IRS Loses Another Roof Case...

  • Thread starter Ed Zollars, CPA
  • Start date

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M

Michael T Wing CPA

CPA Ed Zollars said:
The IRS has lost another roof repair case--and, again, it
was a pro se case in a Tax Summary opinion.
Yeah, I was going to mention this one. The thing I don't get
is ~why~ does the IRS continue to allow these cases to go to
trial? Why aren't they settling this issue at Appeals? Are
all their people that far behind on CPE? <g>

Or, do they figure that they'll just roll the dice on these
"summary" cases since they can't be cited as precedent in
any event? (IOW, there is nothing more for the IRS to lose
than the particular case in question.)

MTW
 
B

Barry Picker

Yeah, I was going to mention this one. The thing I don't get
is ~why~ does the IRS continue to allow these cases to go to
trial? Why aren't they settling this issue at Appeals? Are
all their people that far behind on CPE? <g>

Or, do they figure that they'll just roll the dice on these
"summary" cases since they can't be cited as precedent in
any event? (IOW, there is nothing more for the IRS to lose
than the particular case in question.)
You may not be able to cite the case as precedent, but you
can sure cite the case that the Tax Court cited. You can
also point out to an agent that while you may not be able to
cite the case as precedent, the case sure shows how the
Court is ruling and why would the agent continue the fight?
 
F

Frederick Jorden

You may not be able to cite the case as precedent, but you
can sure cite the case that the Tax Court cited. You can
also point out to an agent that while you may not be able to
cite the case as precedent, the case sure shows how the
Court is ruling and why would the agent continue the fight?
This case only proves to an IRS employee that the national
office is willing to fight this outcome tooth and nail. I
would not even bring it up.
 
D

Dick Adams

It really says something when a pro se case prevails!
Yeah, I was going to mention this one. The thing I don't get
is ~why~ does the IRS continue to allow these cases to go to
trial? Why aren't they settling this issue at Appeals? Are
all their people that far behind on CPE? <g>

Or, do they figure that they'll just roll the dice on these
"summary" cases since they can't be cited as precedent in
any event? (IOW, there is nothing more for the IRS to lose
than the particular case in question.)
Replacing a roof is a capital improvement and not a repair.
The logic in the original roof case could be used to make
replacing a furnace, an air-conditioning unit, even a
bathroom into a repair.

Maybe the IRS is waiting for a million dollar repair job
before they appeal.
 
J

Justin Green

Yeah, I was going to mention this one. The thing I don't get
is ~why~ does the IRS continue to allow these cases to go to
trial? Why aren't they settling this issue at Appeals? Are
all their people that far behind on CPE? <g>

Or, do they figure that they'll just roll the dice on these
"summary" cases since they can't be cited as precedent in
any event? (IOW, there is nothing more for the IRS to lose
than the particular case in question.)
You're talking about an organization that will fight both
sides of an issue in different court cases if it means the
taxpayer in each will owe more tax.
 
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D

Don Priebe

Replacing a roof is a capital improvement and not a repair.
The logic in the original roof case could be used to make
replacing a furnace, an air-conditioning unit, even a
bathroom into a repair.
On a purely economic level, I would argue that REPLACING a
furnace, a/c unit or bathroom[1] IS a repair. You usually
don't replace something unless it is broken. A new furnace
or roof will not increase the life of the underling
structure. At best it will make it habitable for its
original life. The commonly used criteria for tax
classification lead to obvious contradictions - a seven year
water heater is an improvement while a seven year paint job
is a repair.

--
Don EA in Upstate NY

[1] I will stipulate that replacing the bathroom is an
improvement if the previous bathroom was an inconvenient
distance from the house, especially in winter.
 
E

Ed Zollars, CPA

Dick said:
Replacing a roof is a capital improvement and not a repair.
The logic in the original roof case could be used to make
replacing a furnace, an air-conditioning unit, even a
bathroom into a repair.

Maybe the IRS is waiting for a million dollar repair job
before they appeal.
Hmm--they also just lost an aircraft engine case to Federal
Express in a District Court (who obviously has a bunch of
these each year <grin>), so I think they have the million
dollar case.

Remember, our issue here is not the *accounting* definition,
but rather the IRC based one, as interpreted by the
regulations. To capitalize it, it needs to meet one of two
criteria:

1. Substantially increase the value of the asset (and not
just because a "broke" asset is worth less than a fixed
one <grin>) OR

2. Substantially extend the useful life of the asset.

A key issue becomes the simple question of just what is the
asset--is the roof the asset, or is the building the asset?
The judge in the Federal Express case actually phrases it
that way, though using aircraft engines and aircraft as the duo.

If the building is the asset, then the question also becomes
whether the expenditure is one necessary to *put* the asset
into service (such as you buy a building with a leaky roof
and have to repair it before you can rent it out) or whether
it merely *restores* it to the same state as before (after
ten years, the roof starts leaking and you take care of the
problem at the tenants request).

Also, please remember that we have attorneys (judges) who
are evaluating these issues and not accountants. As such,
they will view those tests differently than you'd expect an
accountant to view them.

Accountants look at this as a materiality issue in most
cases. The *judges* tend to look at it as a simple issue of
applying Section 263 or not, and do not treat materiality as
the key issue.
 
B

Barry Picker

Accountants look at this as a materiality issue in most
cases. The *judges* tend to look at it as a simple issue of
applying Section 263 or not, and do not treat materiality as
the key issue.
Way back when, during my first semester in my masters
program, the teacher asked this type of question, about
whether certain items like those discussed here should be
capitalized or expensed.

After most people answered "capitalized", he told us that
the answer was "expensed". He added that it doesn't take
much work to decide that something should be capitalized.
We provide value to our clients when we can determine that
something can be expensed.

I've been expensing whenever feasible since then, and have
been able to convince the agent on audit by simply stating
"doesn't add value or extend the life".

Barry Picker, CPA
 
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E

Ed Zollars, CPA

Barry said:
I've been expensing whenever feasible since then, and have
been able to convince the agent on audit by simply stating
"doesn't add value or extend the life".
And it's very clear that *is* the issue and the only issue
in play. The regulation makes it clear that the difference
between a capitalized expenditure and a repair is that the
former must either add value or extend the life.

And, to be clear. it must do so in some way beyond the fact
that a repaired asset will last longer or be worth more than
an unrepaired one.
 

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