Court case · 2000
Kurzet v. Commissioner
222 F.3d 830 (10th Cir. 2000)
U.S. Court of Appeals, 10th Cir.
IRS won
Audio summary
A short audio walkthrough of this case: what happened, what the court decided, and why it matters for your study.
The facts
A taxpayer reclassified a reservoir from 31.5-year nonresidential real property to 15-year property without first getting IRS consent. The IRS argued that changing the recovery period for a property is a change in accounting method under Section 446(e), requiring prior consent.
What the court decided
The Tenth Circuit agreed with the IRS. Changing a recovery period from 31.5 years to 15 years is a change in accounting method requiring IRS consent under Section 446(e). The taxpayer had not gotten consent. The change did not stand.
Why it matters for your study: The Tenth Circuit held that moving property to a shorter recovery period is a change in accounting method that needs IRS consent. Later Treasury regulations (Treas. Reg. 1.446-1(e)(2)(ii)(d), T.D. 9307) now apply that rule in every circuit, for property placed in service in a tax year ending on or after December 30, 2003. So a catch-up study is filed on Form 3115 under the automatic consent procedures.
Parts the case looked at
- Reservoir (31.5-yr, reclassified without consent)
Where this comes from
When you move a building component from one MACRS recovery period to another, you face a procedural question: does that move require IRS consent? The answer depends on where your property sits.
Kurzet is the Tenth Circuit's answer. The taxpayer reclassified a reservoir to a shorter life and did not ask permission first. The IRS said that was a Section 446(e) method change requiring consent. The Tenth Circuit agreed.
What it decided
The court held that changing a property from a 31.5-year to a 15-year recovery period is a change in accounting method. Section 446(e) requires the IRS's prior consent for such a change. Because the taxpayer had not obtained that consent, the reclassification was invalid.
The Fifth Circuit in Brookshire Brothers and the Eighth Circuit in O'Shaughnessy once ruled the other way. Later Treasury regulations (Treas. Reg. 1.446-1(e)(2)(ii)(d), T.D. 9307) settled the question for property placed in service in a tax year ending on or after December 30, 2003. They treat a change in asset classification as a change in accounting method, so consent is needed in every circuit.
How it shows up in a study
Kurzet reached the rule the later regulations now apply everywhere: a change in recovery period is a change in accounting method that needs IRS consent.
So a retroactive cost segregation study uses the automatic consent procedures under Form 3115, wherever the property is. Filing Form 3115 with your return and sending the copy the instructions call for is how the reclassification is properly authorized.
What it does not mean
Kurzet does not say cost segregation is forbidden. It says reclassifying without consent does not stand. Following the Form 3115 automatic-consent path solves the procedural problem.
The case also does not determine what recovery period is correct for any specific asset. It addresses only the consent requirement.
- Category
- Asset classification
- Outcome
- IRS won
- Applies to
- All property types
- Status
- Vetted
This page explains a tax authority in plain words. It is not tax advice for your situation. Joel Salas, our Director of Tax, signs every study. Citation is provided so you or your advisor can read the primary source.