A.C. Monk: When Adaptability Can Defeat Electrical Allocation

Does an electrical system become § 1245 property simply because it currently supplies machinery? A.C. Monk & Co. v. United States, 686 F.2d 1058 (4th Cir. 1982), shows why the answer can be more complicated. The Fourth Circuit rejected the functional allocation approach used in Scott Paper and instead examined whether the electrical system had more general uses than operating specific machinery. Under that approach, wiring and other electrical components that could be reasonably adapted to more general uses were treated as structural components of the building. For CostSegRx engineers, A.C. Monk adds another important question to electrical analysis: not only what does the system serve today, but how specialized is the system to that use?

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Key Takeaways

• A.C. Monk rejected functional allocation and applied an adaptability test to the electrical system.
• The test asks whether electrical components serving machinery can reasonably be adapted to more general uses.
• Current equipment use alone does not necessarily determine electrical classification under the A.C. Monk approach.
• System design, dedicated wiring, voltage, routing, connections, and adaptability can provide important engineering evidence.
• A.C. Monk conflicts with the functional allocation approach accepted by other circuits and is not the predominant ATG methodology.
• Two systems serving similar machinery can present different adaptability evidence because of how they were designed and installed.
• Current use matters, but electrical design and adaptability can matter too.

What Did A.C. Monk Decide About Electrical Systems?

A.C. Monk & Co. v. United States involved several disputed assets, including an electrical distribution system.

The 2025 ATG's court-case table lists the electrical distribution system in A.C. Monk as § 1250 property while separately identifying wiring for a computer room as § 1245 property.

The important part for electrical cost segregation is the methodology used by the Fourth Circuit.

The court rejected the functional allocation approach.

Instead, the ATG explains that the court looked at whether the electrical system had more general uses than simply operating specific machinery. If the wiring and other electrical components could be reasonably adapted to more general uses, they were structural components of the building.

That is an adaptability test.

The question is different from the one emphasized in Scott Paper.

Scott Paper asks where the electrical demand ultimately goes.

A.C. Monk asks whether the electrical infrastructure serving that equipment is sufficiently specialized, or whether it could reasonably be adapted to general building use.

Those approaches can lead an engineer to investigate different characteristics of the same system.

What Does “Reasonably Adapted to More General Uses” Mean?

Consider electrical wiring that currently serves production machinery.

The fact that the electricity terminates at machinery establishes its present use.

But A.C. Monk asks another question.

Could that wiring and related infrastructure reasonably serve more general purposes?

That inquiry directs attention toward the physical design of the electrical system.

A circuit specifically engineered around one piece of specialized equipment may present different facts from electrical infrastructure that can readily support ordinary loads after relatively modest changes.

The engineer may therefore need to understand characteristics such as voltage, amperage, conductor size, routing, panel configuration, connection type, control equipment, and the relationship between the electrical infrastructure and the machinery.

The ATG itself demonstrates that electrical classification can depend on these kinds of distinctions. Its case-law asset table separately identifies the overall A.C. Monk electrical distribution system as § 1250 property and the computer-room wiring as § 1245 property.

The asset name “electrical wiring” is not enough.

The physical configuration and use need to be understood.

This is why CostSegRx approaches electrical distribution systems in cost segregation as an engineering problem rather than a simple contractor-cost classification.

Why Isn't Current Machinery Use Always Enough?

An electrical system can be serving machinery today without necessarily being permanently specialized to that machinery.

Commercial properties change.

Production equipment is replaced.

Tenant layouts change.

Operating processes evolve.

Electrical loads move.

A former manufacturing area can become storage space.

A specialized room can be repurposed.

The engineering question under the A.C. Monk approach is whether the electrical infrastructure itself can reasonably accommodate more general uses.

That is different from merely documenting what is plugged into the system on the inspection date.

Imagine a large feeder that currently serves production equipment.

If the equipment disappears tomorrow, could that feeder and its associated infrastructure reasonably be repurposed for ordinary building loads?

Now compare it with a dedicated electrical connection engineered specifically around specialized machinery with unusual voltage, controls, protection requirements, or operating characteristics.

Both systems may currently power machinery.

Their adaptability may be very different.

This is an example of why the ATG describes asset classification as factually intensive and warns that conclusions can vary with the specific use and industry.

What Engineering Evidence Can Show Electrical Adaptability?

Adaptability is not something an engineer should determine from the asset ledger alone.

The electrical drawings can provide important evidence.

The ATG identifies electrical plans as vital information when analyzing electrical distribution systems and explains that the design of a building's electrical system affects conductors, breakers, transformers, switchgear, conduit, and other equipment.

CostSegRx engineers may therefore examine:

• One-line electrical diagrams
• Panel schedules
• Equipment schedules
• Feeder sizes
• Conductor sizes
• Voltage
• Transformer configuration
• Circuit protection
• Control systems
• Disconnects
• Branch circuit routing
• Equipment connections
• Spare capacity
• Historical equipment changes
• Field conditions

The purpose is not to mechanically count specialized features.

It is to understand the system.

For example, dedicated wiring that terminates at one piece of equipment may present stronger evidence of specialization than general-purpose distribution that happens to serve machinery at the moment.

The ATG's modern industry guidance makes a similar physical distinction. In its auto manufacturing guidance, special electrical connections necessary to and used directly with specific machinery or equipment are treated differently from outlets of general applicability and accessibility.

That does not turn A.C. Monk into a universal dedicated-circuit rule.

It illustrates why system design matters.

Does A.C. Monk Replace the Scott Paper Functional Allocation Approach?

No.

This is the critical limitation investors need to understand.

A.C. Monk represents a conflicting judicial approach.

The Fourth Circuit rejected functional allocation in A.C. Monk. Later, the Seventh Circuit affirmed the Tax Court's functional allocation approach in Illinois Cereal Mills, Inc. v. Commissioner, 789 F.2d 1234 (7th Cir. 1986). The Supreme Court denied certiorari, leaving the conflicting Fourth and Seventh Circuit opinions intact.

The ATG's court-case table is even more specific.

It says the A.C. Monk opinion should be followed only in cases appealable to the Fourth Circuit.

The functional allocation approach subsequently received additional support.

In Morrison, the Eleventh Circuit expressly adopted the reasoning of Illinois Cereal Mills and rejected the reasoning in Monk. It also accepted the Tax Court's focus on the ultimate use of electricity.

Then the IRS revised AOD 1991-019.

The ATG states that the Commissioner concluded further litigation was not warranted and that the IRS would not challenge the functional allocation approach set forth in Scott Paper for determining the eligibility of building electrical systems as § 38 property.

The current ATG's Chapter 8 therefore uses functional allocation as its detailed electrical methodology. It instructs engineers to analyze all property served by the electrical distribution system, study the building's electrical design plans, and proportionally allocate costs using electrical demand load.

A.C. Monk remains important because the conflicting circuit precedent remains intact.

But it should not be presented as though it displaced Scott Paper.

How Can Two Machinery Electrical Systems Have Different Adaptability?

Illustrative example only. Actual classifications, electrical characteristics, costs, recovery periods, depreciation deductions, and tax results depend on the specific property, engineering analysis, documentation, jurisdiction, applicable authority, and taxpayer circumstances.

Assume two manufacturing facilities each contain electrical infrastructure currently serving production machinery.

Facility A uses conventional building distribution equipment.

The feeder originates from a general distribution panel.

Its voltage is commonly used elsewhere in the facility.

The route can serve multiple areas.

The machinery connection can be removed without materially changing the upstream distribution.

If the production equipment is removed, much of the infrastructure can reasonably support other electrical loads.

Facility B presents different facts.

Its electrical infrastructure was designed specifically around specialized production equipment.

It includes dedicated transformation, specialized protection, dedicated routing, equipment-specific controls, and connections that have limited usefulness without the machinery.

Both systems currently serve production equipment.

That fact alone does not describe their physical design.

Under an adaptability analysis, Facility A may present stronger evidence of reasonable adaptability to general use.

Facility B may present stronger evidence of specialization.

Under the ATG's predominant functional allocation methodology, a different analysis is performed. The engineer studies the end-use loads and electrical design to determine the proportional demand associated with § 1245 property and § 1250 property.

The example therefore illustrates why methodology matters.

Before discussing a percentage or classification, the investor should understand which legal and engineering framework is being applied.

What Is the Most Important Lesson From A.C. Monk?

A.C. Monk is valuable because it prevents electrical analysis from becoming one-dimensional.

Current use is important.

But physical design can also tell us something important about the relationship between an electrical system and the property.

The Fourth Circuit asked whether electrical infrastructure could reasonably be adapted to more general uses. Under that approach, adaptable wiring and electrical components were treated as structural components.

Other courts took a different approach.

Illinois Cereal Mills and Morrison supported functional allocation, and the IRS later stated that it would not challenge the Scott Paper functional allocation approach. The current ATG uses that functional allocation framework and explains that a taxpayer properly following the Chapter 8 methodology should not have the allocation challenged.

For CostSegRx engineers, the broader lesson remains useful regardless of which issue is being investigated.

Do not stop at the equipment name.

Do not stop at the current electrical load.

Understand the electrical system itself.

How was it designed?

How specialized is it?

What does it serve?

Could it reasonably serve something else?

Which legal framework applies?

Those questions produce a much stronger understanding of the property than simply assuming every wire leading to machinery receives the same treatment.

Current use is important, but system design matters too. An electrical system that can readily serve general building functions may present a different classification issue from infrastructure specifically designed around dedicated equipment.