Kitchen Cabinets Are Not 5-Year Property: What Amerisouth v. Commissioner Means for Your Cost Seg Study

I spent several hours with James Peacock last week. He spent 38.5 years at the IRS as a General Engineer, was among the first IRS engineers to examine cost segregation, and contributed to the Cost Segregation Audit Techniques Guide from its first release in 2004 through the February 2025 update.

One of the things he told me that I did not expect: most cost seg providers are still classifying kitchen cabinets as five-year personal property. The Tax Court ruled in 2012 that this is wrong. The case is Amerisouth v. Commissioner, and if your study includes kitchen cabinets at 5-year, you should read this carefully.

What the Case Actually Said

AmeriSouth XXXII, Ltd. v. Commissioner, T.C. Memo. 2012-67, involved a 366-unit apartment complex in Mesquite, Texas, purchased for $10.25 million. The owner spent another $2 million on renovations and hired a cost seg firm to study the property. The study attempted to move $3.4 million, roughly 28% of total cost, into shorter-lived assets. Among those assets: kitchen cabinets, countertops, and sinks.

The Tax Court ruled against the taxpayer. Kitchen cabinets, counters, and sinks were classified as Section 1250 structural components because they serve "the operation and maintenance of the building." They are not accessories. They are not portable equipment. They are fixtures built into the property.

One thing most articles leave out: The taxpayer in AmeriSouth essentially stopped defending their case. They sold the property mid-audit, stopped responding to their own attorney, stopped appearing in court, and eventually represented themselves without legal counsel. The Tax Court noted it could have dismissed the case outright. The IRS won largely by default, not by beating a well-prepared cost seg firm in court. The legal principle stands. The case does not prove the IRS can beat a quality study.

That ruling did not say kitchen cabinets can never be 1245 property. It said they are 1250 property by default, and that reclassifying them requires satisfying a two-part legal test.

The Whiteco Test: Both Prongs Required

The Whiteco test comes from a case involving roadside billboards that were physically dismantled and moved to new locations. The court held that to qualify as personal property, an item has to be:

• Movable, designed or capable of being removed without destroying the structure
• In fact moved, the owner must prove it was actually removed and actually reused or disposed of

Theoretical movability is not enough. You cannot just say "these cabinets could be taken out." You have to show they were taken out.

James explained this distinction directly. The test is not whether the cabinet is physically possible to remove. Plenty of things bolted to walls can be unbolted. The test is whether you have contemporaneous documentation proving the cabinets were removed and either installed elsewhere or disposed of.

"To qualify as 1245 personal property, you must document both: that the items were actually removed AND that they were actually reused or disposed of. The Whiteco case involved billboards that were physically dismantled and relocated. That is the standard."

James C. Peacock, former IRS Engineer SME

This matters because a lot of kitchen renovations do not involve removing the original cabinets. Refinishing, refacing, painting, none of those qualify. If the original cabinet boxes are still in the wall, the two-part test is not met. The cabinets are still 1250 property.

How You Actually Meet the Test

James gave a concrete example of when kitchen cabinets can legitimately be 1245 property.

Imagine a property owner who runs a residential portfolio. When they renovate a unit, they remove the old cabinets and install them in another unit, or donate them to a Habitat for Humanity ReStore, or send them to a demolition resale yard. If they document that process with contractor invoices, before-and-after photos, and receipts or records from wherever the cabinets went, they have a real argument.

The documentation has to be contemporaneous. You cannot reconstruct this two years after the fact during an audit. The IRS will ask for the contractor's final application for payment, plans and specs, and if the study claims cabinets are 1245 property, they will want to see proof of removal and disposition.

James also mentioned a variation: a property management company that maintains its own cabinet refinishing department. If they pull cabinets from units, refurbish them in a shop, and reinstall them in other units, that workflow may satisfy the test depending on the specifics. The key is documentation at every step.

If you cannot produce that documentation, the cabinets are 27.5-year property for residential rentals or 39-year property for commercial. No exceptions.

Why Most Providers Are Getting This Wrong

I asked James directly: how common is it for cost seg studies to misclassify cabinets?

He said it happens regularly. The IRS cost seg community has known about Amerisouth since 2012. But the pressure to maximize 1245 reclassifications, which is what drives the ROI calculations providers show clients, creates incentives to be aggressive with classifications that should not qualify.

Kitchen cabinets are a high-value line item in residential cost seg studies. A 20-unit apartment building might have $200,000 in kitchen components. Classifying that at 5 years instead of 27.5 years is a significant acceleration. The savings look great in the provider's pitch deck. And if the investor never gets audited, nobody finds out.

But "nobody finds out" is not a tax strategy. It is a gamble. And if the IRS opens an audit, for any reason, not necessarily cost seg related, and finds cabinets on a 5-year schedule with no documentation of removal and reuse, that is an automatic adjustment.

James put it plainly: "It's the support, not the report." That was a mantra from an IRS colleague he repeated throughout our conversation. The report that goes to the client looks like a thorough analysis. But what the IRS examiner actually cares about is the support behind each classification. A 30-page cost seg study with kitchen cabinets at 5-year and no documentation of removal is not supported. It is just a number on paper.

The Self-Storage Contrast: When It Does Work

James walked me through an example where a similar analysis leads to the opposite conclusion, and it helps clarify exactly what the test requires.

Self-storage facilities often have metal partitions: the walls between individual storage units. Those partitions are typically screwed or bolted into the concrete floor and walls. In most cost seg studies, they get classified as structural components.

But if the owner of that self-storage facility can prove that the metal partitions are routinely removed and rearranged to reconfigure unit sizes, and that this actually happens, documented with work orders and before-and-after photos, those partitions may qualify as 1245 property. They are movable, and they have in fact been moved.

The distinction is not about the physical characteristics of the item. It is about what actually happens to it. A metal wall that sits in place for 30 years is 1250 property. A metal wall that gets reconfigured every few years, with records to prove it, has a real argument for 1245 treatment.

For kitchen cabinets, the parallel is direct. Cabinets that stay in place through multiple tenants and renovations are 1250 property. Cabinets that are physically removed, documented, and reused or disposed of can qualify as 1245 property.

The Scott Paper Methodology for Electrical Panels

While we were discussing component-level classification, James brought up another case that residential investors and commercial property owners often miss: Scott Paper Co. v. Commissioner.

The Scott Paper case established that a dedicated electrical panel, one that serves only a specific piece of personal property equipment, can be allocated to the same asset class as the equipment it powers.

Here is the practical application. Say you have a commercial laundry facility and there is a dedicated 200-amp panel that runs nothing but the electric dryers. The dryers are Section 1245 personal property. The panel exists only to serve those dryers. Under Scott Paper, you have a defensible argument that the panel follows the dryers into 1245 treatment.

This does not apply to the main electrical panel or any panel that serves general building loads. It applies only where you can document exclusive use for identifiable personal property equipment. James noted this is covered in Chapter 8 of the IRS Cost Segregation Audit Techniques Guide, which is available publicly.

"A dedicated electrical panel for specific equipment can be allocated to 1245 property if proven exclusively used for that equipment. Covered in ATG Chapter 8. But you have to prove it. 'Probably' doesn't cut it with the IRS."

James C. Peacock, former IRS Engineer SME

The pattern is consistent across all of these cases: the IRS does not oppose aggressive classifications on principle. They oppose aggressive classifications that are not supported by documentation. The ATG exists precisely to tell providers what support is required. Most providers know what the ATG says. The question is whether they apply it.

What This Means for Residential Cost Seg Studies

If you own residential rental properties, apartment complexes, single-family rentals, short-term rentals, and you have had a cost seg study done in the last several years, it is worth reviewing how kitchen components were classified.

Look for these line items in the 1245 personal property schedule:

• Kitchen cabinets
• Countertops or counters
• Kitchen sinks
• Built-in appliances (range, dishwasher, microwave), these may actually qualify if movable and documented

Built-in appliances are a different analysis. A dishwasher connected by a hose fitting, installed by the prior tenant, removed and kept by the next tenant, that might pass the Whiteco test. A permanently installed range hood hardwired into the exhaust and electrical systems is a harder argument.

For cabinets, counters, and sinks: if they are on the 5-year schedule and you do not have documentation of actual removal and reuse, ask your provider to explain the basis. If they cannot point to the Whiteco documentation, you may be looking at a classification that would not survive IRS examination.

James noted that IRS engineers do not get called into every audit, they are brought in for larger cases, typically at the upper end of the small business division or in Large Business and International (LB&I). But smaller cases can still get examined, and when they do, the same ATG standards apply. The examiner may not have an engineering background, but they can read the ATG and identify that kitchen cabinets at 5-year require documentation.

What to Ask Your Cost Seg Provider

If you are getting a new study or reviewing an existing one, these are the right questions to ask about kitchen and fixture components:

1. How did you classify kitchen cabinets, countertops, and sinks? If the answer is "5-year personal property," ask for the next question.
2. What is your Whiteco documentation for those items? The provider should be able to identify what evidence exists that those components were removed and reused or disposed of.
3. Did you physically inspect the property? James was direct on this point: AI-generated cost seg studies that rely on square footage models and databases without physical inspection "go against every IRS rule." You cannot document what you have not seen. Square footage models tell the IRS "they used averages and didn't look at the property", which generates more Information Document Requests if audited.
4. What RS Means codes support your 1245 classifications? James checks the back of every study for 12 or 16-digit RS Means codes. "RS Means mechanical" with no specific code is a red flag. Vague codes mean the estimate is not property-specific.

The IRS's position has not changed since Amerisouth in 2012. What has changed is that more providers are using software-based approaches that push classifications to maximize 1245 property without the property-specific analysis the ATG requires.

For more on what IRS engineers look for when they examine a study, see our guide on what an IRS engineer looks for in a cost segregation audit. For a broader look at the case law shaping cost seg practice, including Amerisouth, Peco Foods, and Hospital Corporation of America, see our overview of significant court cases in cost segregation.

The Broader Principle

James returned to the same idea several times throughout our conversation. The IRS is not looking for technical perfection. They are looking for support. A defensible study does not have to have every classification exactly right. It has to have every classification grounded in documented, property-specific analysis.

"It's the support, not the report. The IRS engineer goes to the back of the report first, looks for RS Means codes. Then checks land allocation. Then looks at whether the big numbers make sense. A beautiful-looking report with nothing behind it gets adjusted. A simple report with solid documentation holds up."

James C. Peacock, former IRS Engineer SME

Kitchen cabinets are a small piece of this. But they are a useful litmus test. If your provider classified cabinets at 5-year without asking you about removal and reuse, they either do not know Amerisouth, or they know it and ignored it. Neither is acceptable.

The right answer on kitchen cabinets is usually 27.5-year property, with a note that reclassification is available if removal and reuse can be documented. That is conservative. It is also what the case law requires.

A study that stays within the ATG boundaries, supports every 1245 classification with property-specific documentation, and uses proper RS Means codes will hold up under examination. A study that chases maximum 1245 reclassifications without that support is not a defensible study. It is a number generator.