Court case · 1967
Commissioner v. Danielson
378 F.2d 771 (3d Cir. 1967), cert. denied, 389 U.S. 858 (1967)
U.S. Court of Appeals, 3d Cir.
IRS won
Audio summary
A short audio walkthrough of this case: what happened, what the court decided, and why it matters for your study.
The facts
In a business acquisition, the parties wrote an express allocation of purchase price into the contract, including an amount attributed to a covenant not to compete. Later, the taxpayer tried to reallocate the purchase price differently on the tax return. The Third Circuit had to decide whether a taxpayer is bound by the allocations written into a signed purchase agreement.
What the court decided
The Danielson rule: a party who signs an express contractual allocation of purchase price is bound by it for tax purposes. You cannot reallocate on your tax return later, unless you can prove fraud, duress, or a mistake of fact. Only the IRS, not the taxpayer, may challenge the agreed-upon allocation. The Supreme Court declined to hear the case.
Why it matters for your study: Before any acquisition cost segregation study, the purchase agreement and Form 8594 must be reviewed. If an express allocation was written in, you are bound by it. This rule shapes what a study can and cannot reclassify after the fact, and it is directly relevant when you buy a building that includes a business.
Where this comes from
When one business buys another, the deal often splits the purchase price among different assets in the contract itself. Each party has reasons to want different allocations, so negotiations happen.
Danielson involved a business acquisition where the parties wrote an explicit allocation into the agreement, including an amount for a covenant not to compete. After closing, the taxpayer tried to treat the dollars differently on the tax return. The Third Circuit had to answer the question: are you stuck with what you signed?
What it decided
The Third Circuit said yes. When you negotiate and sign an express allocation of purchase price in a contract, that allocation binds you for tax purposes. You cannot challenge your own agreement later, unless you can show fraud, duress, or a mistake of fact. Those exceptions are narrow.
The court also drew an interesting asymmetry. Only the IRS can challenge an allocation the parties agreed to. The taxpayer who signed it cannot come back and say the allocation was wrong to get a better tax result.
The Supreme Court declined to hear the case. The rule stood. Tax professionals now call it the Danielson rule.
How it shows up in a study
Danielson matters on every acquisition study. When you buy a building or a business and the purchase agreement includes a written allocation of purchase price among assets, or when Form 8594 (the asset acquisition statement) was filed, those allocations bind your study.
Before we prepare an acquisition cost segregation study, we review the purchase agreement and any Form 8594. If a written allocation exists, we work within it. A study that reclassifies assets in a way that contradicts an express contractual allocation is built on a weak foundation.
If the purchase agreement is silent on asset-level detail, you have more flexibility. That is where a well-prepared acquisition study adds real value.
What it does not mean
Danielson does not mean that a cost segregation study on an acquired building is impossible. It means that the contractual record comes first. If no express allocation exists, or if the agreement is silent at the component level, the study has room to work.
The rule also applies to Section 1060 transactions specifically. Not every real estate acquisition is a business transfer, so the reach of Danielson depends on the structure of the deal. A licensed tax professional can help you assess whether an existing allocation affects your study.
Primary source
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- Category
- Asset classification
- Outcome
- IRS won
- Applies to
- All property types
- Status
- 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.