Last week we discussed the Tax Court’s unfavorable ruling in Amerisouth, in which the court deconstructed a cost segregation study performed on an apartment building. In our eyes, the most damning implication of the court’s decision was the requirement that all component assets of an apartment building be analyzed on whether they were essential to the operation or maintenance to a standard apartment building, rather than a generic shell building, thus forcing certain assets such as gas lines and kitchen sinks into a 27.5 year life.
The cost segregation community, however, has not shared our concern that Amerisouth was potentially a game changer; instead, the consensus has been that had the preparer of the cost segregation properly documented their findings and been adequately prepared to defend their reclassifications in front of the IRS, this harsh result could have been avoided. Below is a response sent from WS+B’s preferred cost segregation consultants — Ernst & Morris Consultants Group — to all of its clients and partners, which reaffirms what we’ve been hearing elsewhere: The decision in Amerisouth was more a product of a sloppy study than a shift in the court’s approach to cost segregation:
To our valued clients,
On Monday, March 12, 2012 the United States Tax Court released T.C. Memo 2012-67 regarding AmeriSouth XXXII, LTD. v. Commissioner that has generated several emails to us from CPA’s around the country asking what’s our opinion on this case.
AmeriSouth XXXII, LTD. purchased the Garden House Apartments in Mesquite Texas back in 2003 for 10.25 million and then spent another 2.0 million renovating the property. Garden House Apartments were originally constructed in 1970 and contain 366 units on 16 acres. The taxpayer then hired MS Consultants to perform a Cost Segregation (CS) study. The study reclassified 3.4 million of the purchase price and subsequent renovations to 15 and 5-year MACRS property. The IRS disagreed with the taxpayer’s allocations, so the taxpayer filed a petition to challenge the IRS. The taxpayer then sold the property and discontinued further discussions with not only the IRS but with their legal counsel as well. In a rare move, the IRS allowed the taxpayer’s attorneys to be removed from the case since the taxpayer stopped all communications, so AmeriSouth was left to represent themselves in Court as they failed to file a post trial brief.
After reading the entire case, it’s obvious that the CS provider did a very poor job of defending his work in front of the IRS. They claimed the overhead incoming electric power lines as well as portions of the incoming utilities as 15-year MACRS property that the taxpayer did not own. Taking the costs associated with clearing and grubbing the site as 15 year depreciable property, qualifying the stove hood that they called a microwave exhaust, taking base molding along with many other mistakes obviously did not lend much credibility to the study. The CS provider claims that they had work papers but they were never admitted as evidence-wonder why?? In this case, it’s obvious that the CS provider did not provide enough evidence to prove that their allocations were valid and their report did not pass IRS scrutiny. The circumstances behind this case enabled the IRS to provide their positions with no rebuttal from the taxpayer. I’m sure the results would have been different if the taxpayer was more cooperative with the IRS.
As with every T.C. Memo, this case involves special circumstances between the taxpayer and the IRS. We will take these issues under consideration going forward. We do not anticipate changing how we perform CS studies for apartments. We emphasize to our clients the importance of having a qualified CS professional perform an engineering based study. Over the last few years during these tough economic times, some of our competitors started offering buy one study, get one free. The old saying of “you get what you pay for” definitely applies to this situation.
Every one of our studies provide a full narrative report, a set of cross referenced work papers and the support that we bring by defending our study for as long as it takes, at no charge. Feel free to visit the client testimonials regarding the defense of our work @ our website, www.costseg.com . Any questions or comments on this case or any CS issues you might have, please don’t hesitate to contact me @ 1-800-COST-SEG.
Michael P. Morris
Ernst & Morris Consulting Group, Inc.