'Substantially complete' buildings eligible for go zone depreciation.

• Author: Sands, Reed W.

In Stine, LLC, No. 2:13-cv-03224 (W.D. La. 1/27/15), a retailer's store buildings were considered "placed in service" for federal tax depreciation purposes when they were "substantially complete"--rather than when they subsequently were "open for business"--resulting in the taxpayer's being able to take an accelerated depreciation deduction for the buildings. This decision highlights the importance of properly identifying an asset's placed-in-service date.

The Facts

Stine involved a Louisiana-based retailer that sells home building materials and supplies. The taxpayer built two stores that were considered nonresidential real property. By Dec. 31,2008, the taxpayer had received limited certificates of occupancy, hired employees, and begun preparing the stores for opening. The taxpayer took the position that the store buildings were placed in service during 2008 and, accordingly, claimed the 50% accelerated depreciation deduction under the Gulf Opportunity Zone Act of 2005, RL. 109-135 (GO Zone Act), for qualified property placed in service by Dec. 31, 2008. This depreciation deduction created a loss for 2008 that the taxpayer carried back to 2003, 2004, and 2005, resulting in a refund.

The IRS denied the deduction and assessed additional taxes, including the paid refund, of more than $2 million, arguing that the buildings had not been placed in service before the 2008 GO Zone deadline.

The Court's Analysis and Conclusion

The taxpayer argued that the buildings were placed in service in 2008 because they were substantially complete and ready and available for their intended use (i.e., to house and secure shelving, racks, and merchandise) in that year. The IRS contended that to be placed in service, the stores had to be open for business, and because they were not open for business until 2009, they were not placed in service in 2008. The U.S. District Court for the Western District of Louisiana sided with the taxpayer.

The IRS cited several cases to support its argument that the buildings had not yet been placed in service (e.g., Piggly Wiggly Southern, Inc., 84 T.C. 739 (1985)). However, the court distinguished each of the cases the IRS cited, primarily because they dealt with equipment, not buildings. The court stated that there is a "marked difference in a building as opposed to equipment and how the tax courts determine when these assets are placed in service" (Stine, slip op. at 8).

The court found that the regulations supported the...