The case addressed the ability of Alabama-based Peco Foods Inc., the 13th largest poultry producer in the U.S., to adjust the asset allocations from those originally stated on Form 8594 through a cost segregation study and subsequent 3115 filing. The court held that in the case of Peco Foods, the asset lives could not be adjusted on a Form 3115.

In the mid-1990s, Peco purchased two chicken-processing plants. These plants were purchased as assets requiring a breakdown of the costs as stipulated in Section 1060 of the Tax Code. Peco and the seller agreed to a detailed allocation and filed a Form 8594.

A few years later Peco contracted someone to complete a cost segregation study adjusting the amount associated with building on the 8594. The IRS’s position, which was sustained by the court, was that the lives could not be adjusted on a 3115. The Section 1060 allocations are considered permanent and cannot be adjusted after the fact.

While this decision generated significant interest, this is not a new opinion. In fact, there are other cases that established a similar precedent stating very similar fact patterns. In Spector v. Commissioner, it was stated “in none of these decisions did this Court allow a taxpayer, having voluntarily and at arms-length bargained for a particular form of transaction, with complete foreknowledge of the tax consequences flowing therefrom, and having represented to the Commissioner that the chosen form reflected the true nature of the transaction, to disavow that form as a sham designed for the sole purpose of misleading the Commissioner, and, having already received substantial nontax benefits therefrom, adopt one with more favorable present tax consequences…”

In other words, the courts do not want one side of a purchase adjusting without the other side adjusting as well to keep things even.

In summary, this case will not cause drastic change. The Peco Foods case is more of a restatement of longstanding policy, and a reminder of certain important tax issues. The case does not establish a drastic change in policy, but rather spotlights very important issues that are frequently overlooked.

While Peco Foods v. Commissioner does not represent a major shift, the case does bring up some interesting questions. Should a taxpayer be less detailed in the filing of the 8594? The Form 8594 lumps all depreciable assets into category V.

Can a buyer and seller agree to the amount of a building and improvements without agreeing to the application? Should a cost segregation study be completed prior to the purchase? These questions and others are complicated and require conversations not only with a depreciation expert, but also with the CPA involved.

Two things are certain based on this case. It is very important to get experts involved early in an asset purchase. There are many ramifications, some tax related and others not tax related, that need to be carefully considered. Too often, if there are not immediate tax consequences, these issues are not addressed for a year or two. Based on this case and others like it, this course of action could be a mistake.

The case also shows the importance of making sure the 8594 is filed effectively. Discussions with experienced providers need to take place prior to the filing of this form, which is often seen as an afterthought.

David McGuire is a director at McGuire Sponsel, an Indianapolis-based specialty tax group that provides cost segregation services and works with approximately 100 CPA firms across the country.