Functional Interdependence Decisions
Whether two items work as one asset can affect unit-of-property and placed-in-service questions. Scott Paper’s load split is functional allocation of electrical cost — a different idea. L.L. Bean shows integration with the building. FedEx discussed interdependence in a repairs case about aircraft engines.
Educational information, not tax advice.
Updated 2026-10-14
Key takeaways
- Functional allocation (Scott Paper / Morrison) splits electrical cost by use. Functional interdependence asks whether components are one unit.
- FedEx treated an aircraft, including engines, as the unit of property for incidental engine-shop repairs. That is a pre-2013 repairs case, not a building-class case.
- L.L. Bean kept a rack system that supported roof and walls with the building. Integration can make equipment-like items structural.
- Interdependence is not a slogan that turns every hook-up into 5-year property.
- Educational information, not tax advice.
Two different “function” ideas appear in this library. Classification: does this electrical or HVAC capacity exist to run the building, or to run a machine? That is Scott Paper’s allocation question. Unit of property: do two pieces work as one asset so that work on one is tested against the larger whole? That is the interdependence discussion in repairs cases and, now, in Treas. Reg. §1.263(a)-3(e). Mixing the two is a common error.
Scott Paper Co. v. Commissioner, 74 T.C. 137 (1980), and Morrison, Inc. v. Commissioner, 891 F.2d 857 (11th Cir. 1990), used function — measured by load or stipulated percentage — to split primary electrical cost. That is allocation of one system’s cost, not a holding that the mill and the paper machine are one asset. A.C. Monk refused that allocation and asked instead whether electrical gear could be adapted to general building uses.
FedEx Corp. v. United States, 412 F.3d 617 (6th Cir. 2005), affirming 291 F. Supp. 2d 699 (W.D. Tenn. 2003), is the clearest judicial discussion of functional interdependence that this library opened. Off-wing engine shop visits were deductible incidental repairs. The district court, adopted by the Sixth Circuit, treated the aircraft — including engines and APUs — as the unit of property. It declined to adopt the “functional interdependence” test from Treas. Reg. §1.263A-10(c) as an absolute rule, but called interdependence one important factor. The 6th Circuit opinion is short; it expressly adopts the district court’s reasoning. The case is about airplanes and predates the 2013 tangible property regulations, which now define building and building-system units of property.
L.L. Bean, Inc. v. Commissioner, 145 F.3d 53 (1st Cir. 1998), is interdependence in the other direction. The rack system was so integrated with roof and walls that treating it as stand-alone equipment failed. Theoretical movability did not break the unit. AmeriSouth, conversely, would not let apartment outlets become personal property merely because a toaster or treadmill plugged into them. A copier on a convenience outlet does not make the outlet equipment.
Placed-in-service rules also use functional interdependence for when a larger unit is ready. Bonus-depreciation original-use rules can look at larger units as well. Those timing rules are not Scott Paper. Super Intelligence is proposed only. This page is educational information, not tax advice.
Keep the vocabulary straight
Allocation answers “what share of this electrical system serves machines?” Interdependence answers “is this engine part of the plane?” or “is this rack part of the building?” Using one word for both questions hides the test that actually applies.
Current building units
Treas. Reg. §1.263(a)-3(e) now lists building systems as units of property for improvement testing. FedEx does not override that regulation for a rooftop unit or a sprinkler riser.
How to use this page
If the question is “what share of this electrical system serves machines?”, you are in Scott Paper / Morrison allocation. If the question is “is this engine part of the plane, or this rack part of the warehouse?”, you are in FedEx / L.L. Bean interdependence. If the question is “when was the production line placed in service?”, you are in a timing rule that this page only flags.
AmeriSouth’s convenience-outlet discussion is the everyday version: a toaster on a kitchen receptacle does not make the receptacle process equipment. L.L. Bean’s rack is the opposite everyday version: calling it a shelf does not make it furniture if the roof sits on it. The 6th Circuit FedEx opinion is short because it adopted the district court; the unit-of-property reasoning lives there and is now overtaken for buildings by the 2013 regulations.
Educational information, not tax advice.
Limits and flags
Scott Paper’s load split is functional allocation of electrical cost, not a holding that the mill and the paper machine are one asset. FedEx is a 2005 aircraft-engine repairs case that predates Treas. Reg. §1.263(a)-3(e)’s building-system units. Do not use FedEx to pick a unit of property for a rooftop chiller or a sprinkler riser.
Interdependence is not a slogan that turns every hook-up into 5-year property (flag F-10). A dedicated process feeder can still be personal property on Scott Paper or Morrison facts; a convenience outlet that happens to serve a copier generally cannot. L.L. Bean’s integration holding is First Circuit warehouse facts.
Super Intelligence is proposed only. Educational information, not tax advice.
Practice note
Write the question in a sentence before you cite a case. “What share of this feeder serves machines?” is Scott Paper. “Is this rack part of the warehouse?” is L.L. Bean. “Is this engine part of the plane for a repair test?” is FedEx, and for a building that question is now Treas. Reg. §1.263(a)-3(e).
AmeriSouth’s toaster-on-an-outlet example is the everyday version of the second question going the building’s way. Do not use interdependence as a shortcut that converts every hook-up into 5-year property, and do not use FedEx to pick a unit of property for a rooftop chiller.
Sources
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- 7IRS 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.