Peco Foods, Inc. v. Commissioner

The facts

Peco bought two poultry processing plants as part of business acquisitions. Both purchase agreements set agreed dollar values for named assets under §1060, and both sides reported those values to the IRS on Form 8594. Years later, Peco hired a consultant and filed a Form 3115 to re-split the same assets into shorter lives.

What the court decided

The court held Peco was bound by the written allocations it had agreed to. A buyer in a §1060 'applicable asset acquisition' who agrees in writing to a purchase-price allocation cannot later use a cost-seg study to contradict those agreed values. The case did not say cost segregation is barred on purchased buildings, only that you cannot re-trade an allocation you signed.

Parts the case looked at

• acquired plant real property and tangible personal property

Background

Peco Foods bought two poultry processing plants as parts of business acquisitions. These were applicable asset acquisitions under section 1060. In both deals, the purchase agreements set agreed dollar values for named assets, and both buyer and seller reported those allocations to the IRS on Form 8594.

Years later, Peco hired a consulting firm to perform a cost segregation study on the plants. It then filed a Form 3115 to change its accounting method and reclassify property from nonresidential real property into shorter-life personal property, cutting against the values it had agreed to.

The Tax Court decided the case in T.C. Memo 2012-18, and the Eleventh Circuit affirmed at 522 Fed. App'x 840 (2013).

What the court actually analyzed

The court held Peco was bound by the clear and unambiguous terms of the allocation schedules it signed. Having agreed in writing to how the purchase price was split among the assets, Peco could not later deviate from its own characterization through a cost segregation study and a Form 3115.

The legal frame is the binding force of written section 1060 allocations. The IRS audit guide instructs examiners along the same line: where buyer and seller agreed to a written allocation between personal and real property, that allocation binds the taxpayer, and only the IRS can challenge it.

The scope is just as important as the holding. The audit guide itself states it is unclear whether Peco Foods would apply to acquisitions other than applicable asset acquisitions under section 1060. And where there is no written allocation, the guide tells examiners to simply address the study and move on. The bar is the signed allocation, not the study.

How it shows up in a study

Peco Foods drives our intake checklist for any property that arrived as part of a business purchase. Before fieldwork, we ask for the purchase agreement and any Form 8594. If a written section 1060 allocation exists, the study works within those agreed values rather than against them.

Often there is still real value inside the lines. An amount allocated to a building can frequently be studied within itself, and amounts allocated to equipment classes already carry short lives. The case shapes how we frame the engagement, not whether depreciation planning is possible.

In Appendix A we cite it as a methodology authority: it shows the study respected the acquisition documents, which is one of the first things the IRS audit guide tells an examiner to check.

What it does not mean

Peco Foods does not say you cannot do cost segregation on a building you bought. An ordinary real estate purchase, with no written section 1060 allocation between the parties, is not blocked by this case at all.

It also does not reach beyond its facts. The binding force came from a signed allocation in an applicable asset acquisition, reported on Form 8594 by both sides. The IRS's own guide concedes the holding's reach outside section 1060 is unclear.

What it does mean: never sign a purchase price allocation casually. The numbers agreed at closing can lock in depreciation outcomes for decades, so the time to involve a cost segregation professional is before the agreement is signed, not after.

Category

Methodology & procedure

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. The way this authority applies to your property is reviewed by a licensed tax professional. Citation is provided so you or your advisor can read the primary source.