Time to revisit HCA.

• Author: Moore, Philip E.
• Position: Hospital Corporation of America decision addressing depreciation of building components

It has been over four years since the controversial Tax Court decision in Hospital Corporation of America, 109 TC 21 (1997) (HCA), in which the taxpayer successfully argued that certain items included in a hospital building should be depreciated as personal property.

Cost Segregation

In the pre-accelerated cost recovery system (ACRS) days, the Service allowed component depreciation, which was the practice of segregating the components of a building and depreciating the various components over a life shorter than the life for the shell. ACRS and the modified ACRS (MACRS) do not permit component depreciation; however, there is still a distinction between real property and personal property. The purpose of a cost-segregation study is to identify and classify personal property, thus taking advantage of its shorter depreciable life. The key to the cost segregation is determining what is real property and what is personal property. In HCA, the courts held (and the IRS acquiesced) that items in a building that qualify as tangible personal property under the investment tax credit (ITC) rules in effect prior to 1981 may be separately depreciated as personal property; see Regs. Sec. 1.48-1(c).

The IRS initially argued that cases involving the years prior to 1981, when component depreciation was allowed, were of limited application in determining what constitutes a structural component. The Tax Court rejected this argument, stating that Congress did not intend to redefine Sec. 1250 property to include property that, prior to the enactment of ACRS, had been Sec. 1245 property for ITC purposes. The Service also argued in HCA that the items in question were structural components under an ITC analysis and, consequently, were Sec. 1250 property within the meaning of Regs. Sec. 1.48-1(e)(2). Regs. Sec. 1.48-1(e)(2) defines "structural component" by way of example rather than by definition. The court summarized the regulation, stating "an item constitutes a structural component of a building if the item relates to the operation and maintenance of the building."

Common Types of Personal Property

The regulations cited in HCA provide a fairly good representation of what a taxpayer can include in personal property. First, it is necessary to determine whether an item is a structural component of a building. In general, if an item is movable rather than permanent, it is personal property. Even if an item is attached to a building, it may still be considered...