The Court of Appeals for the Eleventh Circuit, affirming the Tax Court, has concluded that for depreciation purposes, a taxpayer couldn’t unilaterally change its original purchase price allocations in two asset purchase agreements entered into in connection with acquiring certain assets. The taxpayer had attempted to make the modifications in order to secure quicker depreciation deductions following a cost segregation analysis (Peco Foods, Inc. & Subsidiaries v. Comm., (CA 11, 7/2/2013) 112 AFTR 2d ¶ 2013-5036). The Eleventh Circuit agreed with the Tax Court and stated that the law had been applied correctly.
By way of background, Peco Foods acquired one poultry plant from Green Acre Farm, Inc. in 1995 for $27,150,000 and in 1998 one poultry plant from Marshall Dublin Food Corp. and Marshal Dublin Farms for $10,500,000. As part of the purchase agreements both parties agreed to and included a Purchase Price Allocation (PPA) in the purchase documentation. At issue in the Tax Court case was the classification of a “Processing Plant Building” on one purchase and the “Real Property: Improvements” on the other purchase. Peco Foods initially depreciated these assets as nonresidential real property (39-year) before doing a cost segregation study (CSS) on each. The Tax Court ruled that the CSS was invalid because of the PPA. The PPA went as far as delineating the costs for items such as specific process related items, land improvements, buildings and goodwill. Further, the PPA was very explicit with respect to the definitions of Real and Personal property as they pertained to the specific transaction. These definitions were more than the generic “land and building” descriptions we normally see in a PPA. In addition, the PPA contained specific language that the allocations were to be used for all purposes including financial accounting and tax purposes. The taxpayer also filed the detail listing with their tax return as part of the Form 8594 for their respective year of purchase.
As stated in both the Tax Court case and in the Eleventh Circuit review, this does not add anything new to the use of a CSS as a tax planning tool. The concept of a PPA overriding a CSS has been settled since 1967 and is found in § 1060(a). This concept is even mentioned in the Audit Techniques Guide for Cost Segregation Studies as something agents should look for when auditing a CSS. While the decision in Peco Foods is not new, it does point out that one must pay attention and know the rules before making decisions on what you put into a purchase agreement as this can determine your options including whether one can use a CSS. Communication between the taxpayer, their accountant and the cost segregation provider is paramount. Specific allocations should be avoided as well as statements to the effect that this is binding for both book and tax purposes. A little forethought can pay huge dividends by allowing you to conduct a cost segregation study on your purchased property.