Court case · 2003
O'Shaughnessy v. Commissioner
332 F.3d 1125 (8th Cir. 2003), 91 AFTR 2d 2003-2559, rev'g in part 2002-1 USTC para 50,235 (D. Minn. 2001)
U.S. Court of Appeals, 8th Cir.
Taxpayer 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 glass manufacturer reclassified property between MACRS depreciation categories without first getting IRS consent. A federal district court in Minnesota ruled for the IRS, holding that consent was required. The taxpayer appealed to the Eighth Circuit.
What the court decided
Two holdings. (1) SUPERSEDED: the Eighth Circuit held that moving property into an existing MACRS category was not a Section 446(e) method change under the regulations then in force. Treas. Reg. 1.446-1(e)(2)(ii)(d) now treats a change in recovery period as a method change for property placed in service in tax years ending after December 29, 2003. That is why a study needs Form 3115 and a Section 481(a) adjustment. (2) Still good: the court's fact-specific test for whether an asset is depreciable. Rev. Rul. 2015-11 adopts it.
Why it matters for your study: A second federal appeals court sided with Brookshire Brothers on the no-consent question. For properties in the Eighth Circuit (Minnesota, Iowa, Missouri, Arkansas, Nebraska, North Dakota, South Dakota), this case is direct authority that a cost segregation reclassification does not require prior IRS consent. Later Treasury regulations (Treas. Reg. 1.446-1(e)(2)(ii)(d), T.D. 9307) treat a change in asset classification as a change in accounting method for property placed in service in a tax year ending on or after December 30, 2003, so this no longer states the current rule.
Parts the case looked at
- Property reclassified between MACRS categories
Where this comes from
O'Shaughnessy arose in a glass manufacturing context. The taxpayer reclassified property between MACRS categories without filing for IRS consent under Section 446(e). A Minnesota federal district court sided with the IRS. The taxpayer appealed.
The question was the same one the Fifth Circuit had already answered in Brookshire Brothers. Does moving property from one MACRS recovery period to another require prior IRS consent? The Eighth Circuit had a chance to speak for its territory.
What it decided
The Eighth Circuit reversed the district court and held for the taxpayer on the consent question. A MACRS recovery-period reallocation fits within the regulatory exemption for adjustments in useful life. Section 446(e) does not require prior IRS consent for that kind of change.
The court affirmed some other aspects of the district court's ruling, but the net result was a win. The key point for cost segregation is the no-consent holding, which aligns directly with Brookshire Brothers.
How it shows up in a study
O'Shaughnessy and Brookshire Brothers once covered a large part of the country on the consent question.
This no-consent route is history for property placed in service in a tax year ending on or after December 30, 2003. Later Treasury regulations (T.D. 9307) treat the change as a change in accounting method, so a catch-up study today is filed on Form 3115 under the automatic consent procedures. Our new reports no longer cite this case.
What it does not mean
Like Brookshire Brothers, O'Shaughnessy was limited to its circuit, and the later regulations overtook it. The Tenth Circuit reached the opposite conclusion in Kurzet. For property placed in service in a tax year ending on or after December 30, 2003, the regulations require consent in every circuit.
O'Shaughnessy also says nothing about which assets belong in which MACRS category. It decided only the procedural question of consent. The underlying classification still has to be supported by the facts and the case law.
- Category
- Asset classification
- Outcome
- Taxpayer 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.