PLR 200031024: Developer receives more time to file alternative cost method request

Plain-English summary

A real estate development partnership included its request to use the alternative cost method in its timely filed 1998 return but failed to send a separate copy to the district director. It attributed the omission to an administrative error and sought an extension. Under Rev. Proc. 92-29, the method permits certain estimated common-improvement costs to be included in the basis of properties sold, subject to limits. The IRS found that the partnership acted reasonably and in good faith and that an extension would not prejudice the government. It granted 45 days from the date of the ruling to file the request with the district director. The letter grants filing time; it does not address tax treatment beyond that relief.

Ruling snapshot

• Question: May the partnership file its alternative cost method request with the district director after the deadline?
• Outcome: Approved. The IRS granted a 45-day extension from the ruling date.
• Key authorities: Treas. Reg. §§ 301.9100-1 and 301.9100-3; Rev. Proc. 92-29.

Full text (IRS public release)

Internal Revenue Service                        Department of the Treasury

Index Number:      9100.22-00                   Washington, DC 20224
Number: 200031024
Release Date: 8/4/2000                          Person to Contact:

                                                Telephone Number:

                                                Refer Reply To:
                                                CC:DOM:IT&A:5-PLR-101051-00
                                                Date:
                                                April 24, 2000




             TY:

Legend

       Taxpayer     =
       EIN          =
       Firm         =
       Date x       =



Dear           :

       This responds to a letter dated January 6, 2000, submitted by your authorized
representative, requesting an extension of time, under section 301.9100 of the
Procedure and Administration Regulations, for taxpayer to make an election to use the
alternative cost method of accounting in conformity with the requirements of Rev. Proc.
92-29, 1992-1 C.B. 748. The facts are as follows:

       Taxpayer is an accrual-basis partnership engaged in the business of real estate
development. Taxpayer’s federal partnership return for the year ended December 31,
1998, was prepared by Firm. The request to use the alternative cost method under
Rev. Proc. 92-29 was prepared and included in the 1998 partnership return filed with
the Internal Revenue Service Center for the appropriate location.

       Taxpayer represents that, due to an inadvertent administrative error, a duplicate
request was not received from Firm and therefore filed separately with the district
director on or before the filing deadline. Taxpayer’s Tax Matters Partner detected this
error shortly after Date x, and consequently, this request for relief was filed.

       Rev. Proc. 92-29 allows a developer of real estate to automatically elect the
alternative cost method with respect to its projects. This alternative cost method allows
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a developer to include in the basis of properties sold their allocable share of the
estimated cost of common improvements without regard to whether the costs are
incurred under section 461(h), subject to certain limitations.

       Under section 6.01 of Rev. Proc. 92-29, the developer must file a request with
the appropriate District Director for the internal revenue district in which is located the
principal place of business or the principal office or agency. The request must be filed
on or before the due date of the developer’s original federal income tax return
(determined with regard to extensions of time) for the taxable year in which the first
benefitted property in the project is sold. In addition, the developer must also attach a
copy of the request to its timely filed original federal income tax return for the taxable
year.

                                  LAW AND ANALYSIS

       Section 301.9100-1 of the regulations provides in part that the regulations under
this section, and §§ 301.9100-2 and 301.9100-3, provide the standards the
Commissioner will use to determine whether to grant an extension of time to make a
regulatory election. The regulations under this section and § 301.9100-2 also provide
an automatic extension of time to make certain statutory elections. Section 301.9100-3
provides extensions of time for making regulatory elections that do not meet the
requirements of § 301.9100-2.

       Section 301.9100-3(a) of the regulations provides in part that requests for relief
subject to this section will be granted when the taxpayer provides the evidence to
establish to the satisfaction of the Commissioner that the taxpayer acted reasonably
and in good faith, and the grant of relief will not prejudice the interests of the
government.

       Section 301.9100-3(b)(1) of the regulations provides in part that a taxpayer is
deemed to have acted reasonably and in good faith if the taxpayer requests relief under
this section before the failure to make the regulatory election is discovered by the
Internal Revenue Service (IRS), and failed to make the election because of intervening
events beyond the taxpayer’s control.

     Section 301.9100-3(b)(3) of the regulations provides in part that a taxpayer is
deemed to have not acted reasonably and in good faith if the taxpayer -

              i)     Seeks to alter a return position for which an accuracy-related
                     penalty has been or could be imposed under section 6662 at the
                     time the taxpayer requests relief;
              ii)    Was informed in all material respects of the required election and
                     related tax consequences, but chose not to file the election; or
              iii)   Uses hindsight in requesting relief. If specific facts have changed
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                     since the due date for making the election that make the election
                     advantageous to a taxpayer, the IRS will not ordinarily grant relief.
                     In such a case, the IRS will grant relief only when the taxpayer
                     provides strong proof that the taxpayer’s decision to seek relief did
                     not involve hindsight.

        Section 301.9100-3(c) of the regulations provides in part that the interests of the
Government are prejudiced if granting relief would result in a taxpayer having a lower
tax liability in the aggregate, for all taxable years affected by the election, than the
taxpayer would have had if the election had been timely made (taking into account the
time value of money). This section also provides that the interests of the government
are prejudiced if the taxable year in which the regulatory election should have been
made or any taxable years that would have been affected by the election had it been
timely made are closed by the period of limitations on assessment under section
6501(a) before the taxpayer’s receipt of a ruling granting relief under this section.

      Based upon our analysis of the facts, the taxpayer in the present case acted
reasonably and in good faith, and granting relief will not prejudice the interests of the
Government, and therefore the requirements of § 301.9100 have been met.

        The failure to file a copy of the request for election was an inadvertent error on
the part of Taxpayer, and Taxpayer did not affirmatively choose not to file the election.
Taxpayer is not seeking to alter a return position or to use hindsight to request relief.
Finally, Taxpayer acted promptly in filing its request for relief, before the IRS discovered
the failure to make a regulatory election. Therefore, Taxpayer did not act unreasonably
or in bad faith.

       Furthermore, Taxpayer’s tax liability will not be altered by granting the request for
an extension of time to file a request for the alternative cost method with the district
director, nor will any closed tax years be affected. Therefore, the interests of the
government have not been prejudiced by granted the requested relief.

        Because Taxpayer acted reasonably and in good faith, and because the
interests of the government will not be prejudiced if the request for relief is granted,
Taxpayer is granted an extension of 45 days from the date of this ruling to file with the
district director a request to use the alternative cost method under Rev. Proc. 92-29.

        The ruling contained in this letter is based upon facts and representations
submitted by the taxpayer. Except as specifically addressed herein, no opinion is
expressed regarding the tax treatment of the subject transaction under the provisions of
any other sections of the Code or regulations that may be applicable thereto. This
ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.
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       In accordance with the power of attorney on file in our office, a copy of this letter
is being sent to your representative. A copy of this letter ruling should be attached to
the returns, schedules, and forms filed in connection with making the election under
Rev. Proc. 92-29 when such forms are filed.




                                              Sincerely,


                                              ______________________________
                                              Douglas A. Fahey
                                              Acting Chief, Branch 5
                                              (Income Tax & Accounting)