BUILDINGS can be in service before they open for business, a federal district said in late January.
A company that owns retail outlets that sell home building materials and supplies completed two new buildings in Louisiana in December 2008 that it intended to outfit as stores. Both stores had received certificates of occupancy that allowed them to receive and install equipment, shelving, racks and merchandize. The stores were not yet open for business, and the certificates did not allow the public to enter yet.
Louisiana was still recovering at the time from Hurricane Katrina. The US government allowed companies putting new assets in service in Louisiana to write off 50% of the cost immediately as a stimulus under so-called GO Zone legislation to encourage rebuilding. The special depreciation allowance only applied to assets put in service during the period August 26, 2005 through December 31, 2008.
The company claimed the special depreciation allowance on the buildings. The IRS disallowed the deductions. It said the buildings were not in service until they open for business, citing a matching principle that depreciation should not start to run until an asset has started earning revenue.
The federal district court disagreed. It said the matching argument was “totally without merit.” Allowing a 50% depreciation deduction “inherently offends the matching principle. It is a tax subsidy purposely created to increase business investments and stimulate the economy.”
The court said buildings are in service when they are “substantially complete.” It does not matter whether the retail outlets are ready to receive customers.
The IRS cited a number of cases for the proposition that depreciation cannot start until a retail operation is open for business. The court distinguished all the cases as involving equipment (airplanes, power plants, an ethanol distillery, grocery display counter) rather than a building. The current case is Stine, L/LC v. USA.
Keith Martin in Washington