Petitioners, husband and wife, were shareholders in an S corporation which provided wireless cellular service. The IRS asserted a deficiency in tax for approximately $16 million for the 5 years in issue (1996-2001) . At the heart of the dispute was the length in years of the recovery period that the S corporation was required to use in computing its annual cost recovery allowance for the wireless cellular assets, i.e., including antenna support structures, cell site equipment and leased digital equipment, used in the corporation's businss operations. Such class period recovery was set forth based on different asset class by the Service in Rev. Proc. 87-56, 1987-2 C.B. 674, which was in effect for the years in issue. The Tax Court agreed that the antenna support structures fall within asset class 48.14 and have a recovery period of 15 years per Rev. Proc. 87-56, supra. The cell site equipment, excluding the switch, and the leased digital equipment, were held to fall within asset class 48.12 with a recovery period of 10 years. In contrast, the taxpayers’ reported the antenna support structures as under “Telegraph, Ocean Cable, Satellitte Communications Activity category and Asset Class 48.32 and recoverable over a shorter 7-year period.
The Tax Court, per the opinion of Judge Kroupa, held that the structures were more appropriately within the Telephone Communications activity category and therefore per Rev. Proc. 87-56, supra, Similarly, taxpayers' classification of a wide variety of cell site equipment, including base station and switch, as computer-based telephone central office switching equipment coming under Asset Class 48.121 with 5-year recovery period was, except for switch, also inappropriate; instead, and despite presence of some computerized components, remaining cell site equipment had to be classified under Asset Class 48.12 with 10-year life because radio was key component. Also, no depreciation was available for other/ leased digital equipment until year it was placed in service/year corp. switched from analog to digital service.
The authority to set forth class live periods by the IRS is granted by Congress. §167(m). Such guideline classes and lives or periods are established, supplemented and revised where necessary. Treas. Reg. §1.167(a)-11(b)(4)(ii). The Secretary has the authority to prescribe class lives for each class of property. The revenue procedure in effect for the years at issue was Rev. Proc. 87-56, 1987-2 C.B. 674.