14B — September 29 - October 12, 2017 — 2017 NJ Governor’s Conference on Housing & Economic Development — Owners, Developers & Managers — M id A tlantic
Real Estate Journal
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2017 NJ G overnor ’ s C onference on H ousing & E conomic D evelopment By Sara Palovick, CPA, WithumSmith+Brown, PC Beginning Depreciation-Courts Weigh in on When Property is “Placed in Service” F or owners of real prop- erty, the depreciation deduction provides
property times the applicable percentage outlined in the Treasury Regulations for the type of property placed in service. One of the biggest questions that arises is when the taxpayer is eligible to begin claiming depreciation deductions. Pursuant to Reg. Sec. 1.167(a)-10, the depreciation period for an asset begins when the asset is “placed in service”. As explained in Reg. Sec. 1.167(a)-11(e)(1) (i), property is first placed in service when it is placed
in a condition or state of readiness and availability for a specifically assigned function. The issue of when buildings are placed in ser- vice was recently addressed by the courts in Stine, LLC v. USA. In Stine, the court was faced with a dispute over when certain units of proper- ty, specifically buildings used for a retail operation, were placed in service for purposes of claiming depreciation de- ductions. The taxpayer ar- gued that when the buildings
were substantially complete, the buildings were ready and available for their intended use and, as a result, depre- ciation should begin. The IRS disagreed and argued that the buildings needed to be open for business before a valid depreciation deduction could be claimed. At the time depreciation was claimed by Stine, LLC, the stores in question had been issued certificates of oc- cupancy which allowed for the delivery of equipment, shelv- ing, racks and merchandise.
In addition, the appropriate personnel were permitted in the buildings to install the equipment, shelving and racks and stock the merchan- dise. It was not disputed that the stores were not open for business and the certificates of occupancy did not allow the public to enter the buildings. In ruling for Stine and de- termining that the deprecia- tion deductions in question were valid, the court looked to the language in the In- ternal Revenue Code and the Regulations thereunder. They also looked at case law. After considering all of these sources, the court decided that “whether a building is open for business is of no moment; rather the building is placed in service when is it substantially complete, meaning in a condition of readiness and availability to perform the function for which it was built.” The court further reasoned that if lawmakers desired for the building to be open to the public, that language would have been added to the rel- evant regulations. The Stine case can be used by taxpayers as a guide to determine when to be- gin claiming depreciation on their buildings. After this ruling, a taxpayer does not need to wait until the building is actually open to the public. They can begin to depreciate the building when it is ready and avail- able to perform the function for which it was built, which in many cases will allow for an earlier placed-in-service date. It is important to note that in April 2017, the IRS issued notice to taxpayers that they do not acquiesce to the hold- ing in Stine. As a result, it is possible that the IRS may challenge taxpayers who use the holding in Stine to place retail buildings in service prior to the date that they are officially open to the public. For questions on how this case and the notice on non- acquiescence may impact your business, please reach out to Rebecca Machinga, Real Estate Team Leader at rmachinga@withum.com. Sara Palovick, CPA, Withum Real Estate Ser- vices team member. n
an opportu- nity to de- duc t cos t s incurred for capital im- provements. Under the r e l e v a n t provisions of the Internal
Sara Palovick
Revenue Code, a property owner is entitled to a deduc- tion for the tax year equal to the unadjusted basis of the
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