Category: Deductions & Credits Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Taxpayer manufactures materials handling racks for the purpose of hauling automotive parts for the "Big Three" auto makers. The racks are designed to accommodate specific automotive parts in current use. These racks have no alternative usage other than cartage of these automobile parts. Accordingly, when the parts these racks are designed to carry become obsolete, so will the racks. The racks are designed for cartage either by truck or railroad car. The taxpayer has decided to use the racks it manufactures to haul the goods for the auto makers. In other words, the taxpayer is starting a separate business to haul the goods for which the racks were designed. What is the appropriate cost recovery period for these racks? In general, MACRS recovery periods are based on the class lives as set forth in Rev. Proc. 87-56, 1987-2 CB 674. The cost of personal property which does not have a class life or is not otherwise specified in IRC Sections 168(e)(2) or (3) is recovered over seven years. IRC Section 168(e)(3)(C)(ii). The issue becomes whether or not the racks in question fit under any of the categories set forth in Rev. Proc. 87-56. The activity in question is essentially transportation of good for hire either by truck or rail. Category 42.0 includes assets used in the commercial and contract carrying of freight by road. The appropriate recovery period for such assets is five years. I think the activity in question arguably fits within this category. However, do note that there is no information on which to judge whether an asset fits within a certain category other than the two-or-three sentences provided in the Revenue Procedure. It seems to me that one could argue that Category 42.0 fits in this case, but I am not prepared to say it is a comfortable fit. By no means am I prepared to say that this categorization is beyond challenge. I think there is certainly a filing position, but the taxpayer should be put on notice that there is a risk of reclassification of these assets as 7-year assets. Oddly enough, there seems to be no similar category for assets used in transportation of goods by rail. The shortest category available amongst the various classifications concerned with railroad transportation is seven years. This leads to the illogical and rather peculiar conclusion that racks designed for rail transportation should be written off over seven years while racks designed for truck transport should be written off over five years. Perhaps the racks are even identical making the conclusion even more peculiar and illogical. I think the bottom line on all this for me is the following. If the taxpayer in question is comfortable taking a somewhat aggressive position, use five years for the truck racks and seven years for the railroad racks. If the racks are really all the same, then using five years for some of the racks based on an artificial distinction between identical assets is even more aggressive and there is even more risk. If the taxpayer is risk averse, use a seven year recovery period for everything. |
