As a tax professional if a client has a car that is acquired by the business, you’d probably automatically consider that car a single unit of property for purposes of the capitalization rules under Regs. §§1.263(a)-1 to 3 and for purposes of determining a disposition of property.  But in PLR 201710006 the IRS, faced with a unique situation, allowed the car to be broken down so that each part became a separate unit of property.

The unique fact was that the taxpayer in question was an organization that built a championship racing car entry and assembled a racing crew to compete in a racing series.  In this racing circuit the team doesn’t generally look at their asset as a single finished automobile.

Rather, as the ruling notes:

(Teams that compete on this racing circuit) “do not build, acquire, or carry a finished, complete automobile. Instead, they build or acquire parts that they then assemble and reassemble into different racing cars over a race season, with each entrant registering a particular assemblage for each event. Hereinafter, each such assemblage will be referred to as the racing car entry for an event.”

The taxpayer operated in the manner of the other teams on the circuit, having acquired sources for a supply of parts.  As the ruling goes on to explain:

After each event, Taxpayer’s F team will strip down the racing car used in that event into the different parts which the team will inspect, repair, refinish, repaint, and/or replace as appropriate. The team will then assemble the stripped-down parts, and other parts in stock, as a new racing car for the next event. For each entry, Disregarded Entity 2 management will, consistent with F industry and practice, prepare a “bill of materials” (“BOM”) listing all parts that Disregarded Entity 2 owns and that are incorporated in that entry.

The nature of racing is such that the individual parts generally are not in use for a very long period of time.  At the end of a season the team will have very few usable parts due to three reasons outlined in the ruling:

(a) First, parts may be damaged or destroyed in collisions, wipe-outs, or crashes during a race (“damaged parts”).

(b) Second, parts become obsolete because racing cars are subject to substantial evolution and development given the nature of F motorsport (“obsolescence parts”).

(c) Third, each race subjects parts to high stress and wear and tear. Members of Disregarded Entity 1 management who are also experienced in the F industry have estimated that, out of parts that are not damaged parts or obsolescence parts, approximately K percent of such parts become unusable after a race and must be replaced; that is, approximately L percent of parts on a standard BOM might be used in the immediately following race. Such parts include parts that each F team builds (or has built for it) according to that team’s design specifications and parts that are generic and not manufactured according to any team’s specifications. This letter ruling will henceforth refer to parts described in this paragraph as either “worn parts” or “surviving parts.” Worn parts means parts that become unusable for racing or other purposes after one or more races because of wear and tear; and surviving parts means parts that remain usable for racing or other purposes after a race despite wear and tear.

The team did have some longer-lived cars—it built “show cars” and “pit cars” built out of parts that are not usable for racing, but can be used either for display and demonstration purposes or for pit crew practice.  But these cars used up very few of the parts that were rendered no longer suitable for racing use by the team.

The IRS first ruled that each part was a separate unit of property for disposition purposes, noting:

In this case, Taxpayer does not build, acquire, or carry a finished, complete racing car. Instead, Taxpayer's F team builds or acquires individual parts that they assemble and reassemble into different racing cars over a race season. After each race, Taxpayer strips down each race car to its individual parts and then determines if a part is a damaged part, an obsolescence part, a worn part, or a surviving part. Due to this fact pattern, we conclude that each part that Taxpayer owns and uses to build its race cars for each specific race is the appropriate asset for disposition purposes under § 1.168(i)-8(c)(4).

The IRS goes on to specifically rule:

1. A disposition occurs under § 1.168(i)-8(b)(2) when Taxpayer disassembles each racing car entry into its various parts and permanently withdraws those parts from the Taxpayer's trade or business. In accordance with § 1.168(i)-8(e):

a. Gain or loss is recognized for any part of a racing car entry that is not to be reused to produce another racing car entry or a show or pit car and that is disposed of by sale, exchange, or involuntary conversion;

b. Loss is recognized for any part of a racing car entry that is not to be reused to produce another racing car entry or a show or pit car and that is disposed of by physical abandonment;

c. Gain is not recognized for any part of a racing car entry which part is not to be reused to produce another racing car entry or a show or pit car and that is disposed of by a transfer of such part to a scrap or similar account; loss is recognized for any part of a racing car entry which part is not to be reused to produce another racing car entry or a show or pit car and that is disposed of by a transfer of such part to a scrap or similar account, and such loss is recognized in the amount of the excess of the adjusted depreciable basis of the part at the time of the disposition (taking into account the applicable convention) over the part's fair market value at the time of the disposition (taking into account the applicable convention); and

d. Gain is not recognized for any part of a racing car entry which part is to be reused to produce another racing car entry or a show or pit car and that is disposed of by a transfer of such part to a supplies or similar account; loss is recognized for any part of a racing car entry which part is to be reused to produce another racing car entry or a show or pit car and that is disposed of by a transfer of such part to a supplies or similar account, and such loss is recognized in the amount of the excess of the adjusted depreciable basis of the part at the time of the disposition (taking into account the applicable convention) over the part's fair market value at the time of the disposition (taking into account the applicable convention).

2. If, after a racing car entry is disassembled into various parts, the part or parts of the racing car entry is or are transferred to a supplies, scrap, or similar account, the basis of such part or parts in such account before the application of § 263A is as follows:

a. If no gain was recognized upon the disposition of the part when the racing car entry was disassembled into various parts, the part's adjusted depreciable basis at the time of disposition (taking into account the applicable convention); and

e. [sic] If a loss was recognized upon the disposition of the part when the racing car entry was disassembled into various parts, the part's fair market value at the time of disposition (taking into account the applicable convention).