Scott E. Vincent
Vincent & Fontg LLC
Kansas City

The Eighth Circuit Court of Appeals recently decided a case that has implications for the accelerated depreciation usually available to retail fuel outlets. In Iowa 80 Group, Inc. and Subsidiaries, formerly known as Iowa 80 Truckstop, Inc. and Subsidiaries, Appellant v. Internal Revenue Service, Appellee, U.S. Court of Appeals, 8th Circuit; 04-2826, May 4, 2005, the court held that the truckstop in question did not meet the necessary tests to qualify as a "retail motor fuels outlet" and accelerate depreciation of its main buildings. The court determined that buildings failed to meet a "fifty-percent floor-space test" and, therefore, could only be depreciated over a 30-year period as a retail convenience store. Floor space occupied by a movie theater, arcade, restaurant, showers, laundromat and TV lounge in the taxpayer's main buildings were not features normally associated with a service station.

Background

Iowa 80 operates multi-building truckstops in Walcott, Iowa, and Joplin, Missouri. The Internal Revenue Service ("IRS") categorized these facilities as retail convenience stores, which are generally depreciable over 30 years. Facilities that meet the requirement of a "retail motor fuels outlet" are entitled to more favorable 15-year depreciation. Iowa 80 filed an amended tax return claiming that it was a "retail motor fuels outlet" and sought this more favorable 15-year depreciation. The IRS rejected Iowa 80's claim, and Iowa 80 then filed a refund suit in district court. The district court granted summary judgment in favor of the IRS and Iowa 80 appealed.

In a prior appeal, the Eighth Circuit affirmed the district court's determination that Iowa 80's truckstops failed to meet the gross-revenues test for treatment as a "retail motor fuels outlet." However, the Eighth Circuit remanded the case to determine whether the truckstops could meet the floor-space test also used to confer status as a "retail motor fuels outlet." To meet the floor-space requirement, Iowa 80 needed to show that 50 percent of the floor space in its buildings were "devoted to petroleum marketing activity."

Iowa 80's experts calculated the total square footage of each truckstop building showing compliance with the 50 percent floor-space requirement for the portion of the structure "devoted to petroleum marketing activity." However, through summary judgment proceedings, the district court interpreted the statutory phrase "devoted to petroleum marketing activity" and excluded the second floor of the Walcott building from space that could be used to meet the 50 percent rule. Similarly, the district court excluded the game room, showers, and TV lounge in the Joplin building. As such, the district court ruled that Iowa 80 failed to meet the floor-space test and granted summary judgment in favor of the United States.

Discussion

Iowa 80 based its claim for accelerated depreciation on Section 168(e)(3)(E)(iii), which allows "property which is a retail motor fuels outlet (whether or not food or other convenience items are sold at the outlet)" to claim a 15-year depreciation schedule. A taxpayer may establish that its facility is a retail motor fuels outlet used in the marketing of petroleum and petroleum products using either a gross-revenue test or a floor-space test. Prior to the case in question, the court had already determined that Iowa 80 could not qualify for the gross-revenue test, and the discussion here, therefore, was focused on the application of the floor-space test. Legislative history on these issues provides that a structure meets the floor-space test when "50 percent or more of the floor space in the property is devoted to petroleum marketing sales."

The district court focused on the term "devoted" to determine whether the designated floor space could be aggregated in favor of Iowa 80. The Eighth Circuit refused to adopt the single word "devoted" as the touchstone for the analysis but also declined to adopt Iowa 80's broad definition that would essentially encompass anything tangentially related to marketing petroleum.

The court found that the proper inquiry is a comparison of the services offered by Iowa 80 to the services provided at a traditional service station or other similar markets. Employing a services-comparison standard, the court concluded that Iowa 80 failed to meet the 50-percent floor-space test. The floor space attributed to the movie theater, arcade, showers, laundromat, and TV lounge were not considered features normally associated with a service station. Once these areas were removed from the aggregate calculation of floor space, it was clear that Iowa 80 could not meet the floor-space test.

Conclusion

The Eighth Circuit apparently makes the tests for seeking accelerated depreciation for a retail motor fuels outlet even more complicated. Prior to this decision, a variety of specific guidance from the IRS addressed specific items and their proper category under the floor-space test. With the court's approach, requiring a market services-comparison, it may be very difficult to determine whether particular services are comparable to those provided at a "traditional service station," which frankly appears to be a rapidly changing and evolving part of the fuel delivery market.