Tax Memorandum

Situation

Your client, XYZ, Inc. (XYZ), a calendar year, accrual basis taxpayer, is in the business of manufacturing component parts for auto manufacturers. Three years ago, XYZ, Inc. went through an expansion by acquiring an additional manufacturing facility from Wire Harnesses R Us (Wire) for a lump sum purchase price. XYZ and Wire executed an agreed-upon purchase price allocation under IRC 1060. Based upon an appraisal, the purchase price allocation agreement allocated the cost of the purchase among several classes of assets: Manufacturing Plant Building, Manufacturing Equipment, Furniture & Fixtures, and Manufacturing Plant Land, for all purposes, including financial and tax. XYZ has filed its Form 1120 for the last three years depreciating assets acquired in the purchase using the allocations determined in the written purchase price allocation. A few weeks ago, XYZs CFO, Helen Smith, was approached by a 3^rd party vendor that specializes in preparing cost segregation studies. These studies help businesses maximize their allowable depreciation expense. This vendor believes that XYZ can accelerate depreciation by focusing on the acquired manufacturing facility and segregating some of the costs included in the buildings basis to 1245 property rather than 1250. Helen Smith is very interested in accelerating the companys tax depreciation expense and has come to you, her tax accountant, to give you the good news, and to double check that what the vendor has offered is allowed, before paying them the rather hefty fees it would cost to prepare the study.

Assignment

Prepare a memorandum for XYZ explaining whether the service being offered by the 3^rd party cost segregation vendor will work for XYZ and fully explaining why or why not.