Life after Hospital Corp. of America.

• Author: Bakale, Anthony
• Position: Certain properties in a building that qualify as tangible personal property for depreciation purposes

Tax practitioners enthusiastically greeted the Tax Court's decision in Hospital Corp. of America and Subsidiaries (HCA), 109 TC 21 (1997). In this case, the court concluded that certain properties in a building that qualify as tangible personal property under the former investment tax credit (ITC) rules may also qualify as tangible personal property for depreciation purposes. In other words, practitioners relying on this case can look to the guidance of the old ITC rules when determining whether property is real property (27.5- or 39-year recovery period) or personal property (five- or seven-year recovery period).

In reaching its decision, the court reviewed the multi-factor analysis described in Whiteco Industries, Inc., 65 TC 664 (1975), which asked six pertinent questions:

1. Is the property capable of being moved, and has it in fact been moved?

2. Is the property designed or constructed to remain permanently in place?

3. Do circumstances show the expected or intended length of affixation (i.e., that the property may or will have to be moved)?

4. How substantial and time-consuming a job is removal of the property? Is it readily movable?

5. How much damage will the property sustain on removal?

6. What is the manner of affixation of the property to the land/building?

The taxpayer in HCA argued that the items in dispute were in fact tangible personal property eligible for a five-year recovery period in accordance with the asset guidelines for the taxpayer's particular business. The taxpayer looked to the definitions in the ITC rules to identify items constituting tangible personal property. In addition, the taxpayer based its classification in part on the property's primary use, particularly for the electrical, plumbing and mechanical systems. The IRS argued against the five-year recovery period and in favor of treating the disputed items as Sec. 1250 real property, on the basis that the items were structural components of the buildings and thus should be treated as part of the building. The Service's position was that the old ITC rules should not be relied on when classifying property items for depreciation purposes and that permitting such a classification essentially amounted to component depreciation. The Tax Court rejected the IRS's primary argument of prohibiting component depreciation and concluded that, to the extent disputed property would qualify as tangible personal property for ITC purposes under pre-1981 law, it will also qualify...