Grinalds v. Commissioner

Where this comes from

A taxpayer fit out a commercial interior. They claimed faster depreciation on air conditioning units, cubicle partitions, interior walls, restroom plumbing, and electrical conduit and receptacles. They treated all of it as Section 1245 personal property.

The IRS said no. Every item was a structural component of the building, subject to the slow 39-year schedule. The case went to the U.S. Tax Court in 1993.

What the court decided

The Tax Court ruled against the taxpayer on every single item. A/C units, cubicle partitions, interior walls, restroom plumbing, and electrical conduit and receptacles were all structural components under Section 1250.

The reasoning was straightforward. These items served the building as a place for people to occupy and work. They were not dedicated to a specific production process, not designed for reconfiguration (unlike the movable partitions in King Radio and Minot Federal), and not separable from the building's general function. Standard build-out items that make a space habitable and functional are structural components.

The IRS followed up with an Action on Decision addressing the A/C-unit investment tax credit point specifically, reinforcing the adverse outcome.

How it shows up in a study

Grinalds appears in cost segregation reports to set context. A quality study acknowledges this case and explains why the items it reclassifies are different from the standard build-out components that stayed structural here.

For cubicle partitions, the comparison is to King Radio and Minot Federal. In those cases, the partitions were pre-manufactured and movable. Grinalds involved standard construction partitions built into the space. The distinction matters.

For A/C units, the comparison is to cases like Deseret Management, where equipment-serving HVAC passed the sole-justification test. In Grinalds, the A/C served occupants, not equipment. That is the line.

What it does not mean

Grinalds does not mean commercial interiors never have personal property. Plenty of components in a fitted-out commercial space qualify. Dedicated process equipment, movable partition systems, specialty electrical for specific equipment, and other items with documented function beyond the general build-out all have support.

This case tells you what the baseline looks like. Standard office construction, generic electrical, regular HVAC, fixed interior walls, these stay structural. Everything a study moves to a shorter class has to clear a higher bar than the items the court held structural here.