Schrum v. Commissioner

Where this comes from

Peninsula Enterprises operated eight car washes in Virginia. When setting up depreciation, the partners allocated 60 percent of plumbing costs and 50 percent of electrical costs to the car wash equipment, treating those portions as Section 1245 personal property for faster depreciation.

The IRS objected. The case went to the U.S. Tax Court, then to the 4th Circuit twice, in 1994 and again in 1997 after remand.

What the courts decided

The result was mixed. The car wash facility structure stayed in Section 1250. That is the building category, on the slow 39-year schedule.

But the courts allowed the equipment-serving portions of the plumbing and electrical as Section 1245 personal property. The reasoning was that lines and circuits running directly to the car wash equipment existed to serve that equipment, not the building. That functional connection supported the personal property argument for the equipment-serving share.

The IRS Audit Technique Guide notes that Schrum follows an older case called A.C. Monk and that this approach does not represent the most widely accepted view across circuits. It is a minority position in the Fourth Circuit.

How it shows up in a study

Schrum is cited when a study allocates portions of plumbing or electrical to equipment-serving functions. Think of a restaurant where utility lines run directly to kitchen equipment, or a manufacturing facility where pipes serve only production machinery.

The allocation must be documented. The study needs to show which lines and circuits connect to which equipment, and why that connection makes them equipment-serving rather than building-serving. A round-number percentage with no supporting analysis is the kind of thing that fails in an audit.

The case applies to the specific equipment-serving portion, not to general building utilities. The building structure and its shared systems always stay structural.

What it does not mean

Schrum is a minority view and must be used carefully. Outside the Fourth Circuit, and in circuits that have not addressed the issue, the IRS may resist this allocation. A study relying on Schrum should acknowledge its status and document the allocation thoroughly.

It also does not apply to general building systems. The car wash structure itself, its general plumbing, and its general electrical all stayed on the building schedule. The win was narrow: only the identifiable equipment-serving share moved. A broad allocation without a clear tie to specific equipment does not have support here.