The IRS has released field attorney advice (FAA 20140202F) denying bonus depreciation to the owner and operator of a hotel complex because the taxpayer failed to demonstrate when costs were incurred for each property.
The taxpayer owned and operated a hotel complex consisting of several adjacent buildings including a casino, a hotel, a restaurant, a convention center and parking structures. The taxpayer completed four separate construction projects involving existing buildings at the hotel complex. The IRS focused its guidance on one of the projects as representing the others. After the project was completed, the taxpayer engaged a consultant to perform a cost segregation study. The cost segregation study allocated the total costs to each identified asset as a 5-, 7-, 15- or 39-year property. The study, however, did not identify the dates the costs were incurred for each asset.
The taxpayer argued that the project was provided under a turnkey contract and that it did not provide final acceptance of the project until the contractor completed the project for final acceptance. The taxpayer asserted that because the final completion and acceptance of the project occurred in Year 6, it did not incur costs until such time, and thus, the project met the acquisition date requirement of Section 168(k) under the 10% safe harbor rule of Treas. Reg. Sec. 1.168(k)-1(b)(4)(iii)(B)(2).
The IRS rejected the taxpayer's assertion that the project was a true turnkey project and thus found that the assumption could not be made that final acceptance occurred only when the contractor completed the work in Year 6. Accordingly, the IRS determined that each property must be analyzed under the rules of Section 168(k) to determine its eligibility for bonus depreciation.
The IRS determined that the cost segregation study identified a number of properties that would be qualified property if they met the other requirements for bonus depreciation. The agency also concluded that the properties at issue were self-constructed assets under Treas. Reg. Sec. 1.168(k)-1(b)(4)(iii)(A) and the taxpayer chose to apply the safe harbor rule under Treas. Reg. Sec. 1.168(i)-1(b)(4)(iii)(B)(2). In analyzing the all-events test and the economic performance test, the IRS noted that neither the pay applications submitted by the contractor nor the cost segregation study indicated when the costs of any of the separately identifiable properties were incurred. Accordingly, the IRS determined that the taxpayer had failed to meet its burden of proving which separately identifiable property, if any, was acquired after Dec. 31, 2007, under the safe harbor rules.
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