Tax Accounting Issues

Transcription

1 Ch. 3: Tax Accounting Issues Dominion Resources v. U.S. Appeals Court Invalidates Provision in Avoided Cost Interest Capitalization Regs POWER DD COMPANY POWER DD COMPANY $11 million to replace burners $11M Loan $11 million to replace burners

2 POWER DD COMPANY $11 million to replace burners POWER DD COMPANY $11M Mortgage Loans on Other Properties $11M POWER DD COMPANY $11M Mortgage Loans on Other Properties Sec. 263A(f) Avoided Cost Method for Interest Capitalization SFAS 34

3 $11M POWER DD COMPANY Capitalize the interest expense that could have been avoided with the amounts paid for construction Sec. 263A(f) Accumulated Production Expenditures Mortgage Loans on Other Properties Accumulated Production Expenditures: Includes Cost of Property Temporarily Withdrawn from Service to Complete the Construction POWER DD COMPANY $11 million to replace burners $142 million cost of idled plant

4 POWER DD COMPANY $11M const n cost $142M idled plant $153M of APEs $3.3 million capitalized interest $132M POWER DD COMPANY $6M $5M wildly disproportionate results $10M POWER DD COMPANY POWER DD COMPANY $11M Same result with a construction loan $11M Same result with a construction loan $142M idled plant $142M idled plant Cap interest on $153M

5 $11M Dominion Resources v. U.S. Same result with a construction loan $142M idled plant Cap interest XXXXXX on $153M Dominion Resources v. U.S. Does not change the same anomaly for the cost of land Taxpayer owns vacant land with a cost of $1 million $1M Land $7M Construction Loan $1M Land

6 $7M Construction Loan $8M of APEs Capitalize interest on $1 million of taxpayer s other debt $1M Land Accumulated Production Expenditures Reg A-11(e)(1)(ii)(A) Land Reg A-11(e)(1)(ii)(B) Associated Property Withdrawn from Service Dominion Resources Reg A-11(e)(1)(ii)(A) Land Reg A-11(e)(1)(ii)(B) Associated Property Withdrawn from Service XXXXX Partnership formed to build an office building A B C $1 Million Capital

7 A B C A B C Partnership purchases land for $1 million $7M Construction Loan $1M Land $1M Land A B C Notice A B C $7M Construction Loan $7M Construction Loan $8M of APEs $1M Land $8M of APEs $1M Land

8 Notice Deferred Assets Int Cap A B C Notice A B C X Int Cap $7M Construction Loan $1M Land $8M of APEs $7M Construction Loan Substitute Costs $1M Land $8M of APEs Cost Segregation Studies

9 Retroactive Cost Segregation Studies Sec. 481(a) Adjustment Impermissible Method 12/31/ Catch-Up on Understated Depreciation

10 Sec. 481(a) Adjustment Sec. 481(a) Adjustment Impermissible Method Impermissible Method 12/31/ /31/ Year of Change Cumulative Effect: Understated Income Year of Change Positive 481(a) Adjustment Sec. 481(a) Adjustment Sec. 481(a) Adjustment Impermissible Method 12/31/2011 Cumulative Effect: Understated Income 2012 Year of Change Spread Period Positive 481(a) Adjustment Impermissible Method 12/31/2011 Cumulative Effect % Spread Period Elective De Minimis Rule: $25,000 Positive 481(a) Adjustment

11 Sec. 481(a) Adjustment Retroactive Cost Seg Study: Impermissible Method Wrong MACRS Life 12/31/ /31/ Cumulative Effect: Overstated Income 100% Negative 481(a) Adjustment Cumulative Effect: Understated MACRS 100% 481(a) Adjustment: Omitted Depreciation Amerisouth XXXII Ltd v. Comm r IRS Disputes Cost Segregation Study of Apartment Building AmeriSouth argues that, whatever the apartment complex may look like to an untrained observer, to a tax adept it is not a single asset but a collection of more than 1,000 components depreciable over much shorter periods. 3-4

12 We are tempted to say this is why AmeriSouth throws in everything but the kitchen sink to support its argument -- except it actually throws in a few hundred kitchen sinks, urging us to classify them as special plumbing depreciable over a much shorter period than apartment buildings. site preparation and earthwork water distribution system sanitary sewer system gas line site electric special HVAC special plumbing special electric finish carpentry millwork interior windows and mirrors $3.4 million out of $12.25 million $1.4 million extra dep n over 3 yrs

13 Utility Costs site preparation and earthwork water distribution system sanitary sewer system gas line site electric special HVAC special plumbing special electric finish carpentry millwork interior windows and mirrors Special Compared to What? Generic Building or Typical Apartment Building? Related to the Operation/Maintenance of the Building? Segregated: Accessory to a business Decorative Non-permanent

14 Special HVAC Special Plumbing Kitchen Sinks Garbage Disposals Water Pipes to Washers Gas Lines to Dryers Laundry Room Drains Special Electric? IRS Audit Guide

15 Special Electric Decorative Lighting Electrical Panels? Wiring for Kitchen Equipment Kitchen Electical Outlets Electric for Security Gate Electric for Irrrigation Finish Carpentry Finish Carpentry

16 IRS Audit Guide Finish Carpentry Crown Molding Chair Rails Wood Paneling Millwork Cabinets Countertops 366 units

17 Can't decide between "slum" and "ghetto, but after careful consideration, we went with ghetto. Peco Foods v. Comm r Buy-Sell Agreement Purchase Price Allocation Trumps Cost Segregation Study $27M $10M 3-8 Land $350,000 Real Property Improvements $5,100,000 Machinery, Equipment, Furniture & Fixtures $5,050,000

18 Sec. 1060(a): If in connection with an applicable asset acquisition, the transferee and transferor agree in writing as to the allocation of any consideration, or as to the fair market value of any of the assets, such agreement shall be binding on both the transferee and the transferor. Allowing Peco to treat the acquired assets in a way other than the one in which it agreed to, subjects respondent to a potential whipsaw. Such a whipsaw might occur if, for example, Peco treated certain property as section 1245 property but [the seller] treated that property as section 1250 property. Respondent would be made to treat two parties to the same transaction inconsistently. Rev Rul Advance Accrual not 75 Allowed for Prepaid Lease & Service Contract Tax Accrual Method for Deductions: All-Events Test plus Economic Performance

19 Economic Performance Services Provided/Received Property Provided/Used Tax Accrual Method for Deductions: All-Events Test, but No deduction if economic performance has not occurred by year-end, however... Recurring Item Exception for Year-End Accruals of Liabilities where Economic Performance has not yet Occurred Recurring Item Exception for Year-End Accruals Recurring Item Economic Performance within 8½ months after y/e and Immaterial or Better Matching to Income

20 7/1/12 12/31/12 6/30/12 7/1/12 12/31/12 6/30/12 Contract Payment Contract Payment Accrual of Lease Expense? Remaining Economic Performance Recurring Item Exception for Lease Accrual Recurring Item Economic Performance within 8½ months after y/e But not: Immaterial or Better Matching to Income Contract 7/1/12 12/31/12 Payment Accrual of Insurance Expense 6/30/12

21 Payment Liabilities: Insurance, Warranties, Service Contracts Taxes Licenses, Permits Rebates, Refunds Payment is Economic Performance Contract 7/1/12 12/31/12 Payment 6/30/12 Economic Performance for Insurance Expense Insurance Expense: All-Events Test is met 7/1/12 12/31/12 6/30/12 plus Economic Performance has occurred by year-end Contract Payment Insurance Expense Deductible upon Payment

22 7/1/12 12/31/12 6/30/12 Contract for: Contract Payment Accrual of Service Contract Expense? Warranty or Services? Payment Liabilities: Insurance, Warranties, Service Contracts Taxes Licenses, Permits Rebates, Refunds Warranty or Services? Specified Circumstances

23 FFA F TAM Accrual 3-14 For Estimated Rebate Liability Allowed Fixing Event vs. Ministerial Act 3-15 Rebate Liability: Economic Performance? 3-16 Payment Liabilities: Insurance, Warranties, Service Contracts Taxes Licenses, Permits Rebates, Refunds

24 Recurring Item Exception for Rebate Accrual Recurring Item Economic Performance within 8½ months after y/e and Immaterial or Better Matching to Income Wells Fargo v. U.S. Deferral of Deduction for California Franchise Tax Upheld 3-16 Sec. 461(d) 3-19 Automatic Accounting Method Change Rev. Proc App