IRS guidance · 2004
Chief Counsel Notice CC-2004-007 — Cost-Seg Reclassification Not a Method Change
Chief Counsel Notice CC-2004-007 (Jan. 28, 2004)
IRS Chief Counsel Notice
Audio summary
A short audio walkthrough of this rule: what it says and why it matters for your study.
What it holds
The IRS changed its litigating position: a reclassification of depreciable property from a cost segregation study (for example, moving an asset from 39-year to 5 or 15-year MACRS) is NOT a change in method of accounting under Section 446(e). No Form 3115 consent is required, and the taxpayer may file amended returns for open years.
Why it matters for your study: This is the procedural keystone behind retroactive cost segregation. It removed the Section 446(e) consent obstacle that had made look-back studies impractical, opening the door for property owners to recapture missed depreciation from prior years.
Where this comes from
When a taxpayer changes how they depreciate an asset, the IRS sometimes treats that change as a change in accounting method under Section 446(e). A method change requires IRS consent, typically through a Form 3115 filing.
Before CC-2004-007, the IRS argued that reclassifying property through a cost segregation study was a method change requiring consent. That made retroactive studies expensive and uncertain. Property owners who had never done a study could not easily go back and fix their prior returns.
CC-2004-007, issued January 28, 2004, reversed that position.
What it establishes
The notice says reclassifying depreciable property through a cost segregation study is a correction of how the asset was originally classified, not a change in accounting method. It is a different legal category. And because it is not a method change, no Form 3115 consent is required.
That means a property owner who placed a building in service years ago and never had a study done can hire an engineer, prepare a retroactive study, and then file amended returns for the years still open under the statute of limitations. No need to ask the IRS for permission first.
How it shows up in a study
CC-2004-007 is the legal foundation that makes look-back studies workable. It is one of several authorities cited to support the procedure of amending prior returns after a retroactive study.
In practice, many practitioners today use the automatic Form 3115 path provided by Rev. Proc. 2002-9 and its successors instead of amending each prior return. That path can reach more years and often produces a larger deduction in a single year. Both paths remain available. The right choice depends on which years are still open and what the study shows.
What it does not mean
CC-2004-007 is non-precedential. It is internal IRS guidance, not a published revenue ruling or regulation. It does not bind courts. A taxpayer relying on it takes some risk if litigation arises.
The notice also does not eliminate the need for a quality study. The reclassification still has to be correct. A study that does not meet the ATG's engineering and documentation standards will not hold up on exam, regardless of what procedural path was used to file the catch-up.
Primary source
Read the official text for yourself, or share it with your advisor.
- Category
- Methodology & procedure
- Applies to
- All property types
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- Vetted
This page explains a tax authority in plain words. It is not tax advice for your situation. The way this authority applies to your property is reviewed by a licensed tax professional. Citation is provided so you or your advisor can read the primary source.