On July 31, 2009, the Internal Revenue Service (the Service) published a coordinated issue paper1 (LMSB4-0709-029) (CIP) setting forth its current position on the appropriate cost recovery period for open-air parking structures. According to the CIP, the Service and taxpayers agree that a stand-alone, open-air parking structure is a permanent structure. However, the CIP states that the parties have disagreed over whether these structures are “land improvements,” depreciable over a 15-year period, or “buildings,” depreciable over a 39-year period. 

Stand-alone, open-air parking structures characteristically provide multi-level parking connected by a ramp. They tend to be partially open to the outside and protect cars from most of the elements. The structures provide lighting, multiple means of egress, and safety features such as sprinklers and signage. In the CIP, the Service set forth its definition of “Land improvements” from Revenue Procedure 87-56,2 which definition includes improvements such as sidewalks, roads, bridges, fences and landscaping. The Revenue Procedure specifically excludes from its definition “buildings,” which Treas. Reg. § 1.48-1(e) generally defines. In the CIP, the Service concludes that an open-air parking structure (including a stand-alone structure) is a building, the cost of which is properly recovered over a 39-year period.

In its analysis, the Service cites the Regulatory definition of the term “building” as including “any structure or edifice enclosing a space within its walls, and usually covered by a roof, the purpose of which is, for example, to provide shelter or housing, or to provide working, office, parking, display, or sales space.”3 The Service notes that the term has been interpreted as including an appearance test and a function test. The Service argues that, with respect to function, the property meets the test by providing parking and there is no requirement that it meet all of the functions listed in the regulation. With respect to appearance, the Service reasoned that open-air parking structures have walls (despite the fact that they do not extend to the ceiling) that prevent vehicles from driving off the side and protect from the elements. Each level also constitutes a ceiling for the level below. Further, the Service emphasizes that these structures have many of the components described in the regulation – walls, floors, elevators, stairs, electrical wiring, lighting and safety features — and that the regulation does not require that all components be present in a structure to classify it as a building. The Service concludes its analysis by stating that taxpayers have not cited any support for their position that a structure which functions as a building is not a building and that properly maintained and built open-air parking structures can be expected to perform well for 25 to more than 40 years.

After setting forth its analysis, the Service states, “Given the lack of support for the taxpayer position, an accuracy-related penalty for negligence under I.R.C. § 6662 should be considered.” Section 6662 imposes penalties against taxpayers that fail to exercise ordinary and reasonable care in preparation of their tax returns. Thus, if a taxpayer takes the return position that its open-air parking structure is a land improvement, as opposed to a building, the Service believes that it has a position to impose the negligence penalty.

The above Alert provides a brief summary of the Service’s position with respect to the depreciable life of open-air parking structures. If you have any questions or want further information, please contact Robert Honigman, Liz Mullen or any member of the Arent Fox Tax Group listed below.

1 Coordinated issue papers identify, coordinate and resolve complex and significant industry wide issues by providing guidance to field examiners and ensuring uniform application of the law. Although these papers are not official pronouncements on the issues, they do set forth the Service's current thinking.

2 1987 2 C.B. 687 (Asset class 00.3)

3 Treas. Reg. § 1.48-1(e).

Robert E. Falb
falb.robert@arentfox.com
202.715.8569

Robert G. Honigman
honigman.robert@arentfox.com
202.857.6041

John C. McCoy
mccoy.john@arentfox.com
202.857.6175

Joseph A. Rieser
rieser.joseph@arentfox.com
202.857.8964

Melanie L. Bartlett
bartlett.melanie@arentfox.com
202.715.8571

Elizabeth A. Mullen
mullen.elizabeth@arentfox.com
202.775.5704