On November 3, the Internal Revenue Service (IRS) released its first major update to the Cost Segregation Audit Techniques Guide (ATG) in more than a decade. First introduced in 2004, the Cost Segregation ATG has seen minor updates over the years as the IRS has added new industry directive grids and other sections, most notably the sections on open-air parking structures and electrical distribution systems. This most recent revision maintains the basic format of the original ATG, but heavily revises some sections, especially in the appendices. Today we will look at the highlights of the new ATG.
- Examiners are now referred to the IRS Deductible & Capital Expenditures Practice Network for technical and procedural assistance. Practice networks are groups of IRS personnel from LB&I, SB/SE, technical specialists, and Chief Counsel attorneys who specialize in particular topics or issues. These networks assist in knowledge dissemination and issue identification. Unlike specialist groups in large accounting firms, they generally do not control their issues.
- The ATG now incorporates both the 1995 and 2004 CSI MasterFormat Divisions. These divisions are published by the Construction Specifications Institute and allow communications between all stakeholders in a construction process. Divisions include areas such as site onstruction or electrical. Historically, most cost segregation studies followed contractor documentation in using the 16 divisions of the 1995 MasterFormat. The 2004 MasterFormat increased the number of divisions to 50.
- For acquired properties with existing improvements, the ATG now provides much more specific guidance on purchase price allocation issues. For example, the ATG provides a land-first residual method for determining the cost of improvements where land is valued first and then subtracted from the total purchase price to determine the cost of the depreciable improvements. Another example is a new, extensive write-up on Danielson rule issues from the Peco Foods In that case, a taxpayer with a binding written purchase price allocation was not permitted to further cost segregate its acquired properties.
- When discussing Rev. Proc. 87-56, the ATG has established the Clajon trilogy of cases as the touchstone for asset classification. Though not surprising in light of private letter rulings and technical advice memos issued over the last 10 years, this revision further confirms that prior IRS rulings on asset classifications have been abandoned.
- New or additional court cases have been added to the ATG. In addition to Peco Foods, other recent cases such as AmeriSouth XXXII, Trentadue, and PP&L have been added to the ATG. The ATG has also added older cases, such as Wood v. Comm’r, T.C. Memo 1991-205. The Wood case dealt with solar water-heating equipment, a topic with increasing importance. Property units from all cases now use both the 1995 and 2004 CSI MasterFormat divisions.
- The ATG now has an entire appendix section on the inherently permanent standard and how it varies between the Whiteco factors used under 168 and the tests used for other code sections, such as §263A or §199. Another new section has been added for bonus depreciation issues, while the statistical sampling section has been removed.
- The ATG now contains industry guidance for the auto manufacturing industry. This is the first industry guidance, commonly called a “grid”, to feature both the 1995 and 2004 CSI MasterFormat divisions. It is also the first grid to address research assets classified as five-year under 168(e)(3)(B)(v). In addition to these new features, this grid comprises a wider variety of assets than prior grids, which will make it useful for complex cost segregation situations.
This list presents only important highlights of the revised ATG. As the cost segregation industry and the IRS react to the new ATG, we will provide updates on any important new developments.