My initially thought is this could mean trouble to a firm doing a PPA study with cost seg “after the fact” if assets are not specifically identified in the buy-sell agreement or corresponding document. This is precisely why cost segregation professionals should be engaged at the outset, if for no other reason, to simply consult and be a part of the initial transaction no differently than an attorney, CPA, or architect/engineer would be. Additionally, it just makes sense to utilize the expertise the IRS itself recommends (cost seg professionals) when allocating assets, especially since MACRS is required in the first place.
The truth is the main reason Peco happened is they didn’t do their due-diligence in their pre-engagement phase…they should have determined the original methodology used in allocating assets. It is easy to understand the court’s ruling when the Sebastopol Agreement uses terminology like, “Processed Plant Building” in conjunction with “machinery and equipment” and “fixtures and fittings.” Page 8 states, “Pursuant to the Sebastopol agreement, Peco and Green Acre agreed in writing to allocate the purchase prices of 26 assets between PFMI and LLC in accordance with the original Sebastopol allocation schedule. They did so with the understanding that such an allocation would be used “for all purposes (including financial accounting and tax purposes).” The original Sebastopol allocation schedule assigned, among other assets, $3,802,550 to an asset described as “Processing Plant Building.”” How ridiculous is that if there is an expectation of the assets to be considered § 1245 property without a completed study in place PRIOR to the transaction…especially in light of the description. While it is part and parcel to the IRS to be vague, it rarely works in favor of the private-property owner…especially against the IRS.