Kurzet v. Commissioner

Audio summary

A short audio walkthrough of this case: what happened, what the court decided, and why it matters for your study.

The facts

A taxpayer reclassified a reservoir from 31.5-year nonresidential real property to 15-year property without first getting IRS consent. The IRS argued that changing the recovery period for a property is a change in accounting method under Section 446(e), requiring prior consent.

What the court decided

The Tenth Circuit agreed with the IRS. Changing a recovery period from 31.5 years to 15 years is a change in accounting method requiring IRS consent under Section 446(e). The taxpayer had not gotten consent. The change did not stand.

Parts the case looked at

• Reservoir (31.5-yr, reclassified without consent)

Where this comes from

When you move a building component from one MACRS recovery period to another, you face a procedural question: does that move require IRS consent? The answer depends on where your property sits.

Kurzet is the Tenth Circuit's answer. The taxpayer reclassified a reservoir to a shorter life and did not ask permission first. The IRS said that was a Section 446(e) method change requiring consent. The Tenth Circuit agreed.

What it decided

The court held that changing a property from a 31.5-year to a 15-year recovery period is a change in accounting method. Section 446(e) requires the IRS's prior consent for such a change. Because the taxpayer had not obtained that consent, the reclassification was invalid.

This is the opposite of what the Fifth Circuit held in Brookshire Brothers and the Eighth Circuit held in O'Shaughnessy. Those courts treated the same kind of reclassification as falling within a regulatory exception for useful-life adjustments. The conflict has not been resolved by the Supreme Court.

How it shows up in a study

We include Kurzet in the authority library because we show you the full picture. If your property is in Colorado, Kansas, New Mexico, Oklahoma, Utah, or Wyoming, this case controls your jurisdiction. We do not pretend it does not exist.

For Tenth Circuit properties, the safe path is to use the automatic consent procedures under Form 3115 when doing a retroactive cost segregation study. Filing Form 3115 with your return and sending a copy to the IRS is how you properly authorize the reclassification and avoid the Kurzet trap.

What it does not mean

Kurzet does not say cost segregation is forbidden. It only says that in the Tenth Circuit, reclassifying without consent is risky. Following the Form 3115 automatic-consent path solves the procedural problem.

The case also does not determine what recovery period is correct for any specific asset. It addresses only the consent requirement. A study done under the right procedures is still fully valid in the Tenth Circuit.

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.