Scott Paper Co. v. Commissioner
The Tax Court allocated a pulp mill’s primary electrical improvements between building use and production-machinery use based on design load. That functional-allocation holding is the leading electrical case in cost segregation, and it is limited to electrical distribution on those mill facts.
Educational information, not tax advice.
Updated 2026-10-14
Key takeaways
- On these mill facts, mixed-use primary electrical cost was split by function, using design load as the measure.
- The IRS acceptance described in the audit guide is for electrical distribution, not for plumbing or HVAC.
- A.C. Monk rejected allocation in the Fourth Circuit; do not treat Scott Paper as a nationwide percentage.
- Educational information, not tax advice.
Case record
- Court
- U.S. Tax Court
- Citation
- 74 T.C. 137 (1980)
- Decision date
- 1980-04-28
- Facts
- Scott expanded its Mobile, Alabama pulp and paper mill in 1964 to raise capacity from 900 to 1,350 tons a day. The expansion included primary electrical improvements — switchgear, substations, feeders, and related gear that accepted 13.8 kV power from Alabama Power, split it among buses, and reduced voltage for the secondary system. The same primary system served process machinery and building loads (lighting, non-process ventilation, and other building services). Similar improvements at Chester, Pennsylvania, and Fort Edward, New York, were stipulated to follow the Mobile result. The Commissioner had already allocated Scott’s secondary electrical improvements by load; he refused to allocate the primary system at all.
- Issue
- To what extent did the primary electrical improvements qualify as §38 (investment-credit) property rather than structural components of buildings?
- Holding
- The primary electric was not an inherently permanent structure under the Whiteco questions. It was a structural component — and not eligible for the credit — to the extent it supplied power for the overall operation and maintenance of buildings. Otherwise it was tangible personal property. The split followed the machinery’s design load in kilovolt-amperes, the same kind of load measure the Commissioner had used on the secondary system.
- Reasoning
- Judge Goffe refused to treat a 700-acre mill as one building or the primary electric as one indivisible system. Designers sized feeders and substations from the kVA demand of identified devices, so function differed by circuit. Items that occur in unusual circumstances and do not relate to operation or maintenance of a building are not structural components merely because “electrical wiring” appears in Treas. Reg. §1.48-1(e)(2). Cables in trays were readily removable; substations had been moved during the expansion. The court used load as a reasonable allocation key because that is how the system was designed.
- Relevance to cost segregation
- HCA applied Scott Paper analysis under MACRS. The IRS audit guide states the Service will not challenge the functional-allocation approach for primary and secondary electrical distribution (AOD 1991-019, as described there). The guide does not extend that acceptance to plumbing or HVAC. The Fourth Circuit rejected percentage allocation in A.C. Monk; the Eleventh Circuit adopted Scott Paper in Morrison.
Scott Paper Co. v. Commissioner, 74 T.C. 137 (1980), is the origin of load-based allocation of electrical systems in cost segregation. The Tax Court would not let the Commissioner collapse a mill’s primary electric into a single structural component just because the same switchgear also lit buildings. It also would not let Scott treat every dollar of primary electric as process equipment.
The facts were heavy industry. Primary components sat in conditioned rooms, were bolted or tack-welded to channels, and — except for some buried cable — could be unbolted, lifted from trays, or moved. Three substations were relocated during the 1964 expansion after two months of preparation and a 48-hour cutover. Idle breakers from a retired fluff dryer were reused. Those facts answered Whiteco against inherent permanence.
The structural-component question was answered by function. To the extent a feeder carried load for overall operation or maintenance of buildings, it was a structural component. To the extent it carried process load, it was tangible personal property. The court accepted design load as the splitter because engineers had already used kVA demand to size the gear. That is a fact-specific method, not a published percentage for offices, apartments, or restaurants.
Later cases show the forum split. Morrison, Inc. v. Commissioner, 891 F.2d 857 (11th Cir. 1990), adopted functional allocation and allowed 55.9 percent of cafeteria primary electrical cost on a stipulated load split. A.C. Monk & Co. v. United States, 686 F.2d 1058 (4th Cir. 1982), told the district court to ask whether electrical components could reasonably be adapted to more general uses, and rejected percentage allocation. The IRS audit guide treats Boddie-Noell and A.C. Monk as limited to their forums. AmeriSouth later refused an apartment-panel allocation because the taxpayer’s load study was unreliable.
This page is educational information, not tax advice. Super Intelligence, as proposed here, does not turn Scott Paper into a flat electrical percentage for every building type.
What the opinion did not do
Scott Paper did not allocate plumbing or HVAC. It did not hold that tenant equipment in an office building converts the building service to 5-year property. It did not publish a percentage that can be copied into another plant without a load analysis of that plant.
The first half of the opinion is about interest on converted debentures. That holding has no cost-segregation use.
Weight
Scott Paper is a regular Tax Court opinion. Circuit law can differ. Present electrical allocation as fact-specific, and do not describe functional allocation of plumbing or HVAC as an IRS-accepted method (flag F-09).
Verification. Verified from the OpenJurist text of 74 T.C. 137 (filed April 28, 1980; Judge Goffe). The case also decided a convertible-debenture interest issue that is unrelated to cost segregation.
Sources
- 1
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- 3IRS 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.
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