Recently there has been much discussion regarding the IRS General Counsel Memorandum # 20125201F. The memorandum pertains to the recommended assessment of a §6662 penalty on a taxpayer who took the position that an open air parking structure was a 15-year land improvement versus a building with a 39-year life. The taxpayer was penalized 20% of the underpayment of tax caused by this position.
The IRS rejected the taxpayer’s assertion that the cost segregation study and its accompanying memorandum on the parking structure justified their position. Because neither the study nor the memo contained specifics regarding the particular parking structure, and the taxpayer only discussed open air parking structures in general, the IRS decided it was not reasonable for the taxpayer to assume the position they did.
The IRS issued a Coordinated Issue Paper (CIP) on Parking Structures in 2009. While the CIP could not be cited as authority, the document did give taxpayers a good sense of how the IRS would look at parking structure depreciation treatment upon audit and that taxpayers could be cited for a §6662 penalty if there was no substantiation for their position.
Given the specific results associated with this particular taxpayer issue, the outcome should come as no surprise to anyone. The IRS ended its 2009 CIP by clearly stating that assessing underpayment penalties was an option they would pursue where they deemed appropriate.
It should be noted that the taxpayer had previous experience with the denial of 15-year treatment of a similar parking structure in a prior audit. In that case, the taxpayer fought the audit adjustment, but later settled at Appeals. The fact that the taxpayer was a repeat offender made it easy for the IRS to recommend assessing the penalty.
When discussing whether any structure is a building, one first has to look at the ‘Appearance and Function Test’ as set forth in Regulations §1.48-1(e). The Regulations state, in part, “The term ‘building’ generally means any structure or edifice enclosing a space within its walls, and usually covered by a roof, the purpose of which is, for example, to provide shelter or housing, or to provide working, office, parking, display, or sales space.” The first part of the test is simply whether the building looks like a building, i.e. whether its appearance is that of a building.
Various court cases have illustrated how important this test is when evaluating whether a structure is a building. In some circuit courts, a structure must meet both tests to be considered a building; in other circuits, the function test is given the greater weight. In some cases, the appearance test is not met and its importance depends on location and what rationale the court applies to determining whether the structure is a building.
While the facts and circumstances regarding other parking structures could possibly warrant a 15-year treatment in some cases, the CIP essentially served notice to all taxpayers and their advisors that it would be a difficult position to defend upon audit. As such, Bedford began advising clients to assign 39-year lives to parking structures following the issuance of the CIP in 2009.