Cost Segregation

If you are in the process of buying or selling a company, you may want to review the recent tax case Peco Foods v. Commissioner, TC Memo 2012-18. This case dealt with a proposed reallocation of asset values by the purchaser from a broad classification and large dollar value allocation of asset types (e.g. 26 categories of class types) contained in the sales agreement, which was then followed by subsequent cost studies by the purchaser after closing.

The subsequent cost segregation study allocated the 26 class groups into over 300 sub-asset groups; thus creating  smaller, more specific groupings with shortened tax lives for depreciation purposes. The Tax Court ruled that the cost segregation study would be disregarded and the previously negotiated groupings contained in the sales agreement would be binding. This resulted in less annual depreciation deductions by the purchaser on the front end. What lesson is to be learned from this case?

LOOK AT THE COST SEGREGATION STUDY PRIOR TO CLOSING, which should be followed by the negotiated acceptance by the buyer and seller to treat the study as acceptable by both sides and made part of the sales agreement. I would suggest, for example, that the 300 sub-asset groups be attached to Form 8594, which is an IRS form that reports the acquisition and sale by the respective parties in the year of sale.  

If you have questions, please contact Richard Bell, CPA 501.753.9700 or e-mail richard.bell@bellandcompany.net 

A link to a copy of the case can be found here: PecoFoods V Commissioner Case