In Chief Counsel Advice 201509029 the IRS disagreed with a taxpayer’s position that certain buildings on the taxpayer’s new and used heavy and medium-duty trucks and trailers sales and leasing facility qualified as 15 year property under asset class 57.1 of Revenue Procedure 87-56. Assets in that classification qualify for a 15 year, rather than 39 year, life for purposes of depreciation.
The taxpayer depreciated a majority of its buildings as 39-year assets. But four buildings had their costs recovered over 15 years.
Asset class 57.1 property is titled “Distributive Trades and Services-Billboard, Service Station Buildings and Petroleum Marketing Land Improvements” and the taxpayer argued that the buildings devoted to servicing trucks were qualified as such buildings because they either were service station type buildings or involved in petroleum marketing.
The taxpayer pointed out that it sells oil and other lubricating products, both through retail sales of such items and the use in performing various types of services, as well as Diesel Exhaust Fluid which is sold to reduce engine emissions and improve engine performance. Exam countered that the sales of petroleum products is blended into truck sales and is relatively minor compared to the taxpayer’s overall revenue.
The taxpayer countered that while it was a small part of gross revenue, the gross margin from service related activities made up over 50% of its gross profit. The taxpayer also asserted that more than 50% of the total floor space of these buildings was devoted to “traditional service station services” though the taxpayer did not offer an explanation of what it included in “traditional service station activities” nor how it computed the percentage of floor space.
The ruling first considers whether these assets are retail motor fuels outlets. The advice notes that the applicable Senate Committee report held that §1250 property would qualify as retail property if either:
· 50 percent or more of the gross revenues that are generated from the property are derived from petroleum sales, or
· 50 percent or more of the floor space in the property is devoted to petroleum marketing sales.
As well, such property does not qualify if it is “used only to an insubstantial extent in the retail marketing of petroleum or petroleum products.”
The memorandum cites Revenue Procedure 97-37 and Revenue Procedure 2011-14 (now superseded by Revenue Procedure 2015-14 which also holds similarly) that revenue from petroleum products “does not include gross revenue from related services, such as the labor cost of oil changes, and the floor space devoted to the sale of petroleum products does not include the floor space devoted to related services, such as oil changes.”
Applying these tests the CCA concludes:
…[W]e believe that B primarily uses each of the Properties to sell and lease trucks, sell truck parts, and provide truck maintenance and repair services. While B sells petroleum products at each of the Properties, each of the Properties is "used only to an insubstantial extent in the retail marketing of petroleum or petroleum products." See S. Rep. No. 281, 104th Cong., 2nd Sess. 15 (1996). Accordingly, each of the Properties is not a retail motor fuels outlet.
But, as the ruling notes, there is second way to enter asset class 57.1—if the building is a service station building used in the marketing of petroleum and petroleum products.
First the CCA considers whether these buildings are service station buildings, specifically looking at the issue at whether a building can be such if no fuel is sold at the facility.
The ruling notes:
As previously mentioned, Rev. Proc. 80-15 established asset class 57.1 and provided that it includes the section 1250 property, including service station buildings and all depreciable land improvements, included in asset class 13.4 of Rev. Proc. 77-10. Asset class 13.4 of Rev. Proc. 77-10 included assets used in marketing petroleum and petroleum products, such as related storage facilities and complete service stations, but not including any of these facilities related to petroleum and natural gas trunk pipelines. Asset class 13.4 of Rev. Proc. 77-10 clearly provides that service stations are an example of an asset used in marketing petroleum and petroleum products (emphasis added).
Further, we considered whether or not automotive service centers were included in asset class 13.4 of Rev. Proc. 77-10. The Service treated such centers that sold fuel as being included in asset class 13.4, and such centers that did not sell fuel as not being included in asset class 13.4. See GCM 39179. We believe that this treatment continues to apply in determining whether an automotive facility is included in asset class 57.1 of Rev. Proc. 87-56.
Moreover, the 1995 CIP provides that service stations sell gasoline where it states, in distinguishing a C-store building from a service station, that the primary activity of the oil company is to market gasoline through its network of distribution outlets (formerly referred to as service stations) (emphasis added). Also, in describing the law before the Act, the Senate Committee Report to the Act states that property used in the retail gasoline trade is depreciated under section 168 using a 15-year recovery period and the 150-percent declining balance method (emphasis added).
Accordingly, we conclude that sales of gasoline and/or diesel fuel are required in order for a building that possesses the traditional attributes of a service station to be a "service station building" within the meaning of asset class 57.1 of Rev. Proc. 87-56.
A similarly negative answer is provided to the question of whether these facilities, even if treated as “service stations” despite the above, are primarily used in the marketing of petroleum and petroleum products.
The CCA determines:
As discussed above under whether the Properties are retail motor fuels outlets, we believe that B primarily uses each of the Properties to sell and lease trucks, sell truck parts, and provide truck maintenance and repair services. Accordingly, each of the Properties is not section 1250 property primarily used in the marketing of petroleum and petroleum products.
Thus, the CCA concludes that these properties are not properly included within asset class 57.1 and thus must be depreciated over 39, and not 15, years.