Sec. 179 deduction decision was taxpayer favorable.

Robert D. Shirley, TC Memo 2004-188, decided whether a Sec. 179 deduction was available for a motor home bought for a rental fleet. The deduction is allowable if the motor home is "used primarily as a means of transportation," but not if it is "used predominantly to furnish lodging." Thus, the case presents an imponderable question: "When a vehicle can be simultaneously used for both lodging and transportation, how can one tell which use is primary?"

Motor Home Rental Business

Robert Shirley owned Motor Home Rentals, a business that rented and sold motor homes. In 1997, the retail fleet contained 27 motor homes, including a new Gulfstream Motor Home purchased for $48,000 in August. The usual terms for motor home rentals are much like those for car rentals: a daily or weekly fee, a daily mileage allowance of 100 miles and a mileage charge of $0.25 for each additional mile. During the year, the business rented motor homes to many customers, for between one and 90 days, totaling 322 transactions. Most customers drove fewer than 100 miles per day.

Predominant Use

While the IRS argued that motor homes are property used predominantly for lodging, the taxpayer contended that they are used primarily for transportation. The taxpayer further argued that even if a motor home is used predominantly for lodging, it qualifies for an exception, because the lodging is used predominantly by transients (i.e., short-term renters).

Preliminary Question

Solving this puzzle involves determining whether the focus is on the motor home or the motor home business as a whole. The court followed Van Susteren, TC Memo 1978-310, and focused on the use of the fleet, not the specific motor home.

Law

Sec. 179(d) excludes property described in Sec. 50(b) from expensing. Sec. 50(b)(2) identifies property used predominantly for lodging, but excludes property used by a hotel or motel when the predominant portion of the accommodations is used by transients. The Omnibus Budget Reconciliation Act of 1990 essentially reenacted old Sec. 48(a)(3) as new Sec. 50(b)(2). There are no regulations under Sec. 50(b)(2), but the regulations under old Sec. 48(a)(3) have remained unchanged since their issuance. The Tax Court examined these regulations for guidance.

Regulatory Guidance

Regs. Sec. 1.48-1(h)(1)(i) provided that eligible property did not include property used predominantly to furnish lodging. The term "lodging facility" included an apartment, hotel, motel, dormitory or any other facility (or part of a facility) that provides sleeping accommodations, except that such term did not include a facility used primarily as a means of transportation (such as an aircraft, a vessel or railroad car), even though it has sleeping accommodations.

Property was not used predominantly to furnish lodging if the predominant portion of the lodging accommodations was used by transients. Accommodations were deemed used on a transient basis if the rental period was normally less than 30 days. Predominant portion means more than half. The court had held in Moore, 58 TC 1045, 1054 n. 8, aff'd, 489 F2d 285 (5th Cir. 1973), that "predominant portion" means the proportion of accommodations used by transients, not the proportion of all renters who are transients.

All-or-Nothing Classification

The taxpayer and the IRS agreed that Kegs. Sec. 1.48-1(h)(1)(i) prescribes an all-or-nothing approach, under which mixed-use assets are characterized according to their predominant use.

Problems

In other Code sections and in regulations that use similar language, deciding "predominant" means defining a common denominator and then measuring relative size. For example, to determine whether a bus is used predominantly as transportation for passenger revenue, it is necessary to compare (1) the number of miles the bus travels carrying paying passengers, with (2) the number of miles it travels without them. However, a bus cannot simultaneously carry and not carry paying passengers, while a motor home can be used for both transportation and lodging at the same time.

The IRS had focused on the time spent in the motor homes for transportation versus the time spent for lodging. According to the court, this approach ignores the problem of simultaneous use: some family members can sleep, eat or cook, while another family member drives. In addition, a business may not be able to rely on rental customers to maintain the detailed logs required for this type of test.

Union Pacific

In Union Pacific, 91 TC 32 (1988), the Tax Court rejected the taxpayer's approach for determining whether mobile homes were used predominantly for lodging. The court considered the key factor to be the alternative to company-paid accommodations that the inhabitants would likely have chosen. If the company did not provide housing for employees, they would be forced either to rent or buy it. The substitute housing would not be qualifying property, because it is residential real estate.

Application to Motor Home Rental

As in Union Pacific, the court asked what Shirley's customers would have bought or rented if motor homes were not available. If the substitute goods would be qualifying property under Sec. 50(b), then so would the motor homes. Shirley's customers would need some combination of transportation and lodging. If cars or trucks were rented to Shirley's customers to provide the mobility of motor homes, those vehicles would clearly qualify as Sec. 179 property.

Most motor home rentals were for less than 30 days. This strongly suggests that Shirley's customers would rent hotel or motel rooms, campground space or other transient lodging. These likely substitutes would also qualify for the Sec. 179 deduction, because they would be used on a transient basis.

Court Decides for Taxpayer

Because both the substitute transportation and the substitute lodging would qualify, the court concluded that motor homes used by renters mostly for periods of less than 30 days are Sec. 179 property.

FROM HOWARD GODFREY, PH.D., CPA, PROFESSOR OF ACCOUNTING, UNIVERSITY OF NORTH CAROLINA-CHARLOTTE, CHARLOTTE, NC (NOT AFFILIATED WITH BAKER TILLEY INTERNATIONAL)