The Curator offers this insightful article by Kreig Mitchell. It’s interesting. Enjoy.
IRS Concludes Open-Air Parking Garages are Buildings
By Kreig Mitchell
In recent Chief Counsel Memo #20125201F, the IRS concludes that open-air parking garages are considered buildings rather than land improvements for tax purposes and that a taxpayer’s conclusion to the contrary warrants the assessment of a negligence penalty.
Classification as a building or land improvement presents a timing issue. A building generally has a 39-year recovery period for depreciation purposes, whereas a land improvement generally has a 15-year recovery period. The shorter recovery period for property classified as a land improvement generally produces a larger depreciation deduction in the current tax year.
According to field advice handed down by the IRS, a taxpayer made several arguments as to why his open-air parking garages were land improvements and not buildings. The taxpayer argued that:
- The applicable regulations are invalid as they depart from the legislative history;
- The garages are not buildings because they do not have floor-to-ceiling walls, a conventional roof, and they do not share supporting structural elements; they offer only minimal shelter from the elements or protection from vandalism and theft and their primary purpose is storage of vehicles; and
- The garages are land improvements because they are merely parking lots stacked one on top of another and not “garages” as that term is commonly understood.
The IRS field advice rejects each of these arguments based largely on a literal reading of the applicable regulations and certain concessions in the taxpayer’s submissions. This is consistent with Coordinated Issue Paper LMSB4-0709-029, which the IRS made public in 2009.
Despite assertions from the IRS, it is not altogether clear that the taxpayer’s position is incorrect or whether the taxpayer’s facts warrant the imposition of a negligence penalty. It is also not clear whether the IRS would reach the same conclusion if the facts were slightly different, such as if the parking garage was designed in a way that no one floor functioned as a roof for a lower floor, if the parking garage was situated entirely underground, or if the parking garage had an additional primary function–such as storage for supplies, tools, or other equipment.
If anything, this field advice serves as another warning to taxpayers that a contrary position will be challenged by IRS examiners and may have to be resolved by the IRS Appeals Office or the courts.
About the Author
Kreig Mitchell serves on the advisory board of Engineered Tax Services and is tax attorney focused on federal and state research tax credits and incentives and tax controversies. During his career, Kreig has worked as a tax attorney in private practice, a tax consultant for a research tax credit firm, and an attorney and appeals officer for the IRS. He is also the author of Research Tax Credits, a book published by the American Law Institute-American Bar Association and his research tax credit articles are in a number of well-respected tax publications.
The article is designed to provide authoritative information on the subject matter covered. However, it is distributed with the understanding that the publisher, editors, and authors are not engaged in rendering legal, accounting, or other related professional services for your client base. Consequently, it is your responsibility to exercise all of the necessary measures to ensure proper tax preparation and tax advisory services for your client base.
Circular 230 Disclaimer
Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.
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