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All information provided below comes from the IRS’s Cost Segregation Audit TechniquesGuide, which can be found at the following d 134180,00.htmlPLEASE NOTE: Audit Technique Guides are not to be taken as law or as the authoritativedefinition of a given topic. However, as their names suggest, they are guidance for IRSexaminers in the case of an audit or other scrutiny. As such, they can provide great insightfor tax professionals as to how best to go about conducting tax studies and preparingreports.

www.costsegs.com [email protected] 877-633-9840CHAPTER 1 -INTRODUCTION . 5PURPOSE OF THE COST SEGREGATION AUDIT TECHNIQUES GUIDE . 5BACKGROUND. 5SUMMARY AND CONCLUSIONS . 6CHAPTER 2 - LEGAL FRAMEWORK . 7OVERVIEW . 7BULLETIN F . 7COMPONENT DEPRECIATION . 7ASSET DEPRECIATION RANGE (ADR) . 8ACCELERATED COST RECOVERY SYSTEM (ACRS) . 8MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS) . 8EXPENSING PROVISIONS AND BONUS DEPRECIATION - IRC §§ 168, 179, AND 1400L . 9WHAT IS TANGIBLE PERSONAL PROPERTY?. 9INVESTMENT TAX CREDIT - IRC § 48 . 9TANGIBLE PERSONAL PROPERTY . 10BUILDINGS AND STRUCTURAL COMPONENTS . 10SECTION 1245 AND SECTION 1250 PROPERTY . 11FUNCTIONAL USE TEST . 12INHERENT PERMANENCY TEST AND THE "WHITECO FACTORS". 12REPEAL OF ITC AND COMPONENT DEPRECIATION . 13HOSPITAL CORPORATION OF AMERICA v. COMMISSIONER ("HCA") (1997) . 13ACTION ON DECISION . 14CHIEF COUNSEL GUIDANCE . 14LACK OF BRIGHT-LINE TESTS FOR DISTINGUISHING § 1245 AND § 1250 PROPERTY . 14SUMMARY AND CONCLUSIONS . 15CHAPTER 3 - COST SEGREGATION METHODOLOGIES . 16INTRODUCTION . 16WHAT ARE THE MOST COMMON METHODOLOGIES UTILIZED FOR COST SEGREGATION STUDIES? . 16WHAT ARE THE ATTRIBUTES OF VARIOUS COST SEGREGATION METHODOLOGIES? . 16WHAT METHODOLOGY IS REQUIRED BY THE IRS? . 19SUMMARY AND CONCLUSIONS . 19CHAPTER 4 - PRINCIPAL ELEMENTS OF A QUALITY COST SEGREGATION STUDY AND REPORT. 20INTRODUCTION . 20WHAT IS A "QUALITY" COST SEGREGATION STUDY? . 20

www.costsegs.com [email protected] 877-633-9840PRINCIPAL ELEMENTS OF A QUALITY COST SEGREGATION STUDY . 20PRINCIPAL ELEMENTS OF A QUALITY COST SEGREGATION REPORT. 24SUMMARY AND CONCLUSIONS . 25CHAPTER 5 - REVIEW AND EXAMINATION OF A COST SEGREGATION STUDY. 26INTRODUCTION . 26STEPS FOR REVIEWING A COST SEGREGATION STUDY AND REPORT. 26SUMMARY AND CONCLUSIONS . 37APPENDIX - CHAPTER 6.1 - UNIFORM CAPITALIZATION . 38INTRODUCTION . 38APPLICATION OF THE CAPITALIZATION RULES UNDER IRC § 263A . 38Capitalization of Costs under IRC § 263A(a) . 38Capitalization of Interest under IRC § 263A(f) . 39APPENDIX - CHAPTER 6.2 - CHANGE IN ACCOUNTING METHOD . 41INTRODUCTION . 41HISTORICAL SERVICE POSITION . 41RECENT LITIGATION . 41NEW REGULATIONS . 41LOOK-BACK STUDIES . 42SUMMARY AND CONCLUSIONS . 43Table 1 - Revenue Procedures Relative to Cost Segregation Studies . 44APPENDIX - CHAPTER 6.3 - DEPRECIATION OVERVIEW. 45INTRODUCTION . 45HISTORICAL BACKGROUND - A BRIEF RECAP . 45GUIDELINES FOR THE CLASSIFICATION OF ASSETS - MACRS . 45APPENDIX - CHAPTER 6.4 - RELEVANT COURT CASES . 51INTRODUCTION . 51ARRANGEMENT OF INFORMATION . 51CASE CITATIONS . 51TABLE BY CASE NAME . 53TABLE OF CASES BY CSI . 57APPENDIX - CHAPTER 6.5 - STATISTICAL SAMPLING. 62APPENDIX - CHAPTER 6.6 - CONSTRUCTION PROCESS . 66STAGES IN THE CONSTRUCTION PROCESS . 66SUMMARY AND CONCLUSIONS . 73APPENDIX - CHAPTER 6.7 - INFORMATION DOCUMENT REQUESTS . 74INTRODUCTION . 74Field Directive on Asset Class and Depreciation for Casino Construction Costs . 77INTRODUCTION . 77

www.costsegs.com [email protected] 877-633-9840RECOMMENDATIONS . 77EFFECT ON OTHER GUIDANCE . 77Attachments . 78INDUSTRY SPECIFIC GUIDANCE - CHAPTER 7.2 - RESTAURANTS . 93Introduction. 93Planning and Examination Guidance . 94Attachments: Exhibit A . 94INDUSTRY SPECIFIC GUIDANCE - CHAPTER 7.3 - RETAIL INDUSTRIES. 102INTRODUCTION . 102BACKGROUND. 102PLANNING AND EXAMINATION GUIDANCE . 102Attachments: Exhibit A . 103MEMORANDUM FOR INDUSTRY DIRECTORS, LMSB DIRECTORS, FIELD OPERATIONSDIRECTOR, FIELD SPECIALISTS DIRECTOR, PREFILING AND TECHNICAL GUIDANCE AREADIRECTORS, SBSE . 111Introduction. 111Background . 111Planning and Examination Guidance . 111LMSB DIRECTIVE ON COST SEGREGATION IN THE BIOTECH /PHARMACEUTICAL INDUSTRY - EXHIBIT A. 112

www.costsegs.com [email protected] 877-633-9840This ATG has been developed to assist Internal Revenue Service (Service) examiners in the review and examinationof cost segregation studies. The primary goals are t