IRS Issues Guidance on “Placed in Service" Date for Retail Stores

by Miles & Stockbridge P.C.
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The IRS recently announced its disagreement with the ruling of the U.S. District Court for the Western District of Louisiana, that a retail store building could be considered “placed in service” before the retail store was open to the public for an income-producing use. See Action on Decision 2017-02 (April 13, 2017).  

The taxpayer in Stine, LLC v. United States, 115 AFTR 2d 2015-637 (D.C. La. 2015), operated retail stores that sold home building supplies to contractors and consumers. In 2007, the taxpayer began constructing two new stores in the Gulf Opportunity Zone (the “GO Zone”). As of December 31, 2008, the buildings were substantially complete and had received certificates of occupancy, but the retail stores located in the buildings had not opened for business. On its 2008 tax return, the taxpayer claimed accelerated depreciation deductions as permitted for construction in the GO Zone.  

Under Section 1400N(d)(1), a taxpayer that constructs nonresidential real property located in the GO Zone may be entitled to a depreciation deduction of 50% of the adjusted basis of the building for the year the building is placed in service. To qualify for the accelerated depreciation deduction, the taxpayer must show, among other things, that the nonresidential real property was placed in service prior to December 31, 2008. Application regulations provide that “[p]roperty is first placed in service when first placed 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”. Treas. Reg. sec. 1.167(a)-10(b).  

In Stine, the taxpayer took the position that the buildings had been placed in service when the certificates of occupancy were issued. By contrast, the IRS took the position that the buildings were not placed in service until the retail stores were open to the public. The U.S. District Court concluded that the buildings were placed in service when they were substantially complete; specifically, when the buildings were ready and available to perform the function of a retail store.

In the Action on Decision, the IRS contends that the U.S. District Court erred in two ways. First, the IRS contends that the court should have reviewed the specific function of the buildings (i.e., a retail store) and determined when the buildings were available for use for that specific function. Second, the IRS contends that the court failed to consider when the building was ready and available for operational and income-producing use. Accordingly, the IRS concludes that the decision of the U.S. District Court was in error.  

Taxpayers should be aware that the IRS intends to continue to litigate this issue.  Because this case involves the interpretation of the Section 167 regulations, the holding in Stine and the IRS’s Action on Decision has implications that reach all taxpayers who claim depreciation deductions with respect to retail stores, not simply taxpayers claiming GO Zone depreciation

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. Accessing this blog and reading its content does not create an attorney-client relationship with the author or with Miles & Stockbridge. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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