Internal Legal Memorandum 201123001
In an internal legal memo (ILM), IRS has concluded that all of a building housing a truck service station qualified for a quick 15-year writeoff under the MACRS depreciation rules. Although the property contained substantial office space relating to the taxpayer's leasing and contract maintenance business, the truck service center took up approximately 84% of the floor space of the building.
Background. Under the modified accelerated cost recovery system (MACRS) rules, nonresidential real property generally is depreciated over 39 years (31.5 years if placed in service before May 13, '93) using the straight line method. (Code Sec. 168(c)) Under Code Sec. 168(e)(2)(B), “nonresidential real property” means Code Sec. 1250 property which is not (a) residential rental property, or (b) property with a class life of less than 27.5 years.
Under Asset Class 57.1 of Rev Proc 87-56, 1987-2 CB 674, service stations and other Code Sec. 1250 property used in petroleum and petroleum product marketing (including car washes) are depreciated over 15 years via 150% declining balance. Asset Class 57.1 includes Code Sec. 1250 assets, including service station buildings and depreciable land improvements, whether Code Sec. 1245 property or Code Sec. 1250, used in the marketing of petroleum and petroleum products, but not including any of these facilities related to petroleum and natural gas trunk pipelines. Asset Class 57.1 includes car wash buildings and related land improvements such as billboards, whether such assets are Code Sec. 1245 property or Code Sec. 1250, but excludes all other land improvements, buildings and structural components as defined in Reg. §1.48-1(e).
Facts. A portion of Taxpayer's business consists of full-service leasing and contract maintenance programs under which it provides vehicle maintenance, supplies, fuel, and related equipment necessary for the operation of trucks. This business is operated from a property that Taxpayer bought in an unspecified year consisting of land, a single-structure special purpose industrial building, a fuel island located in the rear of the property, a large paved lot with parking spaces, and billboards. The building contains office space, restrooms, a work room, a mechanical room, a truck service center, and a truck wash. The office space is made up of several executive offices, open office areas, restrooms, and a conference room.
The truck service center consists of service bays with overhead doors and has a drive-through layout so the trucks can physically park inside the service center. In the service bays (except for the truck wash), Taxpayer provides maintenance services such as front-end alignments, oil changes, mechanical work, and other truck repair services. One of the service bays is a drive-through truck wash, which is located at the back of the building and is separated by a floor-to-ceiling firewall.
Taxpayer sold an unspecified number of gallons of fuel and quarts of oil, along with lube and other petroleum products as part of its maintenance and repair business, at the truck service center. The fuel was sold to Taxpayer's leased vehicles and also to other truck owners to whom Taxpayer markets both maintenance and fuel services. The customers of Taxpayer's fuel sales include Taxpayer's truck lessees, owners of private truck fleets to whom Taxpayer provides maintenance services, and private fleets who are otherwise customers of Taxpayer.
The issue was whether the building is (1) a service station building includable in Asset Class 57.1 with a 15-year recovery period for Code Sec. 168 purposes, or (2) nonresidential real property with a 39-year recovery period.
Favorable ruling. IRS ruled that the entire building was a service station building included in Asset Class 57.1, with a 15-year recovery period for MACRS purposes. IRS reasoned that the truck service center portion of the building had the features typically associated with a service station building in which truck servicing was performed (e.g., front-end alignments, oil changes, mechanical work, and other truck repair services). In addition, there was a fuel island located in the rear of the property. Finally, the truck service center (including the service bay for the drive-through truck wash) comprises approximately 84% of the floor space of the building. Consequently, Taxpayer used the Property building primarily as a service station building, and the entire building (including the front portion and other office space) Asset Class 57.1 property with a 15-year recovery period.
Observation: There may be shorter-lived assets contained in Taxpayer's property. For example, under Rev Rul 2003-54, 2003-23 IRB, stand-alone canopies erected over gas station pumps are not inherently permanent structures but, rather, tangible personal property that can qualify for 5-year MACRS depreciation. However, IRS says the concrete footings used to anchor the support columns for the canopy are inherently permanent structures whose cost can only be recovered via 15-year MACRS depreciation.
References: For assets included in 15-year MACRS class, see FTC 2d/FIN ¶L-8208; United States Tax Reporter ¶1684.02; TaxDesk ¶266,213.