I had a
conversation today with someone who wanted to understand the “tax side” of a
series of transactions. More specifically, transactions that – to a non-tax
person – would appear to have no tax side at all.
It made me
think of a tax case I read while grabbing a quick dinner one night during busy
season.
COMMENT: Glamorous life, eh?
Think of
your car. In the eyes of the IRS, is it one asset or is it a collection of
interdependent systems that – together – form a car but which can be separately
depreciated, abandoned, sold or whatnot?
This is
easy: it is one asset. You start depreciation on the whole thing and you
eventually sell or abandon the whole thing. You are not picking and choosing manifolds
from rotors.
Except if ….
It is a race
car.
There is a
racing team. After each race the team strips down the car, perhaps to the nuts and
bolts. They decide as they go though:
(1) Damaged parts
(2) Obsolete parts
a. There is enough technological change
in racing that a part can become obsolete almost overnight.
(3) Stress and wear parts
a. These are not damaged or obsolete,
but the team knows they have very limited life left because of the high stress
and wear of racing.
i. Some parts can be reused in a race.
ii. Some parts cannot be raced again, but
would be fine for a show car or pit car.
The team had
a question for the IRS: can they deduct some of this stuff when they
disassemble the car after every race?
To a tax
nerd, the question is whether there has been a “disposition.” That is the
trigger that allows one to remove an asset from a depreciation schedule and
claim a gain or loss on the tax return – hopefully a loss.
But what
does “disposition” mean to a race car?
Turns out
that disassembling it after every race is the disposition. The IRS took pains
to point out that the same car is
never raced twice. Dale Earnhardt Jr races number 88, but you never see the
same number 88 twice.
COMMENT: There is a Zen quality to
this.
That makes
it easy: if you get rid of a part, you can write-off its remaining cost.
But what if
you keep the part?
To phrase it
another way: what if you had a disposition but did not, you know, dispose of the part?
Now you have
an accounting twist. You value the part at its invoice cost (which is normal)
and then adjust down for the amount of useful life already expired. Let’s say
you have a $7,500 part, and the team experts say that it has 40% useful life
remaining. Well, that part stays on your books at $3,000 ($7,500 times 40%).
The other $4,500 gets written-off as a loss.
Heck, you
can deduct a loss even if you keep the part!
Rinse and
repeat for however many parts make up a race car.
COMMENT: I feel sorry for the person who has to bookkeep for
all this.
I wonder if racing
aficionados would recognize which racing team the IRS addressed in PLR
201710006.
A PLR is a
private letter ruling, meaning that someone presents a situation to the IRS and
requests the government position on tax consequences. This is generally done in
advance to obtain some certainty to a transaction, especially if there is a lot
of money involved.
And PLRs are
published. For many years the IRS did not publish them, but there was a famous lawsuit
requiring the IRS to do so. There was an issue, however, as the IRS is not allowed
to release confidential information. The answer was heavy redaction of any confidential
information while drafting the PLR.
Such as the
name of the racing team.
