Cost Estimation Evidence Decisions
When original invoices are missing, studies estimate costs. Both classification and numbers have to be proved. Boddie-Noell rejected after-the-fact percentages. AmeriSouth rejected most of an aggressive takeoff. Peco held that a later study cannot override a binding written §1060 allocation.
Educational information, not tax advice.
Updated 2026-10-14
Key takeaways
- The IRS audit guide ranks detailed engineering from actual costs first, then documented cost estimates. Rule-of-thumb percentages are the weakest approach in that guide.
- Boddie-Noell found restaurant percentage estimates and extrapolations far too unreliable. The audit guide treats that decision as forum-limited.
- Peco Foods bound a buyer to written purchase-price allocations. A study cannot rewrite those schedules.
- Educational information, not tax advice.
Classification without a supportable cost is incomplete. The Cost Segregation Audit Techniques Guide describes six approaches. Detailed engineering from actual cost records is the most accurate. Detailed engineering cost estimates, used when records are missing, must cite the cost source and apply it consistently. Rule-of-thumb percentages sit at the bottom of that ranking.
Boddie-Noell Enterprises, Inc. v. United States, 36 Fed. Cl. 722 (1996), aff’d without published opinion, 132 F.3d 54 (Fed. Cir. 1997), is the clearest evidence case opened for this library. A Hardee’s franchisee claimed ITC on marlite paneling, drive-thru window units, a mirror, mansard roof panels, and portions of HVAC, electrical, plumbing, and ceiling systems. Amounts came from internal percentages, 1990 expert studies of two new and five remodeled units, and extrapolation to the rest of a large chain. The court found items listed as structural components in the regulations not creditable. Separately, it found the substantiation unusual and the estimates far too unreliable — after-the-fact speculation without contemporaneous records. The IRS cited the case in the HCA AOD. The audit guide says that approach has not been followed outside the Court of Federal Claims.
AmeriSouth XXXII, Ltd. v. Commissioner, T.C. Memo. 2012-67, is the modern study-quality caution. MS Consultants visited Garden House and produced a 1,000-component takeoff that would have moved about $3.4 million into 5- or 15-year recovery. The partnership then sold the property, stopped communicating, and filed no brief. The court still wrote a full opinion. Most categories failed for lack of proof, including an electrical-panel allocation extrapolated from unlabeled panels. A few items survived because the facts were clear (appliance outlets, data jacks) or conceded (gates, irrigation timers, surveillance).
Peco Foods, Inc. & Subsidiaries v. Commissioner, T.C. Memo. 2012-18, aff’d, No. 12-12169 (11th Cir. July 2, 2013) (unpublished), is a different failure mode. Peco bought two Mississippi poultry plants under asset purchase agreements that allocated price “for all purposes (including financial accounting and tax purposes).” Years later a cost-segregation study subdivided “Processing Plant Building” and “Real Property: Improvements” into shorter-lived pieces. The Eleventh Circuit called it a simple case: §1060(a) binds the parties to a written allocation unless the Commissioner finds it inappropriate or a contract defense applies. HCA does not authorize rewriting those schedules. The ATG notes that how far that idea extends beyond §1060 acquisitions is unclear (flag F-05).
Keep unit-cost books, takeoff worksheets, reconciliation to purchase price or contract, and the inspection notes that support quantities. Super Intelligence is proposed as a way to organize those records, not as a substitute for them. This page is educational information, not tax advice.
What to keep
Contemporaneous invoices beat a 1990 reconstruction of 1978 restaurants. A load study with labeled panels beats an extrapolation from missing labels. A purchase agreement’s allocation schedule, if §1060 applies, may beat both.
Three different failures
Boddie-Noell: numbers not proved. AmeriSouth: classifications not proved for most items. Peco: a later study cannot contradict a binding written split. Do not treat the three opinions as one rule.
How to use this page
Quality of evidence is as much a cost-segregation issue as the legal test. The audit guide’s ranking — actual costs, then documented estimates, then weaker shortcuts — is examiner guidance, not a statute, but Boddie-Noell shows what happens when percentages and after-the-fact extrapolation are all the taxpayer has. AmeriSouth shows what happens when the takeoff is long and the proof is short. Peco shows what happens when the purchase contract already split the price.
Peco has no named inventory URL (flag F-21). The 11th Circuit PDF was opened. Do not say a written allocation binds every real-estate purchase; the audit guide says the reach beyond §1060 applicable asset acquisitions is unclear (flag F-05). Super Intelligence is proposed as a way to organize takeoff worksheets and inspection notes, not as a substitute for invoices.
Educational information, not tax advice.
Limits and flags
Boddie-Noell is a Court of Federal Claims restaurant case and is forum-limited per the audit guide. It failed on both the regulation list and the quality of percentages extrapolated from seven units. AmeriSouth failed because classifications were not proved for most of a 1,000-item apartment takeoff. Peco failed because a later study contradicted a binding written split in an applicable asset acquisition.
Do not merge those three failures into one rule. The audit guide ranks actual costs above documented estimates and weaker shortcuts; that ranking is examiner guidance, not a statute. Super Intelligence, as proposed here, organizes worksheets — it does not replace invoices or a signed Form 8594.
Educational information, not tax advice.
Practice note
Reconcile the takeoff to the contract or purchase price before you argue class lives. Boddie-Noell’s percentages and seven-unit extrapolation failed as numbers. AmeriSouth’s 1,000-line takeoff failed as proof of what the items were. Peco’s later study failed because the parties had already allocated the price in writing.
Keep invoices, labeled load studies, and the inspection notes that support quantities. If the deal may be an applicable asset acquisition, read the allocation schedule first (flag F-05). Super Intelligence is proposed only as a way to organize those records.
Sources
- 1IRS Publication 5653 — Cost Segregation Audit Techniques Guide (rev. 2-2025)(opens in a new tab)
Written for IRS examiners. The guide states it is not an official pronouncement of law and cannot be cited as authority. It predates the July 2025 law.
- 2
- 3
- 4
- 5