Is Your Cost Segregation Study Ready for Court?
You’ve leveraged cost segregation to accelerate your depreciation and boost your cash flow. It’s a smart move. But what happens when the IRS sends a letter questioning those very deductions? Suddenly, the entire strategy rests on a single, pivotal legal principle: the burden of proof. In the world of tax law, you are presumed incorrect until you can prove otherwise. For cost segregation, this isn't just a theoretical concept. Understanding Rule 142 of the U.S. Tax Court Rules is your first line of audit defense.
Rule 142 Explained
“The burden of proof shall be upon the petitioner...”
Translated from legalese: The weight of proving your deductions fall on you. The IRS does not need to prove you’re wrong; you need to prove you’re right. This shifts the entire dynamic of an audit. Your cost segregation study isn't just a report; it's your key piece of evidence.
Why Your Cost Segregation Study is Directly in the Crosshairs
Think of cost segregation as a strategic reclassification of building components into shorter, more efficient depreciation timelines. The IRS's job is to question that reclassification.
Is that specialized lighting truly 5-year property?
Does that plumbing directly serve manufacturing equipment, justifying a faster write-off?
Was the landscaping truly a 15-year "land improvement" or part of the non-depreciable land preparation?
Under Rule 142, a weak, template-based study will crumble under this scrutiny. A robust, engineering-based study is your shield.
What The IRS Tries to Find
IRS auditors follow specific guides (ATGs) when reviewing cost segregation. They aren't looking for opinions; they're hunting for facts. Their checklist includes:
The "Why" Behind the Number: Was the reclassification based on an engineer's detailed analysis or a simplistic rule-of-thumb?
A Paper Trail of Evidence: Can you produce blueprints, invoices, and photos that directly support each reclassification?
Substance Over Form: Does the study clearly link the asset's function, installation, and adaptability to its assigned recovery period?
A study that fails these tests is a liability, not an asset.
Can You Shift the Burden to the IRS?
While the burden typically rests with you, the tax code (IRC §7491) provides a narrow path to shift it to the IRS. This is the gold standard of defensibility. You can achieve this if you:
Substantiate everything with meticulous, contemporaneous records.
Maintain perfect cooperation with all IRS information requests.
Present a credible, expert-prepared study that is coherent and comprehensive.
This isn't about luck; it's about preparation. A study designed from the outset to meet this high bar can force the IRS to prove its case, a significantly more difficult task for them.
The precedent-setting case of Hospital Corporation of America (HCA) v. Commissioner is a masterclass in meeting the burden of proof. HCA prevailed not because the IRS was weak, but because their case was overwhelmingly strong. They succeeded by deploying qualified engineering experts to testify, basing allocations on detailed cost data instead of estimates and providing a clear, factual narrative for every single asset. The court found their evidence "persuasive." In the language of Rule 142, they decisively carried their burden.
How We Can Help You
At USTAGI, we don't just prepare studies; we build forensic-quality documentation designed for the courtroom. Our approach is rooted in these non-negotiable principles:
We start with on-site inspection and a bottom-up cost analysis, ensuring every dollar is justified.
Our final deliverable is a self-contained evidence vault, designed to provide a clear, irrefutable answer to any IRS challenge.
We anticipate the points of contention and address them within the study, preempting the auditor's questions before they're even asked.
A cost segregation study is a powerful tool, but its true value is realized only when it can withstand the pressure of an audit. Rule 142 ensures that the quality of your study isn't a minor detail - it's the entire game. Choosing a provider based on low cost or fast turnaround is a high-risk strategy. When the burden of proof is on you, the cheapest option can become the most expensive mistake of your career.
You don't just need a report. You need a defense.
At USTAGI, we provide engineering-based cost segregation studies with an uncompromising focus on audit-readiness. We give you the confidence that your tax savings are built on a foundation that can withstand any challenge.
Ready to fortify your position?
Contact USTAGI for a confidential, no-obligation review of your property's potential!