The IRS has released field attorney advice (FAA 20125201F) that authorizes a negligence penalty on a taxpayer for taking the position that an open-air garage is a land improvement and therefore has a 15-year recovery period.

The field attorney advice was written regarding a taxpayer that settled the open-air garage position in Appeals on a previous return and then took the position again. The taxpayer originally filed a Form 3115 (Application for Change in Accounting Method) to reclassify its open-air parking structures from a 39- or 31.5-year recovery period to a 15-year recovery period. After the IRS disallowed the 15-year recovery period in examination, the taxpayer appealed and reached a settlement with Appeals.

Later, the taxpayer placed new parking structures in service and again treated the structures as land improvements with a 15-year recovery period. The taxpayer obtained a cost segregation study that supported this treatment. The IRS examination team again proposed disallowing the treatment of the structures as land improvements and treating the structures as buildings with a 39-year recovery period. In addition, the examination team proposed a similar adjustment for the structures examined in the prior examination cycle. The examination team sought advice from local IRS counsel regarding the existence of authority to also impose a negligence penalty.

The field attorney advice cites an IRS coordinated issue paper effective July 31, 2009, which concludes that an open-air parking structure is a building and, therefore, has a 39-year recovery period. The coordinated issue paper was issued after the taxpayer filed its return for the year in question. The field attorney advice concluded there was no reasonable basis for the taxpayer’s position and the taxpayer could not avoid imposition of a penalty, because it did not have reasonable cause and did not act in good faith. Accordingly, the advice authorized use of a negligence penalty.

This conclusion was reached despite the following:

  • The taxpayer made a technical argument supporting its position.

  • The taxpayer had a cost segregation study supporting its position.

  • The coordinated issue paper was issued after the taxpayer filed its return.

  • The taxpayer had reached settlement in Appeals on the issue for prior years.

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