How Does Peco Ruling Impact Cost Segregation?

ThreeFive Consultant, Mike Carlson Responds:

In answer to the question, “Have you guys found the Peco ruling to have an impact on your Cost Segregation business?”   I would say, “No”.  Here’s why – The situation in the Peco case is one where the FMV of the assets question was a product of an arms-length agreement, which is one of the more powerful concepts in the law.  Judges will very seldom stand between two parties who have reached an arms-length agreement.

The purpose of a Cost Segregation study is to fill a void created by the lack of such an agreement.  Keep in mind, such agreements as to the FMV of assets transferred between parties are fairly rare.  Usually, they have their hands full just agreeing to an overall price. 

The reason a Cost Segregation study didn’t hold up in court was because it was trying to challenge better evidence – an arms-length agreement.  Cost segregation studies of assets (normally, buildings or improved property, to be more precise) that have been in service for some time usually require a bunch of estimates.  For example – an asset placed into service 10 years ago – we may or may not even know how much it originally cost, so that has to be researched and often estimated.   Then you have to figure out how much it is worth today – another estimate.  Rinse and repeat for each asset.  

So, if you have an approach that comes up with FMV without requiring estimates – that’s going to be better evidence.   It may still require estimates, but if the estimates have to be agreed to by two adversarial interests (two parties to an arms-length agreement), then these estimates are better evidence than estimates performed by parties where there is no adversarial position involved (like when we sign up a client to do one of these studies and there is all this incentive to put most of the value in the shorter-lived assets, and no one to watch over the process to make sure we’re not biasing the results).

Bottom Line – If we are faced with a situation similar to that in the Peco case, there is no need for our services; we would not do a cost segregation study because it’s already been done.  On second thought, I guess the right answer is, “Yes, the Peco case DOES impact our Cost Segregation business.  We would not have done a Cost Segregation study under those circumstances.”