Property used as service station eligible for 15 year recovery period
INSIGHT ARTICLE |
In CCA 201123001, the IRS determined that a truck service center building did not constitute nonresidential real property under section 168(e), but rather was a service station building includable in Asset Class 57.1 of Rev. Proc. 87-561. In doing so, the IRS determined that the property had a 15-year recovery period for purposes of section 168(a) rather than the 39-year recovery period that would have been required if the property constituted nonresidential real property. The IRS made this determination because the taxpayer used the property primarily as service station property even though that was not the taxpayer’s main overall business activity.
Under the facts of CCA 201123001, the taxpayer operated three business segments, one of which focused on providing full-service leasing and contract maintenance programs. This segment provided vehicle maintenance, supplies, fuel, and related equipment necessary for operating trucks. The taxpayer purchased and placed in service property that consisted of land, a special purpose industrial building structure (the building), a fuel island, a large paved lot and billboards. The building contained office space, restrooms, a work room, a mechanical room, a truck service center and a truck wash. The truck service center portion, which took up approximately 84 percent of the total square footage of the building, consisted of various service bays with overhead doors and a drive-through layout. In these bays, the taxpayer provided maintenance services such as front-end alignments, oil changes, mechanical work and other truck repair services. During the taxable year in question, the taxpayer sold a significant amount of fuel, oil, lube and other petroleum products to its customers2 as part of its maintenance and repair business.
Section 167(a) provides a deduction for the exhaustion, wear and tear (including obsolescence) of property used in a taxpayer’s trade or business. The deduction for tangible property placed in service after 1986 generally is determined under section 168, which provides a general and an alternative depreciation system. Under either system, the depreciation deduction is computed by using a prescribed depreciation method, recovery period and convention. The depreciation method and recovery period are determined by the property’s classification under section 168(e).
Rev. Proc. 87-56 sets forth the class lives of property that are necessary to compute the depreciation allowances under section 168, and establishes two broad categories of depreciable assets: (1) asset classes 00.11 through 00.4, which consist of specific assets used in all business activities, and (2) asset classes 01.1 through 80.0, which consist of general assets used in specific business activities (activity categories) based on broadly defined industry categories. Property is included in the asset class for the property’s primary use even if that activity is insubstantial in relation to all the taxpayer’s activities.3 The same item of depreciable property may be described in both an asset category and an activity category, in which case the item is classified in the asset category unless specifically excluded from the asset category or specifically included in the activity category (the priority rule).4
Asset class 57.1, Distributive Trades and Services -- Billboard, Service Station Buildings and Petroleum Marketing Land Improvements, includes service station buildings and depreciable land improvements used in the marketing of petroleum and petroleum products. It also includes car wash buildings, related land improvements and billboards. It excludes all other land improvements, buildings and structural components. Assets in this class have a class life of 20 years and a recovery period of 15 years.
If certain property is not classified under Rev. Proc. 87-56, it may be classified under section 168(e)(2)(B) as nonresidential real property if it is not residential rental property and if it has a class life of 27.5 years or more. Pursuant to section 168(c), the recovery period under 168(a) for nonresidential real property is 39 years.
The issue in CCA 201123001 was whether the building should have been included in asset class 57.1 or classified as nonresidential real property. The question turned on whether the building was primarily used as a service station during the taxable year in question and not in the taxpayer’s primary business. The IRS determined that the truck service center portion of the building possessed features typically associated with a service station. Specifically, it had service bays that allowed the taxpayer to provide maintenance services for trucks, including front-end alignments, oil changes, mechanical work and other truck repair services. The IRS also noted that there was a fuel island located in the rear of the property, and that the taxpayer sold a significant amount of petroleum products as part of its maintenance and repair business. Finally, the IRS noted that the service center portion of the building comprised approximately 84 percent of the floor space building. Based on these facts, the IRS concluded that the taxpayer used the building primarily as a service station; thus, the entire building (including the front portion and other office space) was properly classified under asset class 57.1 of Rev. Proc. 87-56, and thus qualified for a 15-year recovery period.
Although not addressed in CCA 201123001, the reclassification of the taxpayer’s truck service station building to asset class 57.1 would presumably provide an opportunity for the taxpayer to reclassify any stand-alone canopies over its fuel island to asset class 57.0 with a 5-year recovery period.5 The supporting concrete footings, however, are generally classified under asset 57.1 with a 15-year recovery period.6
Actions to be Taken
The IRS’s holding in CCA 201123001 serves as an important reminder to look at a property’s primary use when determining its appropriate recovery period for depreciation purposes, even if such use is insubstantial in relation to the taxpayer’s other business activities. Often times, many taxpayers may inadvertently not be using the correct recovery periods when depreciating property. To the extent that the adopted recovery period is too long, the taxpayer is missing out on the deduction for the additional depreciation to which it is entitled. To the extent that the adopted recovery period is too short, the taxpayer may have exposure to interest and penalties. Automatic consent of the IRS is generally available for taxpayers to change to the correct recovery period(s), or to correct most other aspects of the current depreciation method(s) that have resulted in more or less than the correct depreciation allowable.7
11987-2 C.B. 674.
2Such customers included the taxpayer’s truck lessees, owners of private truck fleets to which the taxpayer provided maintenance services, and private fleets that were otherwise customers of the taxpayer.
3In general, only taxpayers with more than one trade or business may use more than one activity class. The trade or business generally must involve substantial sales to third parties and not internal transactions to qualify for a separate activity-based asset class.
4See Norwest Corp. & Subs. v. Commissioner, 111 T.C. 105, 156-64 (1998) (item included in both an asset category and an activity category should be placed in the asset category).
5See Rev. Rul. 2003-54 and App. Sec. 6.06 of Rev. Proc. 2011-14.
7 See App. Sec. 6 of Rev. Proc. 2011-14.