HCA acquiescence clarifies building depreciation.

• Author: McPherron, Cecil
• Position: IRS acquiescence to 1997 Tax Court case

In Hospital Corporation of America, Inc., 109 TC 21 (1997) (HCA), the taxpayer argued that certain items included in a hospital building should be depreciated as personal property. Such items would be depreciated over a much shorter life than the building as a whole. The IRS view was that allowing a shorter depreciation life than the building as a whole was equivalent to allowing component depreciation. The use of component depreciation for purposes of building depreciation was disallowed in the 1980s.

The Service also balked at using an investment-tax-credit (ITC) approach to determine which items could be depreciated as personal property. Regulations issued to determine property eligible for the ITC and related case law provide a convenient standard to determine what is personal property. The court adopted the ITC analysis and held that property that would have qualified for the ITC would qualify as tangible personal property for depreciation purposes.

The primary test for determining whether an item qualifies for a shorter depreciation life is whether the item in question is a structural component of a building. Regs. Sec. 1.48-1(e) (2) provides a detailed explanation of the term "structural component" and, combined with the case law cited in HCA, provides a good source of ideas for cost allocation. One item of particular note was the determination that...