means any tangible property except land and improvements thereto, such as buildings or other inherently permanent structures (including items, which are structural components of such buildings or structures)". In applying the permanency test, the courts frequently consider the following factors developed by the Tax Court in the Whiteco Industries case. (65 TC 664, (1975), acq. 1980-2 C.B. 2.): 1. Is the property capable of being moved, and has it in fact been moved? 2. Is the property designed or constructed to remain permanently in place? 3. Are there circumstances that tend to show the expected or intended length of affixation? 4. How substantial a job is removal of the property and how time- consuming is it? 5. How much damage will the property sustain upon its removal? 6. What is the manner of affixation of the property to the land? What does all this mean to the taxpayer? Based on the preceding regulation, most courts have ruled that a structure cannot be considered a building unless it is "inherently permanent". Thus, in general, if a structure can be readily disassembled and moved to a new location, it will be considered personal property and not a building (real property). To offer an example, a small metal shed for storing tools, which can be disassembled and reassembled at another location, should be considered personal property under the permanency test. This, however, is a simple case, easily resolved in the taxpayer's favor. The application of the rule to larger and more expensive structures, which are necessarily more permanent in nature, is often more difficult and will be subject to closer IRS scrutiny. Two cases that demonstrate the complexities are as follows: Ø Fox Photo (Fox Photo, Inc., 60 TCM 85) - This case involved prefabricated one-hour photo labs erected on small parking lots. The labs were 24 feet wide, 28 feet long and 12 feet high. Although the labs looked like a building and were affixed to a concrete foundation, they were designed to be moved from one location to another by transporting 1/2 of the structure at a time on a flatbed truck. Some structures were moved and the cost was less than the cost of a replacement. The case was decided in favor of the taxpayer. Ø L.L. Bean (L.L. Bean, CA-1, 98-1, USTC ¶50, 454) - In contrast, a specially designed warehouse for storing bulk merchandise (500' x 190' and 57' high) was considered permanent even though the taxpayer produced evidence that a similar structure had been disassembled, moved (approximately 350 feet), and reassembled over a period of 3 months. This case illustrates that even if a structure can be moved, it is not necessarily conclusive evidence that it is not inherently permanent. As the court in this case noted, the fact that the London Bridge was disassembled and moved from England to the United States does not negate the inherent permanency of that structure. As demonstrated in the variety of cases presented, determining the definition of "building" versus the definition of "personal property" can be very complex. Working with knowledgeable professionals can be the best way to keep the advantage in tax matters, and a cost segregation study conducted by an experienced engineer is an important part of the process. Next time, the "appearance and function" test will be addressed to further that advantage.