AmeriSouth XXXII, Ltd. v. Commissioner

Where this comes from

AmeriSouth XXXII, a Texas partnership, bought the Garden House apartment complex, a 366-unit property, in 2003 and commissioned a cost segregation study. The study deconstructed the property into more than 1,000 parts and moved items like site utilities, plumbing pieces, electrical components, and finish carpentry to 5 and 15-year lives.

The IRS audited and disagreed with most of it. Then the case went sideways. AmeriSouth sold the property while the case was pending and simply stopped responding, to the court, the IRS, and its own lawyers. The court let the lawyers withdraw and treated factual claims AmeriSouth failed to contest as conceded.

What it established

In T.C. Memo 2012-67, the court worked through the disputed categories and denied roughly $1.08 million of the reclassified depreciation. The pattern repeated across categories: the study asserted that certain plumbing, electrical, or site costs served equipment or tenants in a way that made them personal property, but the record could not connect specific lines, loads, or costs to the claimed assets.

A few items survived because the evidence supported them. Dryer vents and the gas lines serving dryers, for example, kept their shorter lives. Most everything else, sinks, general wiring, HVAC, finish carpentry, stayed 27.5-year residential rental property.

The opinion did not question the legitimacy of cost segregation itself. It applied the same Hospital Corporation of America framework everyone uses. The taxpayer lost on the facts because nobody showed up with proof.

How it shows up in a study

AmeriSouth is the case that quality standards are built against. It is why a defensible study classifies line by line, with engineering support, photos, drawings, and source cost records, so each asset traces to evidence an examiner can check. A schedule of round-number allocations with no trail behind it is exactly what this opinion punished.

It also shows up in exam strategy. IRS reviewers know this case well, and apartment studies draw particular attention because of it. When our multifamily studies support items like appliance hookups and dedicated venting with specifics, that is the AmeriSouth lesson working.

What it does not mean

AmeriSouth does not mean cost segregation fails for apartments. The court accepted the well-documented items even in a case where the taxpayer had abandoned the field. Plenty of multifamily components can qualify with proper support.

It is also a partly procedural loss. Because AmeriSouth quit responding, unanswered facts counted against it, so the opinion shows a worst-case record, not the ceiling for a prepared taxpayer. The fair reading is narrow but firm: the method is fine, and the proof is mandatory.