When is a Building Placed in Service: Stine LLC v. USA
Is it possible to begin depreciating a building before the building opens its doors to customers? Although it seems unintuitive, the answer is yes.
In the case of Stine LLC v. USA[1], a Louisiana federal district court held that the taxpayer’s retail building had been “placed in service” despite the fact that the retail stores had not yet open for business. As a result, the taxpayer’s buildings were judged to be “placed in service” prior to 12/31/2008 and the taxpayer could therefore claim a deduction for 50% “Go Zone” incentive depreciation.[2]
General rule
Generally, assets are “placed in service” when asset is in a “condition or state of readiness and availability for a specifically assigned function, whether in a trade or business, in the production of income, in a tax-exempt activity, or in a personal activity.”[3] As the district court in Stine noted, this test is applied somewhat differently for buildings and machinery. With respect to buildings, the asset will be considered “placed in service” when the building is “substantially complete and the building is in a condition or state of readiness and availability.”[4]
Taxpayer’s Argument
The taxpayer in Stine runs a retail operation that among other things sells home building material and supplies. In 2008, the taxpayer built two new buildings in Broussard and Walker, Louisiana, which is inside the Gulf Opportunity Zone.
Despite the fact that the retail space was not yet open to the public prior to 12/31/2008, the taxpayer argued that the two buildings were substantially complete, the buildings were then ready, and available for their intended use: to store and house equipment, racks, shelving and merchandise. As evidence, the taxpayer presented certificates of completion and limited occupancy that were granted prior to the 12/31/2008 cutoff for claiming the benefit of GO Zone allowance.
In support of its position, the taxpayer relied on Williams v. Commissioner[5], Prop. Reg. § 1.168-2(e)(3)[6], and IRS’s Audit Technique Guide for Rehabilitation Tax Credits.[7]
Williams: Open For Business ≠ “Placed in Service”
The taxpayer in Williams had purchased a muffler installation and repair shop business, which included a building that was in need of a refurbishment. The taxpayer had claimed that the building, including refurbishment was placed in service on the date the taxpayer acquired the business. In support of his position, the taxpayer claimed that he had “opened for business” while the refurbishment was ongoing. However, the Tax Court concluded that the building and refurbishment were not “placed in service” simply because the taxpayer had “opened for business.” Instead the Tax Court disregarded that fact and look to whether the refurbishment was complete.[8]
Certificates of Occupancy
Both Prop. Reg. § 1.168-2(e)(3) and the IRS’s Audit Technique Guide for Rehabilitation Tax Credits both indicate that receipt of a certificate of occupancy is evidence that a building is available for use in a finished condition such that it is considered “placed in service.”
In Stine, the taxpayer presented undisputed evidence that the buildings had been issued certificates of occupancy before the critical deadline date.
Service’s Argument
The Service argued that, as of GO Zone allowance deadline, the building was not open for business and it was therefore not yet placed in service. In support of its position, the Service cited Sealy Power, Ltd v. C.I.R.[9], Pigglv Wiggly Southern, Inc. v. Comm’r,[10], and Brown v. Comm’r.[11] The Service also argued that finding that the buildings were placed in service violating the matching principle, since the income from use of the building would not be matched with the depreciation deduction taken.
Court’s Holding
The district court found the matching principle argument totally without merit, since bonus deprecation inherently offends the matching principle and Congress intended to provide bonus depreciation as a form of tax subsidy.
The district court recognized that the “placed in service” test is somewhat different for buildings and for machinery. As a result, the Court found that cases regarding whether machinery and equipment, like the Brown (airplane) and Piggly Wiggly (equipment) cases, had no bearing on Stine’s case. Although a building was at issue in Sealy, the district court distinguished Sealy since the building was a power generation plant that, along with the equipment inside, formed a “single property”. As a result, the district court reasoned that the holding in Sealy not applicable to the arguments in Stine.
The district court also stated that the IRS provided no cite of authority to support the conclusion that an asset is not placed in service until it is used in a trade or business.
Ultimately, the district court sided with the taxpayer’s argument and found the taxpayer’s cites persuasive.[12] The district court stated that the building was placed in service when it is in a condition of readiness and availability to perform the function for which it was built. In Stine, the district court held that the taxpayer’s building satisfied this test when the building was ready to house and secure racks, shelving and merchandise, which was before the Go Zone allowance’s December 31, 2008 deadline.
Conclusion
Although Stine involved incentive depreciation for assets utilized in GO Zones, the “placed in service” test is employed in a variety of code sections, including § 167 (depreciation) and section 179.
Taxpayers should recognize that whether its doors are open for business may be a factor in determining that a building or building improvements has reached the “condition or state of readiness and availability for a specifically assigned function.” However, being open for business is not a prerequisite.
In Stine, the buildings were not yet open to customers, yet the assets were “placed in service”. However, in Williams, the taxpayer’s building improvements were not yet placed in service simply because the building was open for business.
When taxpayers are analyzing whether their building and/or improvements are “substantially complete and the building is in a condition or state of readiness and availability,” they should keep the Stine and Williams cases in mind. And, although it is not determinative, Stine shows that receipt of occupancy certificates can be a significant factor in determining whether a building has been placed in service.
Notes:
[1] Stine, LLC v. USA, No. 2:13-cv-03224 (W.D. LA filed Jan. 27, 2015).
[2] Gulf Opportunity Zone Act of 2005; IRC § 1400N(d)(2).
[3] Treas. Reg. § 1.167-11(e)(1)(i).
[4] Id.
[5] Williams v. Commisioner, T.C.M. 1203, T.C. Memo 1987-308 (1987).
[6] Proposed Regulations Amend ACRS, PS-185-81 (Feb.16, 1984).
[7] IRS’s Audit Technique Guide for Rehabilitation Tax Credits.
[8] The taxpayer in Williams was not completely open, but rather had “occasional muffler and auto repairs” while the refurbishment was ongoing.
[9] 46 F.3d 382 (5th Cir. 1995)
[10] 84 T.C. 739 (1985).
[11] T.C. Memo. 2013-275 (2013).
[12] Williams, Prop. Reg. § 1.168-2(e)(3) and the IRS’s Audit Technique Guide for Rehabilitation Tax Credits.
