CCA 199921045 — Cost-Seg Documentation Standards

Where this comes from

After the Tax Court's 1997 Hospital Corporation of America decision confirmed that cost segregation studies were a valid method, the IRS needed to clarify its own position. The IRS Office of Chief Counsel, which provides internal legal analysis to IRS employees, issued CCA 199921045 on April 1, 1999.

Chief Counsel Advice documents are internal memos. They are not binding precedent in the way a court case or a Treasury regulation is. The IRS is not legally required to apply them the same way in every situation. But they carry real weight in practice. They show how the IRS's own lawyers think about an issue and what arguments examiners are trained to make.

What it says

The memo has two sides. First, it endorses cost segregation. It cites Hospital Corporation of America and confirms that allocating construction costs to Section 1245 personal property through a study is an accepted approach. The IRS is not contesting the method itself.

Second, it sets a documentation standard. The memo says an accurate study may not rest on non-contemporaneous records, reconstructed data, or unsupported taxpayer estimates. Each of these three problems has a specific meaning.

Non-contemporaneous records are records created after the fact, not at the time the construction or acquisition happened. Reconstructed data is similar but worse: it means trying to recreate original records from memory or secondary sources when the originals are gone. Unsupported taxpayer estimates are the most obvious problem: a rough guess about what certain building components might have cost, without any supporting document.

All three fail the standard.

How it shows up in a study

A defensible study is built on the original cost records from the time the building was constructed or acquired. For new construction, that means the signed contracts, the architect's and engineer's drawings, the AIA payment applications that break down costs by category, the subcontractor bids and final invoices, and any change orders. For an acquisition, it means the closing statement, the appraisal, and any seller-provided cost schedules.

These documents tie specific costs to specific components with real numbers from real documents created at the time. An engineer inspects the property, matches the components to those records, and certifies the allocation. That is the combination the IRS expects to see.

For older buildings where original records are harder to find, the documentation standard is the same. The study has to work harder, but the IRS's expectation does not change.

What it does not mean

This CCA is not a barrier to cost segregation. It is a quality standard. A study built on the right records meets the standard. The IRS endorsed the method in this very document.

It also does not mean that every estimate is prohibited. Engineers use accepted cost-estimation techniques, and a study can involve some allocation of costs using reasonable engineering judgment. The prohibition is on unsupported estimates that have no basis in real documents. An engineer's certified cost breakdown using industry pricing data and supported by a site inspection is not an unsupported estimate.