Tax Alert

Tax Court Rules Against Modifying Purchase Price Allocation for Cost Segregation Study

(April 13, 2012)

A recent Tax Court case demonstrates that taxpayers need to carefully consider all tax consequences when purchasing the assets of a business.

When a company acquires part or all of the assets of an existing trade or business, the purchaser’s tax basis generally is determined by the amount paid for the assets. Both parties in the transaction generally must agree to an allocation of the purchase price among the assets purchased. In the case Peco Foods Inc. and Subsidiaries v. Commissioner, the Tax Court ruled that a taxpayer who purchased the assets of a business could not retroactively change a purchase price allocation agreed to in connection with the asset acquisition. The court held that even a properly completed cost segregation study could not be used to reclassify assets from real property to personal property after the purchaser and transferor had an enforceable asset allocation agreement in place.

Although the taxpayer in Peco Foods was prevented from using a cost segregation study, taxpayers may be able to draft a purchase agreement that permits the taxpayer to perform a fixed-asset review or cost segregation study after the purchase transaction has been completed.

Read Crowe’s blog for a more detailed review of case.

For more information on how this may affect you, please contact Ed Meyette at 616.752.4234 or or any Crowe Horwath LLP tax professional.

Under U.S. Treasury rules issued in 2005, we must inform you that any advice in this communication to you was not intended or written to be used, and cannot be used, to avoid any government penalties that may be imposed on a taxpayer.  

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Edward D. Meyette