The business in this example involves a restaurant chain whose owner has decided to close down those individual restaurants that are not profitable. Generally, the taxpayer's accountant moves the closed restaurant from an active depreciation account to one that shows the property as inactive. In addition, the company immediately makes plans to sell or lease the restaurant before the end of the year. For those sites not sold or subleased by year-end the taxpayer deducts the losses incurred at the time it closes the restaurant and permanently withdraws it from operations.

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However, in its field service advice, the Internal Revenue Service reached the exact opposite conclusion. According to the IRS, the company cannot deduct a loss on the restaurant if it has not sold the property by the end of the year. The reason: There is no retirement of the property according to the regulations under Code 167.

According to the regulations, the term "retirement" means the permanent withdrawal of depreciable property from use in the trade or business, such as by selling or exchanging the asset, abandoning the asset, or withdrawing the asset from productive use.

In this situation, the company did not sell, exchange or abandon the restaurant upon its closure. According to the IRS field service advice, the property was never retired.

But what if the entire facility has been locked up -- employees laid off, perishables and small items removed, a closed sign on the door? Isn't this considered abandonment?

"You have abandoned that property for all intents and purposes," tax commentator Michael Tucker explains in a new SmartPros CPE segment. "The only thing it's good for is for somebody else to come in and buy it, and they'll do whatever they need to do to get it in operation."

In fact, in two separate contexts -- one involving a restaurant and another involving a computer facility, the IRS has made it clear through their field service advice that a taxpayer cannot take an abandonment loss under Code 165, which says, "In order to have an abandonment, you must have total abrogation of all responsibilities and ownership."

"In other words," says Tucker, "it's inconsistent to keep the property, declare an abandonment loss, and then at some point later, sell that property."

The taxpayer will get the loss eventually, Tucker adds, once the property is sold. While from a financial accounting perspective you want to recognize and accelerate those expenses as soon as possible, the IRS wants to defer the loss because they want to maximize revenues.

"It's really an incompatibility in purpose," says Tucker.

While the IRS appears to have made up its mind on the matter, there is not a formal ruling on Code 165. A case before the Tax Court or a Court of Appeal could very well find in favor of the taxpayer, Tucker concludes.