To: Dr. Otterham
From: Cathy Buchanan
Re: Case 3: Qualified Rehabilitation Expenditures
Date: June 7, 2014
Case three was centered around two key debates falling under IRC §47. The first was
whether or not moving a building was basis enough for disallowing rehabilitation expenditures
credit and the second was whether the expenses incurred in moving the building qualify as
qualified rehabilitation expenditures. The taxpayer’s defense in this case was built largely on the
stance that statutory language was misaligned with original Congressional intent and that the
IRS was interpreting the original legislation too narrowly. I agreed with the ...view middle of the document...
* The IRS disallows the credit because she moved the building and also contended that moving expenses are not qualified rehabilitation expenditures.
The first and most important issue of this case is whether or not the $30,000 Marta spent renovating the home qualifies for the rehabilitation expenditures tax credit since she moved the home from Atlanta to Manhattan. Treasury Regulation §1.48-12(b)(5) which essentially states that the rehabilitated building may not be moved from its original location and IRC §47(c)(1)(A)(iii) which covers that walls must be “retained in place” will be the focal points of both sides of the argument on this first issue. If moving the building is deemed acceptable, then the taxpayer would become eligible for a ten percent tax credit of the qualified rehabilitation expenditures spent according to IRC §47(a)(1).
The second issue of the case is whether the $10,000 expense for moving the building from Atlanta to Manhattan would qualify as rehabilitation expenditure and thus be added to the $30,000 already spent on qualified renovation expenditures in determining the taxpayer’s tax credit. The debate here is whether the moving expense should be capitalized and therefore become part of the home’s acquisition cost or if it should be treated as renovation expenditure. If capitalized, the moving expense wouldn’t count towards the rehabilitation credit since acquisition costs are not included in qualified rehabilitation expenditures according to IRC §47(c)(2)(B)(ii) and the taxpayer would only be allowed to increase her initial cost basis on the project.
The IRS disallowed the credit in this case because the taxpayer moved the home and contended that moving expenses are not qualified rehabilitation expenditures. The IRS would build their case largely around the fact that the taxpayer relocated the building before rehabilitating it and because the buildings were relocated, walls weren’t “retained in place” as required for buildings other than certified historic structures under IRC §48(g)(1)(A)(iii). This is interpreted in Treasury Regulation §1.48-12(b)(5) - which interprets “retained in place” as prohibiting relocation of the building. It’s the IRS’s belief that Congress intended the rehabilitation credit to benefit the areas from which the building originates and allowing credit for relocated buildings would tend to defeat that purpose. The IRS could cite exerts from [Durbin Paper Stock Co., 80 TC 252 vs. Commissioner] where there were attempts to argue that Regulations weren’t valid. “The Commissioner has broad authority to promulgate all needful regulations” [Sec. 7805(a); United States v. Correll, 389 U.S. 299, 306-307 (1967)] and “it is well settled that Treasury regulations must be sustained unless unreasonable and plainly inconsistent with the revenue statutes." [Commissioner v. South Texas Lumber Co., 333 U.S. 496, 501 (1948)] both were cited in the Durbin...