When Is A Car Not A Car?

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.