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Tax Alert: Tax Court Case Emphasizes Need to Conduct Cost Segregation Studies Prior to Purchase Allocations

On January 17, 2012, the United States tax court issued a decision impacting a business' ability to modify purchase price allocations agreed on by a buyer and seller.

According to United States tax court memo. 2012-18 (Peco Foods v. Commissioner), the food processor was not able to modify purchase price allocations that it agreed to in connection with its acquisition of certain assets at two food processing plants. The seller and buyer ("Peco") agreed to allocate the purchase price among 26 assets "for all purposes (including financial accounting and tax purposes)" in accordance with the original purchase price allocation schedule. Peco then had a cost segregation study performed to further allocate one of the purchased assets, described as "Processing Plant Building." The inclusion of the word "building" was significant to the conclusion as it inferred that this asset was solely the building, as the equipment was separately allocated as part of the purchase price.

Section 1060 prescribes special allocation rules for determining a transferee's basis and a transferor's gain or loss in an applicable asset acquisition. An applicable asset acquisition is any transfer of assets that constitutes a trade or business and with respect to which the purchaser's basis in such assets is determined wholly by reference to the consideration paid for them.

Sec. 1060(c). The Omnibus Budget Reconciliation Act of 1990, Pub. L. 101-508, sec. 11323(a), 104 Stat. 1388-464, amended section 1060(a), provides that where the parties to an applicable asset acquisition agree in writing as to the allocation of any amount of consideration, or as to the fair market value of any of the assets transferred, that agreement is "binding" on the transferee and the transferor unless the Commissioner determines that the allocation (or fair market value) is not appropriate.

In this particular case, the Internal Revenue Service determined that there was no basis to re-allocate the agreed upon allocations. Stating that the original allocation schedules are binding upon Peco and that it may not subdivide assets in a manner at odds with those schedules.

Taxpayers contemplating the purchase of the assets of a business should consider arranging a cost segregation analysis before entering into the purchase agreement.

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Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and J.H. Cohn LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

Published date: 1/30/2012

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