Daily Development for Tuesday, April 8, 2003
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC
School of Law
Of Counsel: Blackwell Sanders
Peper Martin
Kansas City, Missouri
dirt@umkc.edu
FEDERAL INCOME TAX; DEDUCTIONS; BUSINESS
EXPENSES; IMPACT FEES: Impact fees incurred by a
taxpayer in
association with the construction
of a new residential rental building
must be
capitalized and allocated to the building.
Rev. Rul. 2002-9, 2002-10 I.R.B. 614.
This Revenue Ruling addressed whether impact fees incurred
by a
taxpayer in connection with the
construction of a new residential rental
building are capitalized and allocated to the building under 263(a)
and
263A of the Internal Revenue
Code.
Taxpayer develops, owns, and leases residential rental
property and
purchased unimproved land to build
a new residential rental building.
The taxpayer
was required by the County to pay impact fees on the new
development. "Impact fees are one-time charges that
are imposed by a
state or local government
against new development or expansion of
existing development to finance specific offsite capital improvements
for
general public use that are necessitated by
the new or expanded
development.
Section 263(a) provides that no deduction is allowed for any
amount paid
out for new buildings or for
permanent improvements made to increase
the
property value. Citing Oriole Homes Corp. v. United States, 705
F.
Supp. 1531 (S.D. Fla. 1989), the IRS stated
that impact fees must be
capitalized under
263(a) of the I.R.C. Oriole addressed specifically
required costs of providing traffic signals as well as
road, educational,
regional park, and municipal
park impact fees paid for the approval and
recordation of plats.
Section 263A provides that direct costs and a portion of
indirect costs of
real or tangible personal
property produced by a taxpayer must be
capitalized to the property produced. The regulations provide
that
"produce" includes "develop" and
"improve." Citing Von-Lusk v.
Commissioner, 104 T.C. 207 (1995), the IRS stated that certain
expenses
incurred by a developer before
physical work began on undeveloped land
are
subject to 263A. Therefore, the IRS held that impact fees must
be
capitalized under 263A.
The Revenue Ruling also provided rules regarding the
application of the
ruling. First, if a
taxpayer changes its method of accounting in order to
conform to the revenue ruling, the provisions outlined in Rev.
Proc.
2002-9 must be followed with minor
exceptions. Second, if a
depreciation
deduction is allowed pursuant to 167(a), then the taxpayer
must depreciate the impact fees under 168 as residential
rental property
or nonresidential real
property. Finally, the IRS held that impact fees are
included in the eligible basis of a qualified low-income
building.
Comment: Cheer up, folks. If you hire lawyers to fight
the impact fees,
presumably those expenses are
deductible. Otherwise, tax law is all a
matter of hair slicing and (dare we say it in April?) risk
taking.
Compliance with a revenue ruling like
this is certainly the safest course,
and,
really, did you think the Service would find otherwise?
Readers are encouraged to respond to or criticize this posting.
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