The question comes up with some frequency: when is an
asset placed-in-service for tax purposes?
Generally one is talking about depreciation. Buy an
expensive asset near the end of the year, allow for delivery (and perhaps
installation) time and one becomes quite interested with the metaphysics of depreciation.
Let me give you a couple of situations:
· You
finish constructing an office building near the end of the year. It is ready-to-go,
but your first tenant doesn’t move in until early the following year. When do you
start depreciation?
· You
are a pilot and buy a plane through your business. It is delivered in the last
few days of December. There is no business travel (as it is near year-end and
between holidays), but you take the plane up for its shakedown flight. When do you
start depreciation?
The numbers can become impressive when you consider that
we presently have 100% bonus depreciation, meaning that a qualifying asset’s
cost can be depreciated/deducted in full when it is placed in service.
And what do you do in COVID 2020/2021, if you buy an
asset but government orders and mandates restrict or close the business?
There is a classic tax case that goes back to the
1960s. It distinguished between an asset being ready and available for use and actually
being placed into use. Why the nitpicking? Because life happens. In general, a
place-in-service date occurs when the asset is ready and available for use.
Well, that rule-of-thumb would help with COVID
2020/2021 issues.
On to our case.
A company in New York bought a barge from a builder in
Louisiana.
The barge made it to Rome, New York.
It was outfitted and ready to go by the end of 1957.
Winter came. The canal froze. The barge was stuck in a
frozen New York canal until spring of 1958.
When was the barge placed-in-service?
You know the IRS was on the side of 1958. They had persuasive
arguments in their favor, and that – plus the sheer cost of a barge – meant the
matter was going to be litigated.
Here is the Court:
… the barge was ready for charter or for use in the taxpayer’s own distribution business by December 1, 1957, but could not be used until May, 1958, because it was frozen into the water of an upstate canal. This was certainly not a condition which the taxpayer desired to bring about.”
And here is the staying power of the case:
… depreciation may be taken when depreciable property is available for use ‘should the occasion arise,’ even if the property is not in fact in use.”
Common tax issue + dramatic facts = memorable tax law.
Our case this time was Sears Oil Co., Inc v
Commissioner, 359 F.2nd 191 (2d Cir 1966).
