                        T.C. Memo. 2012-18



                      UNITED STATES TAX COURT



         PECO FOODS, INC. & SUBSIDIARIES, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13789-08.             Filed January 17, 2012.



     James H. Williams, III and John S. Rice, for petitioner.

     William B. McClendon and Francis C. Mucciolo, for

respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     LARO, Judge:   Peco Foods, Inc. (Peco), is an Alabama

corporation and the parent company of an affiliated group of

corporations that file their Federal income tax returns on a
                                 - 2 -

consolidated basis.1    Peco petitioned the Court to redetermine

respondent’s determination of Federal income tax deficiencies of

$120,751, $678,978, and $727,323 for its taxable years ended

March 28, 1998 (1997 taxable year), April 3, 1999 (1998 taxable

year), and March 30, 2002 (2001 taxable year), respectively.2

Following a trial of this case, we decide whether Peco may modify

purchase price allocations which it agreed to in connection with

its acquisition of certain assets at two poultry processing

plants.   We hold it may not.

                           FINDINGS OF FACT

     Some facts were stipulated.    We incorporate herein by this

reference the parties’ stipulation of facts and the exhibits

submitted therewith.    We find the stipulated facts accordingly.

When the petition was filed with the Court, Peco’s mailing

address was in Tuscaloosa, Alabama.

I.   Background

     Peco is the common parent of an affiliated group of

corporations.     The other members of the affiliated group are Peco

Farms, Inc. (Peco Farms), Peco Foods of Mississippi, Inc. (PFMI),

and Peco Foods of Brooksville, Inc.      At all relevant times, Peco




     1
      We generally use the term “Peco” to refer without
distinction to Peco or one or more of its affiliated
subsidiaries. We name the affiliated corporations individually
only where we believe it is necessary to do so for clarity.
     2
      Some dollar amounts have been rounded.
                                  - 3 -

and the members of its affiliated group were engaged in the

business of poultry processing.

II.   Acquisitions

      A.   Overview

      During the mid-to-late 1990s, Peco acquired two poultry

processing plants.     First, Peco acquired a poultry processing

plant in Sebastopol, Mississippi (Sebastopol plant).     Second,

Peco acquired a poultry processing plant in Canton, Mississippi

(Canton plant).      We collectively refer to Peco’s acquisitions of

the Sebastopol plant and the Canton plant as the acquisitions.

      B.   Sebastopol Acquisition

      Peco, through PFMI and Peco Farms of Mississippi, LLC (LLC),

acquired certain assets of the Sebastopol plant (Sebastopol

acquisition) from Green Acre Farm, Inc. (Green Acre) for

$27,150,000.   The Sebastopol acquisition was effected through an

asset purchase agreement dated December 29, 1995 (Sebastopol

agreement).    Included in the Sebastopol agreement was a schedule

(original Sebastopol allocation schedule) which allocated the

purchase price of the acquired assets between PFMI and LLC as the

purchasing subsidiaries.     In particular, Peco and Green Acre

agreed to allocate the $27,150,000 purchase price among 26 assets

“for all purposes (including financial accounting and tax

purposes)” in accordance with the original Sebastopol allocation
                                    - 4 -

schedule.     The original Sebastopol allocation schedule allocated

the purchase price as follows:
      Asset                         PFMI            LLC       Total

Processing plant building         $3,802,550         -0-    $3,802,550
Holding shed #1                          -0-     $64,800        64,800
Holding shed #2                          -0-      75,395        75,395
Fuel tanks                               -0-      61,000        61,000
Waste water treatment plant
  lagoon                            112,000          -0-      112,000
Rail spur                               -0-       86,625       86,625
Weightronic truck scale                 -0-       55,000       55,000
Fencing                              27,700          -0-       27,700
Utility extension                    50,000          -0-       50,000
Concrete and paving                  50,000          -0-       50,000
Site work                           100,000          -0-      100,000
Hatchery real property                  -0-    1,509,125    1,509,125
Feedmill                                -0-    1,005,700    1,005,700
Waste water treatment plant       1,879,545          -0-    1,879,545
Egg farm                                -0-       96,625       96,625
Land
  Processing plant                   106,500          -0-      106,500
  Hatchery                               -0-       10,000       10,000
  Feedmill                               -0-        2,500        2,500
  Egg farm                               -0-       10,000       10,000
  Waste water treatment plant          6,000          -0-        6,000
Rolling stock                            -0-      280,500      280,500
Furniture and equipment              100,620          -0-      100,620
Machinery and equipment            3,785,420    2,178,720    5,964,140
Inventories (estimated)              384,237    6,265,763    6,650,000
Accounts receivable (estimated)    4,000,000          -0-    4,000,000
Goodwill                                 -0-    1,043,675    1,043,675
  Total                           14,404,572   12,745,428   27,150,000

The Sebastopol agreement defined the term “Real Property” as

“real property, leaseholds and subleaseholds therein,

improvements, fixtures, and fittings thereon, and easements,

rights-of-way, and other appurtenants thereto (such as

appurtenant rights in and to public streets located within the

state of Mississippi)”.      The term “Equipment” was defined as

“tangible personal property (such as machinery, equipment,

computer hardware and software, furniture, automobiles, trucks,
                                - 5 -

tractors, trailers, tools, jigs, and dies) located within the

state of Mississippi”.

     In connection with the Sebastopol acquisition, Peco engaged

William A. Payne (Mr. W. Payne) of PayneSmall Investment Property

Appraisals (PayneSmall) to appraise the Sebastopol plant

(Sebastopol appraisal).   The Sebastopol appraisal, dated January

25, 1996, listed more than 750 separately identifiable assets.

That list generally reported the acquisition date, acquisition

cost, cost multiplier, replacement cost, effective age, economic

life, and depreciated life of each of the separately identified

assets.   Mr. W. Payne was deceased at the time of trial.

     C.    Canton Acquisition

     Peco, through PFMI and LLC, acquired certain assets related

to the Canton plant (Canton acquisition) from Marshall Durbin

Food Corp. and Marshall Durbin Farms, Inc. (collectively,

Marshall Durbin), for $10,500,000.      The Canton acquisition was

memorialized in an asset purchase agreement dated May 12, 1998.

The Canton agreement included a schedule (original Canton

allocation schedule) which allocated the purchase price among

three assets.   More specifically, Peco and Marshall Durbin agreed

to allocate the $10,500,000 purchase price among 3 assets “for

all purposes (including financial accounting and tax purposes)”

in accordance with the original Canton allocation schedule.      The
                                - 6 -

original Canton allocation schedule allocated the purchase price

as follows:

                  Asset                  Purchase Price

           Real property
             Land                            $350,000
             Improvements                   5,100,000
           Machinery, equipment,
             furniture, and fixtures        5,050,000
               Total                       10,500,000

The Canton agreement defined the term “Real Property” as “real

property, leaseholds and subleaseholds therein, improvements,

fixtures, and fittings thereon, and easements, right-of-way, and

other appurtenant rights thereto (such as appurtenant rights in

and to public streets) associated with a processing plant located

in Canton, Mississippi.”    The term “Equipment” was defined as

“tangible personal property (such as machinery, equipment,

furniture, automobiles, trucks, tractors, trailers, tools and

jigs) used in * * * [the Canton plant].”    Peco engaged Terry L.

Payne (Ms. T. Payne) of PayneSmall to appraise the Canton plant

(Canton appraisal) in connection with the Canton acquisition.

The Canton appraisal was dated March 8, 1998.    Included in the

Canton appraisal were approximately 20 pages that listed more

than 300 separate assets.    That list generally reported the

acquisition date, acquisition cost, cost multiplier, replacement

cost, and depreciated value of each of the separately identified

assets.   Ms. Payne was deceased at the time of trial.
                                - 7 -

III. Cost Segregation Study

      Peco commissioned Moore Stephens Frost, PLC (Moore

Stephens), in or around 1999 to perform a segregated cost

analysis (cost segregation study) of the Sebastopol and Canton

plants.    The cost segregation study subdivided the assets

acquired by Peco into subcomponents based on the Sebastopol

appraisal and the Canton appraisal.     The results of that study

were documented in at least two schedules (collectively,

subsequent allocation schedules) and determined that subdividing

the acquired assets into various subcomponents entitled Peco to

an additional depreciation expense of $5,258,754 from 1998

through 2002.    The cost segregation study was prepared by Jim

Strobbe, who was deceased when the trial in this case was held.

IV.   Federal Income Tax Reporting of Acquisitions

      Peco filed a Form 1120, U.S. Corporation Income Tax Return,

for the 1997 taxable year (1997 return).     On the 1997 return,

Peco depreciated certain assets acquired in the Sebastopol

acquisition, including the property described as “Processing

Plant [Building]” (Processing Plant Building), as nonresidential

real property depreciable by a straight-line method over 39

years.

      In December 1999, after the cost segregation study was

complete, Peco filed a Form 1120 for the 1998 taxable year (1998

return).    Attached to the 1998 return was Form 3115, Application
                               - 8 -

for Change in Accounting Method.    An attachment to the Form 3115

stated that, pursuant to section 2.01 of an appendix to Rev.

Proc. 98-60, 1998-2 C.B. 759, 772, Peco proposed to change its

method of accounting to “claim allowable depreciation”.   Attached

to the Form 3115 was a schedule which proposed adjustments to the

depreciation method of 55 assets.   The attachment to the Form

3115 stated that each item of property “that is reclassified from

nonresidential real property to an asset class of Revenue

Procedure 87-56 that does not explicitly include section 1250

property, is section 1245 property for depreciation purposes.”

In total, Peco calculated the section 481(a)3 adjustment arising

from the accelerated depreciation method as $2,135,779, which

reflects the amount of depreciation that Peco believed should

have been deducted for the previous taxable years.

     Beginning on the 1998 return, Peco depreciated certain

assets acquired in the Sebastopol acquisition over 7-year or 15-

year class lives and with a double declining or 150-percent

depreciation method.   Peco continued to deduct those assets under

this accelerated method of depreciation during the taxable years

ended April 1, 2000, and March 31, 2001 (1999 and 2000 taxable

years, respectively), and the 2001 taxable year.



     3
      Unless otherwise indicated, section references are to the
applicable versions of the Internal Revenue Code, and Rule
references are to the Tax Court Rules of Practice and Procedure.
                               - 9 -

     Peco also subdivided assets reflected in the original Canton

allocation schedule into component parts.   In particular, Peco

subdivided the asset titled “Real Property: Improvements” into

subcomponents and, depending upon the asset, claimed depreciation

for those subcomponents on the 1998 return using a 7-year or 15-

year recovery period and a double declining or 150-percent

depreciation method.   For the 1999 through 2001 taxable years,

Peco continued to depreciate the subcomponents derived from “Real

Property: Improvements” under the same method of depreciation.

V.   Notice of Deficiency and Petition

     In a notice of deficiency dated March 7, 2008, respondent

determined Federal income tax deficiencies of $120,751, $678,978,

and $727,323 for Peco’s 1997, 1998, and 2001 taxable years,

respectively.   The deficiencies are mainly attributable to three

adjustments.4   First, respondent disallowed section 481(a)

adjustments of $458,233 for each of the 1998 and 2001 taxable

years.   Second, respondent determined depreciation adjustments of

$635,517 and $444,978 for the 1998 and 2001 taxable years,

respectively.   Third, respondent determined decreases of




     4
      Respondent also determined an alternative minimum tax
adjustment of $238,188 for the 1997 taxable year, a prior year
minimum tax adjustment of $253,993 for the 1998 taxable year, and
a general business credit of $340,849 for the 2001 taxable year.
Additionally, respondent determined adjustments to the 1999 and
2000 taxable years which are not at issue in this case.
                               - 10 -

$162,222, $998,953, and $1,010,787 in Peco’s net operating losses

for the 1997, 1998, and 2001 taxable years, respectively.

     Respondent based these adjustments on his determination that

Peco was not entitled to portions of the section 481(a)

adjustments related to the Sebastopol acquisition, including (1)

all of the section 481(a) adjustment related to the $3,902,551 of

assets described as “Processing Plant Building”; (2) all of the

section 481(a) adjustment related to the $64,800 of assets

described as “Holding Shed #1”; (3) all of the section 481(a)

adjustment related to the $75,395 of assets described as “Holding

Shed #2”; and (4) a portion of the section 481(a) adjustment

related to the $112,000 of assets described as ”Waste Water

[Treatment Plant]”.    Respondent also based these adjustments on

his determination that Peco was not entitled to subdivide the

asset described as “Real Property: Improvements” into component

parts after acquiring that asset in the Canton acquisition.    Peco

petitioned the Court in response to the notice of deficiency.

                               OPINION

I.   Burden of Proof

     Respondent’s determinations in the notice of deficiency are

presumed correct, and Peco bears the burden of proving those

determinations erroneous in order to prevail.   See Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933).    We need not decide
                                 - 11 -

which party bears the burden of proof because the burden of proof

does not affect the result in this case.5

II.   Binding Effect of the Original Sebastopol and Canton
      Allocation Schedules

      A.   Overview

      Section 1060 prescribes special allocation rules for

determining a transferee’s basis and a transferor’s gain or loss

in an applicable asset acquisition.       An applicable asset

acquisition is any transfer of assets that constitutes a trade or

business and with respect to which the purchaser’s basis in such

assets is determined wholly by reference to the consideration

paid for them.   Sec. 1060(c).    The Omnibus Budget Reconciliation

Act of 1990, Pub. L. 101-508, sec. 11323(a), 104 Stat. 1388-464,

amended section 1060(a) to provide that where the parties to an


      5
      Peco argues that the burden should shift to respondent to
prove the correctness of his determination because the notice of
deficiency is arbitrary and capricious. Barring a written
stipulation to the contrary, the venue for an appeal of this case
is the Court of Appeals for the Eleventh Circuit. See sec.
7482(b)(1)(B). That court differentiates between unreported
income cases and deduction cases in determining when the burden
of proof shifts to the Commissioner. See Gatlin v. Commissioner,
754 F.2d 921, 923 (11th Cir. 1985), affg. T.C. Memo. 1982-489;
see also Amey & Monge, Inc. v. Commissioner, 808 F.2d 758, 761
(11th Cir. 1987), affg. T.C. Memo. 1984-642. Although the
Commissioner bears the burden of proving unreported income once
it has been shown his determination was arbitrary and erroneous,
where, as here, the case involves incorrect reporting of
deductions, the taxpayer bears the burden of proving his or her
entitlement to the deductions claimed “At all times”. See Gatlin
v. Commissioner, supra at 923. Thus, even assuming the notice of
deficiency was arbitrary and capricious, the burden remains with
Peco to prove its entitlement to the deductions claimed.
                             - 12 -

applicable asset acquisition agree in writing as to the

allocation of any amount of consideration, or as to the fair

market value of any of the assets transferred, that agreement is

“binding” on the transferee and the transferor unless the

Commissioner determines that the allocation (or fair market

value) is not appropriate.

     The House report accompanying the amendment to section

1060(a) explained that

     a written agreement regarding the allocation of
     consideration to, or the fair market value of, any of
     the assets in an applicable asset acquisition will be
     binding on both parties for tax purposes, unless the
     parties are able to refute the allocation or valuation
     under the standards set forth in the Danielson case.
     The parties are bound only with respect to the
     allocations or valuations actually provided in the
     agreement. * * *

          The committee does not intend to restrict in any
     way the ability of the [Internal Revenue Service] to
     challenge the taxpayers’ allocation to any asset or to
     challenge the taxpayers’ determination of the fair
     market value of any asset by any appropriate method,
     particularly where there is a lack of adverse tax
     interests between the parties. [H. Rept. 101-881, at
     351 (1990)].

     In Commissioner v. Danielson, 378 F.2d 771, 775 (3d Cir.

1967), vacating and remanding 44 T.C. 549 (1965), the Court of

Appeals for the Third Circuit ruled that a taxpayer can challenge

the tax consequences of a written agreement as construed by the

Commissioner “only by adducing proof which in an action between

the parties to the agreement would be admissible to alter that

construction or to show its unenforceability because of mistake,
                               - 13 -

undue influence, fraud, duress, etc.”   The Court of Appeals for

the Eleventh Circuit has expressly adopted the Danielson rule.

See Plante v. Commissioner, 168 F.3d 1279, 1280-1281 (11th Cir.

1999), affg. T.C. Memo. 1997-386; Bradley v. United States, 730

F.2d 718, 720 (11th Cir. 1984).

     B.   Parties’ Arguments

     Respondent asserts that section 1060 and the Danielson rule

each bar Peco from modifying the purchase price allocations of

the Sebastopol and Canton plants in a manner inconsistent with

the original Sebastopol allocation schedule and the original

Canton allocation schedule (collectively, original allocation

schedules).   Peco contends that neither section 1060 nor

Danielson prohibits it from classifying property acquired in the

Sebastopol and Canton acquisitions as section 1250 property

(i.e., structural components of a building) or section 1245

property (i.e., tangible personal property).   According to Peco,

section 1060 and its legislative history are silent as to whether

a taxpayer may classify property as section 1250 property or

section 1245 property and require only that the purchase price be

allocated under the residual method of section 338(b)(5).    Thus,

Peco argues that it may redetermine the useful lives of assets

received in the Sebastopol acquisition and make an initial

determination of the useful lives of assets received in the

Canton acquisition.
                               - 14 -

     C.   Application of Principles to Acquisitions

     The parties agree that each of the acquisitions is an

applicable asset acquisition within the meaning of section 1060,

and respondent does not challenge the correctness of the

allocations of the original allocation schedules.   Peco, insofar

as it seeks to elevate the residual method of section 338(b)(5)

over the written allocations, misinterprets the law.

     Where the parties to an applicable asset acquisition agree

in writing as to the allocation of the consideration or as to the

fair market value of any of the assets, that agreement “shall be

binding” on both the transferee and the transferor unless the

Commissioner determines that the allocation is not appropriate.

Sec. 1060(a).   However, where the parties to an applicable asset

acquisition do not agree in writing to allocate any part of the

consideration of the acquired assets, the residual method of

section 338(b)(5) applies to determine the transferee’s basis in,

and the transferor’s gain or loss from, each of the assets

transferred.    See West Covina Motors, Inc. v. Commissioner, T.C.

Memo. 2009-291.   Congress’ use of the phrase “shall be binding”,

when viewed in the light of section 1060(a) as a whole, directs

that the written agreement supersedes the residual method of

purchase price allocation.   The residual method is not relevant

in the instant case because, as we find, the Sebastopol agreement

and the Canton agreement are each enforceable.
                              - 15 -

     Before we decide the validity of the Sebastopol and Canton

agreements, we first address Peco’s reliance on United States v.

Fort, 638 F.3d 1334 (11th Cir. 2011), to support the argument

that the Danielson rule is inapposite this case.   The taxpayer in

Fort received restricted shares in connection with Cap Gemini’s

acquisition of Ernst & Young’s information-technology consulting

business.   The taxpayer in Fort was an Ernst & Young partner who

received, in addition to other consideration, restricted shares

in Cap Gemini in exchange for his partnership interest in Ernst &

Young.   The terms of the agreement between Cap Gemini and Ernst &

Young were detailed in an agreement (master agreement) to which

the Ernst & Young partners agreed to be bound.   The taxpayer

filed his 2000 Federal income tax return reporting the restricted

and unrestricted shares as income and amended that return to

assert that he did not receive income from the restricted shares

during that year.   The IRS issued a refund and, after determining

that it did so erroneously, sued to recover the refund in the

U.S. District Court for the Northern District of Georgia.   The

District Court granted summary judgment in the Government’s favor

because the taxpayer constructively (but not actually) received

the restricted shares.

     On appeal to the Court of Appeals for the Eleventh Circuit,

the Government argued that the Danielson rule bound the taxpayer

to a provision in the master agreement apparently requiring him
                                - 16 -

to report the restricted shares as income in 2000.    The Court of

Appeals, in rejecting that argument, noted that “Danielson and

its progeny recognize that parties may agree to a certain form of

a transaction, and that if they do, they face a difficult burden

in convincing the court that they did not actually engage in the

form that they contracted to engage in.”     United States v. Fort,

supra at 1337-1338.    The court also stated that “the Danielson

rule applies if a taxpayer ‘challenge[s] the form of a

transaction’”.     Id. at 1338 (quoting Bradley v. United States,

730 F.2d 718, 720 (11th Cir. 1984)).     The Court of Appeals noted

that the taxpayer did not argue that the form of the transaction

differed from what was written in the master agreement, but that

the agreed-upon form had specific tax consequences.    Such an

argument, said the court, was outside the scope of the Danielson

rule.

     Unlike the taxpayer in Fort, Peco did not agree in either

the Sebastopol agreement or the Canton agreement to a particular

tax consequence.    Instead, Peco agreed to allocate the purchase

price among the assets listed on each of the original allocation

schedules “for all purposes (including financial accounting and

tax purposes)”.    In seeking to reallocate the purchase price

among assets not listed in the original allocation schedules,

Peco seeks to challenge the form of the transaction.    We
                                - 17 -

therefore read Fort as supporting application of the rule in

Danielson, not inhibiting it.

     Peco has entered into two written agreements allocating the

purchase price of the Sebastopol plant and the Canton plant among

the acquired assets.   Those allocations are binding upon Peco

unless (1) respondent determines that they are not appropriate,

see sec. 1060(a), or (2) the agreement is unenforceable under

traditional contract formation defenses, see Commissioner v.

Danielson, 378 F.2d at 775.   Because respondent does not dispute

the propriety of the original allocation schedules, we need only

decide the enforceability of each agreement.

          1.   Sebastopol Acquisition

     Pursuant to the Sebastopol agreement, Peco and Green Acre

agreed in writing to allocate the purchase prices of 26 assets

between PFMI and LLC in accordance with the original Sebastopol

allocation schedule.   They did so with the understanding that

such an allocation would be used “for all purposes (including

financial accounting and tax purposes)”.   The original Sebastopol

allocation schedule allocated, among other assets, $3,802,550 to

an asset described as “Processing Plant Building”.

     Peco contends that the Sebastopol agreement is unenforceable

because the term “Processing Plant Building” is ambiguous.   As

Peco sees it, that term does not reflect Peco’s and Green Acre’s

intention to include within the term special mechanical systems
                                - 18 -

and assets that qualify as section 1245 property.   Because the

Sebastopol agreement has a choice-of-law provision specifying the

use of Mississippi law, we apply the law of that State in

interpreting the provisions of that contract.

     Whether a contract is ambiguous is a question of law, and

the subsequent interpretation of the contract is a question of

fact.   Wood v. Wood, 35 So. 3d 507, 513 (Miss. 2010).   Under

Mississippi law, an ambiguous term or phrase is “‘one capable of

more than one meaning when viewed objectively by a reasonably

intelligent person who has examined the context of the entire

integrated agreement and who is cognizant of customs, practices,

usages and terminology as generally understood in the particular

trade or business.’”   Dalton v. Cellular S., Inc., 20 So. 3d

1227, 1232 (Miss. 2009) (quoting Walk-In Med. Ctrs., Inc. v.

Brever Capital Corp., 818 F.2d 260, 263 (2d Cir. 1987)).

Contract interpretation requires a three-step inquiry.   First, we

look to the express wording of the contract in the light of the

entire contract without regard to extrinsic or parol evidence.

Cherokee Ins. Co. v. Babin, 37 So. 3d 45, 48 (Miss. 2010).       This

calls for an interpretation of the language in a manner “‘which

makes sense to an intelligent layman familiar only with the

basics of English language.’”    Pursue Energy Corp. v. Perkins,

558 So. 2d 349, 352 (Miss. 1990) (quoting Thornhill v. Sys.

Fuels, Inc., 523 So. 2d 983, 1007 (Miss. 1988)).    If the parties’
                                - 19 -

intent is unclear, we next apply canons of contract construction.

Cherokee Ins. Co. v. Babin, supra at 48.    If the meaning of a

term remains ambiguous, only then may we look to extrinsic

evidence to give effect to the ambiguous term.     Id.

     We reject Peco’s contention that the term “Processing Plant

Building” is ambiguous.   Peco and Green Acre agreed to allocate a

portion of the Sebastopol purchase price to an asset described as

a “Processing Plant Building” (emphasis added), and not one

described simply as “Processing Plant”.    We conclude that

inclusion of the word “building” is significant.

     As relevant here, the Merriam Webster’s College Dictionary

150 (10th ed. 1997) defines the term “building” as “a [usually]

roofed and walled structure built for permanent use”.    In its

second definition, the Merriam Webster’s College Dictionary 890

(10th ed. 1997) defines the term “plant” as “the land, buildings,

machinery, apparatus, and fixtures employed in carrying on a

trade or an industrial business”, “the total facilities available

for production or service”, or “the buildings and other physical

equipment of an institution”.    In the light of these definitions,

we believe that Peco and Green Acre would have simply referred to

“Processing Plant” rather than “Processing Plant Building” had

they intended to include within the term special mechanical

systems and other assets that are not part of a building.     By

including the term “building” (i.e. a structure) to describe the
                              - 20 -

assets acquired, we believe that Peco and Green Acre intended to

allocate a portion of the purchase price to a structure and not

to the assets contained therein.

     The Sebastopol agreement as a whole also evidences an intent

on the part of Peco and Green Acre to specifically assign value

to a structure and not to the assets contained therein.   Under

the original Sebastopol allocation schedule, Peco and Green Acre

agreed to allocate $6,064,760 of the purchase price to machinery,

equipment, and furniture, and $3,802,550 to the “Processing Plant

Building”.   We view Peco’s decision to allocate almost twice as

much of the purchase price to machinery, equipment, and furniture

as to the “Processing Plant Building” as probative of its intent

that the original Sebastopol allocation schedule allocated the

purchase price among the specific component assets conclusively.

The decision to allocate the purchase price among machinery,

equipment, and furniture, we believe, also shows that Peco was

aware of the specific component assets but chose to not allocate

additional purchase price to those assets.

     Moreover, Peco acknowledged on brief that it perceived the

need to alter the depreciation method of the “Processing Plant

Building” following its consultation with Moore Stephens, and our

decision in Hosp. Corp. of Am. v. Commissioner, 109 T.C. 21

(1997).   Such an acknowledgment suggests that Peco intended the

asset described as “Processing Plant Building” to be treated as a
                              - 21 -

single asset when it entered into the Sebastopol agreement.    The

chronology of events suggests that Peco believed that the term

“Processing Plant Building” was ambiguous only after it perceived

a benefit which could be realized by subdividing the building

into component assets.   Thus, it is reasonable to conclude that

there was not an ambiguity concerning the asset described as

“Processing Plant Building” as agreed to by Peco and Green Acre.

Because Peco alleges no other defect in the Sebastopol agreement

which makes that contract unenforceable, we give effect to that

agreement for Federal tax purposes, as Peco agreed to be bound.

     On the basis of the foregoing, Peco is bound by the original

Sebastopol allocation schedule under section 1060 and Danielson.

It follows that Peco must report its income under the method of

accounting adopted before the request for change in accounting

method.   See Capital One Fin. Corp. v. Commissioner, 130 T.C.

147, 155 (2008), affd. 659 F.3d 316 (4th Cir. 2011).   We

therefore sustain respondent’s determination as to the Sebastopol

acquisition.

          2.    Canton Acquisition

     A similar analysis applies to the Canton acquisition.    Under

the Canton agreement, Peco and Marshall Durbin agreed in writing

to allocate the purchase price of the Canton plant among three

assets as provided in the original Canton allocation schedule.

They did so with the understanding that the original Canton
                               - 22 -

allocation schedule would be used “for all purposes (including

financial accounting and tax purposes)”.   The original Canton

allocation schedule allocated $5,100,000 to, among other assets,

an asset described as “Real Property: Improvements”.

     Peco asserts that the Canton agreement is not enforceable

because the term “Real Property: Improvements” is ambiguous.      As

with the Sebastopol agreement, Peco contends that the term “Real

Property: Improvements” does not reflect the parties’ intent to

include within that term specialized mechanical systems and other

assets that qualify as section 1245 property.   We apply Alabama

law in construing the provisions of that contract because the

Canton agreement contains a choice-of-law provision specifying

the use of the law of that State.

     Whether a contractual provision is ambiguous is a question

of law, and the meaning of that contract is a question of fact.

Kelmor, LLC v. Ala. Dynamics, Inc., 20 So. 3d 783, 790 (Ala.

2009) (quoting Ex parte Gardner, 822 So. 2d 1211, 1217 (Ala.

2001)).   We discern the intent of the contracting parties from

the contract as a whole.    Homes of Legend, Inc. v. McCollough,

776 So. 2d 741, 746 (Ala. 2000).    We give the terms in a contract

their “ordinary, plain, and natural meaning” unless the contract

establishes that the terms were intended to be used in a special

or technical sense.   Id.   Where the terms are unambiguous, we

presume that the contracting parties intended what they stated
                              - 23 -

and will enforce the contract as written.   Id.    However, where

the terms of the contract are ambiguous, we resolve the ambiguity

using established rules of contract construction.    Id.    Where we

are faced with competing constructions, one valid and the other

invalid, we are bound to accept the construction that will give

effect and meaning to the terms of the contract.     Id.   A

contractual term is ambiguous where it is “reasonably susceptible

of more than one meaning.”   FabArc Steel Supply, Inc. v.

Composite Constr. Sys., Inc., 914 So. 2d 344, 357 (Ala. 2005).

     We conclude that the term “Real Property: Improvements” is

unambiguous in the light of the Canton agreement as a whole.

Peco and Marshall Durbin agreed to allocate the purchase price of

the Canton plant among three assets; namely, “Real Property:

Land”, “Real Property: Improvements”, and “Machinery, Equipment,

Furnitures [sic] and Fixtures”.   The decision to allocate the

purchase price separately among these various assets shows that

Peco was aware of the existence of subcomponent assets but chose

not to allocate additional purchase price to them.    Had Peco

intended to allocate purchase price to subcomponent assets, we

believe that it would have done so by allocating additional

purchase price to the asset described as “Machinery, Equipment,

Furnitures [sic] and Fixtures”.   We note that the Canton

appraisal was dated before the date on which Peco entered into

the Canton agreement.   This chronology suggests that Peco could
                                - 24 -

have adopted a more detailed allocation schedule into the Canton

agreement but did not.

     Further, the Canton agreement contained a merger clause that

the contract, accompanying exhibits, and closing documents

“constitute the entire agreement between the Parties.”     The

merger clause creates a presumption that the writing represents a

“final and complete * * * agreement of the parties.”     Ex parte

Palm Harbor Homes, Inc., 798 So. 2d 656, 660 (Ala. 2001).        Given

the foregoing, we believe it reasonable to conclude that the term

“Real Property: Improvements” is not ambiguous.     Because Peco

raises no other defect in the Canton agreement, we enforce the

contract as written.     Consequently, we hold that the original

Canton allocation schedule is binding upon Peco under section

1060 and Danielson.6



     6
      Whereas Peco urges us to look to extrinsic evidence in the
form of the Canton appraisal to determine the meaning of the
asset described as “Real Property: Improvements”, we decline to
do so because we conclude that the terms of the Canton agreement
are clear and unambiguous. See, e.g., Gafford v. Kirby, 512 So.
2d 1356, 1363 (Ala. 1987) (“It is well settled in this state that
extrinsic evidence is not admissible if the instrument, on its
face, is clear and unambiguous.”); Martin v. First Natl. Bank of
Mobile, 412 So. 2d 250, 253-254 (Ala. 1982) (“the Court will not
look beyond ‘the four corners of the instrument’ unless latent
ambiguities exist”). We also consider the Canton appraisal to be
unreliable in certain material respects. Because Ms. T. Payne
was not alive at the time of trial, respondent was unable to
cross-examine her on the methodologies she used to allocate value
among the assets. Moreover, the Canton appraisal states that Ms.
T. Payne used “opinions, data, and statistics” from third parties
in drafting the report and thus it contains hearsay within
hearsay.
                              - 25 -

      Peco argues that neither section 1060 nor the Danielson rule

prohibits it from making an initial determination of the useful

lives of assets acquired in the Canton acquisition inconsistent

with the original Canton allocation schedule.    We disagree.

Where a taxpayer’s method of accounting does not clearly reflect

income, section 446(b) authorizes the Commissioner to compute

taxable income under a method which, in his opinion, clearly

reflects income.   The Commissioner’s determination of whether an

accounting method clearly reflects income is entitled to “more

than the usual presumption of correctness.”     Ford Motor Co. v.

Commissioner, 102 T.C. 87, 91 (1994), affd. 71 F.3d 209 (6th Cir.

1995).   The Commissioner’s interpretation under the “clear

reflection standard” is given wide latitude that courts have been

loathe to interfere with “‘unless clearly unlawful’”.     Thor Power

Tool Co. v. Commissioner, 439 U.S. 522, 532-533 (1979) (quoting

Lucas v. Am. Code Co., 280 U.S. 445, 449 (1930)); see also

Knight-Ridder Newspapers, Inc. v. United States, 743 F.2d 781,

788 (11th Cir. 1984); Ford Motor Co. v. Commissioner, supra at

91.   Before we will disturb the Commissioner’s determination that

a method of accounting does not clearly reflect income, the

taxpayer bears the burden of proving that the Commissioner acted

arbitrarily, capriciously, or without sound basis in fact.      See

Knight-Ridder Newspapers v. United States, supra at 788.
                              - 26 -

     We conclude that respondent did not abuse his discretion in

prohibiting Peco from determining useful lives of assets in a

manner that was inconsistent with the original Canton allocation

schedule.   In binding Peco to that schedule, respondent ensures

that the transferee (Peco) and the transferor (Marshall Durbin)

treat the assets consistently for Federal tax purposes.    Allowing

Peco to treat the acquired assets in a way other than the one in

which it agreed to, subjects respondent to a potential whipsaw.

Such a whipsaw might occur if, for example, Peco treated certain

property as section 1245 property but Marshall Durbin treated

that property as section 1250 property.    Respondent would be made

to treat two parties to the same transaction inconsistently.

Even if a danger of whipsaw did not occur, binding Peco to the

original Canton allocation schedule prevents it from realizing a

better tax consequence than the one it bargained for.     See Plante

v. Commissioner, 168 F.3d at 1282.

     Nor was respondent unreasonable in determining that assets

described as “Real Property: Improvements” are nonresidential

real property depreciable over 39 years.    A building and its

structural components are classified as section 1250 property,

sec. 1245(a)(3)(B), and nonresidential real property is per se

section 1250 property, sec. 168(e)(2)(B).    Section 1.1250-

1(e)(3), Income Tax Regs., defines real property to include the

structural components of a building within the meaning of section
                             - 27 -

1.1245-3(c), Income Tax Regs., which in turn specifies that the

terms “building” and “structural components” have the meanings

assigned to those terms in section 1.48-1(e), Income Tax Regs.

Section 1.48-1(e), Income Tax Regs., defines the terms “building”

and “structural components” as follows:

     (e) Definition of building and structural components.

     (1) * * * The term “building” generally means any
     structure or edifice enclosing a space within its
     walls, and usually covered by a roof, the purpose of
     which is, for example, to provide shelter or housing,
     or to provide working, office, parking, display, or
     sales space. The term includes, for example,
     structures such as apartment houses, factory and office
     buildings, warehouses, barns, garages, railway or bus
     stations, and stores. * * *

     (2) The term “structural components” includes such
     parts of a building as walls, partitions, floors, and
     ceilings, as well as any permanent coverings therefor
     such as paneling or tiling; windows and doors; all
     components (whether in, on, or adjacent to the
     building) of a central air conditioning or heating
     system, including motors, compressors, pipes and ducts;
     plumbing and plumbing fixtures, such as sinks and
     bathtubs; electric wiring and lighting fixtures;
     chimneys; stairs, escalators, and elevators, including
     all components thereof; sprinkler systems; fire
     escapes; and other components relating to the operation
     or maintenance of a building. * * *

The term “tangible personal property”, on the other hand, is

defined under section 1.48-1(c), Income Tax Regs., to include

“any tangible property except land and improvements thereto, such

as buildings or other inherently permanent structures (including

items which are structural components of such buildings or

structures).”
                             - 28 -

     When viewed against the foregoing regulations, respondent’s

conclusion that assets described as “Real Property: Improvements”

are nonresidential real property is not unreasonable.     The Canton

agreement defines term “real property” to include, in addition to

other assets, “improvements, fixtures and fittings thereon”.    We

think it reasonable to conclude that assets described as “Real

Property: Improvements” are better viewed as nonresidential real

property than tangible personal property.   We therefore sustain

respondent’s determination that the asset described as “Real

Property: Improvements” is section 1250 property, depreciable

with a straight-line method over a period of 39 years.7    See sec.

168(b) and (c).

     Peco relies upon our decision in Hosp. Corp. of Am. v.

Commissioner, 109 T.C. 21 (1997), as support for its position

that it may subdivide the acquired assets into subcomponents for

depreciation purposes because some of the subcomponent assets

are, in hindsight, more appropriately viewed as section 1245

property than section 1250 property.   As Peco sees it, our

decision in Hosp. Corp. of Am. provides the legal basis and the

cost segregation study provides the factual basis for subdividing



     7
      We note that although Rev. Proc. 87-56, 1987-2 C.B. 674,
allows for certain “Land Improvements” to be depreciated over a
recovery period of 15 or 20 years, that revenue procedure
specifically excluded from that category any land improvements
that are buildings and structural components as defined in sec.
1.48-1(e), Income Tax Regs.
                              - 29 -

the component assets.   We disagree with Peco that Hosp. Corp. of

Am. applies in the manner urged.

     The taxpayers in Hosp. Corp. of Am. were members of an

affiliated group of corporations that owned, operated, and

managed hospitals.   The taxpayers claimed depreciation deductions

based on 5-year recovery periods for certain property which they

claimed constituted tangible personal property (i.e., section

1245 property).   The Commissioner determined that the properties

were structural components (i.e., section 1250 property) and that

they should be depreciated over the same recovery periods as the

buildings to which they related.   We held that the classification

of an asset as section 1245 or section 1250 property is decided

under the precedent governing whether property is eligible for

the section 48 investment tax credit, and specifically under the

definitions in section 1.48-1(c), Income Tax Regs. (defining

tangible personal property), and section 1.48-1(e)(2), Income Tax

Regs. (defining buildings and structural components).

     The dispute in the instant case is far more simplistic than

the one presented in Hosp. Corp. of Am.   Unlike the taxpayers in

Hosp. Corp. of Am., Peco is bound by the clear and unambiguous

terms of the original allocation schedules.   Thus, whether the

acquired assets may be subdivided into component assets is

immaterial because Peco may not deviate from its characterization

of those assets as stated in the original allocation schedules.
                              - 30 -

     The Court of Appeals in Danielson observed that “‘where

parties enter into an agreement with a clear understanding of its

substance and content, they cannot be heard to say later that

they overlooked possible tax consequences.’”     Commissioner v.

Danielson, 378 F.2d at 778 (quoting Hamlin’s Trust v.

Commissioner, 209 F.2d 761, 765 (10th Cir. 1954)); see also

Thomas v. Commissioner, 67 Fed. Appx. 582 (11th Cir. 2003)

(“changes in the tax code do not meet the Danielson standard

warranting unilateral reformation of the agreement.”), affg. T.C.

Memo. 2002-108.   The original allocation schedules are binding

upon Peco, and it may not subdivide assets in a manner at odds

with those schedules.   Accordingly, respondent’s determination as

to each of the acquisitions is sustained.

III. Conclusion

     We have considered all arguments made by the parties, and to

the extent not discussed above, we conclude that those arguments

are irrelevant, moot, or without merit.

     To reflect the foregoing,


                                          Decision will be entered

                                    for respondent.
