PLR 1024034: IRS granted more time to make depreciation and drilling-cost elections

Plain-English summary

The IRS granted a corporate group more time to make two tax elections after a clerical error caused it to miss the filing deadline. The first election concerned whether to claim additional first-year depreciation under § 168(k), and the second concerned spreading intangible drilling and development costs over 60 months under § 59(e). The IRS found that the taxpayer acted reasonably and in good faith and that granting relief would not prejudice the government. The ruling treated the elections on the group's consolidated return as timely, but it did not decide whether any property qualified for additional first-year depreciation.

Ruling snapshot

• Question: May the taxpayer make the § 168(k) and § 59(e) elections late after a clerical filing error?
• Outcome: Approved
• Key authorities: IRC §§ 59, 168, 263, and 301; Treas. Reg. §§ 1.59-1, 1.168(k)-1, and 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201024034 Third Party Communication: None
Release Date: 6/18/2010 Date of Communication: Not Applicable
Person To Contact:
Index Number: 9100.04-00, 9100.02-00 -----------------, ID No. -----------------
Telephone Number:
---------------------
------------------------------------------------ Refer Reply To:
--------------------------------------------------------------- CC:ITA:7
----------------- PLR-141562-09
------------------------------ Date:
--------------------------- March 10, 2010

Re: Request for Extension of Time to Make the Election Not to Deduct the Additional
First Year Depreciation and to Make the Election to Deduct Intangible Drilling and
Development Costs over the 60-Month Period

P = ---------------------------------------------------------------------
S1 = -------------------------------------------------------------------------
S2 = ---------------------------------------------------------------
A = -------
B = ---------------
C = ---------------------
Date1 = --------------------------
Date2 = -------------------
Date3 = ---------------------
Date4 = ---------------------------

Dear ---------------:

     This letter responds to a letter dated September 14, 2009, and supplemental

correspondence, submitted by P on behalf of itself and S1 and S2 (P, S1, and S2 will be
collectively referred to as “Taxpayer”), requesting an extension of time pursuant to §
301.9100-3 of the Procedure and Administration Regulations (1) to make the election
not to deduct the additional first year depreciation under § 168(k) of the Internal
Revenue Code for all classes of qualified property placed in service in the taxable year
ended Date1 (the A taxable year) and (2) to make the election under § 59(e) to deduct
intangible drilling and development costs (“IDC”) incurred in the A taxable over the 60-
month period.

FACTS

      Taxpayer represents that the facts are as follows:

PLR-141562-09 2

   P is the common parent of an affiliated group of corporations, which includes S1

and S2, that files consolidated federal income tax returns. Taxpayer is an independent
exploration and production company that drills for, acquires, develops, and produces
natural gas and crude oil primarily in B and C. For the taxable year ended Date1, P
planned to make the election to deduct a portion of Taxpayer’s IDC ratably over the 60
month period under § 59(e) and to make the election not to deduct the additional first
year depreciation under § 168(k) for all classes of qualified property placed in service by
Taxpayer.

   For the taxable year ended Date1, Taxpayer used an outside tax preparer to

prepare its federal and state income tax returns. The tax preparer prepared a request
for an extension of time to file P’s consolidated federal income tax return for the A
taxable year and delivered it to P on Date2 to be filed by P by Date3, the due date for
the return. Due to a clerical error, P did not timely file the request for an extension or its
consolidated federal income tax return for the A taxable year. P filed its consolidated
federal income tax return for the A taxable year on Date4. On this return, P made the
election not to deduct the additional first year depreciation under § 168(k) for all classes
of qualified property placed in service by Taxpayer in the A taxable year and made the
election under § 59(e) to deduct IDC incurred by Taxpayer in the A taxable year over
the 60-month period by providing the statement described in § 1.59-1(b) of the Income
Tax Regulations.

RULINGS REQUESTED

   Accordingly, P requests an extension of time pursuant to § 301.9100-3 of the

Procedure and Administration Regulations (1) to make the election not to deduct the
additional first year depreciation under § 168(k) for all classes of qualified property
placed in service by Taxpayer in the taxable year ended Date1 and (2) to make the
election under § 59(e) to deduct IDC incurred by Taxpayer in the taxable year ended
Date1 over the 60-month period.

LAW AND ANALYSIS

   Section 59(e) provides an optional write-off of certain tax preferences over an

applicable period. Section 59(e)(4) provides that an election may be made under §
59(e)(1) with respect to any portion of any qualified expenditure.

   Under § 59(e)(2), qualified expenditure includes, among others, any amount

which, but for an election under § 59(e), would have been allowable as a deduction for
the taxable year in which paid or incurred under § 263(c) (relating to intangible drilling
and development expenditures).

   Section 1.59-1(b)(1) provides that an election under § 59(e) shall only be made

by attaching a statement to the taxpayer’s income tax return for the taxable year in
PLR-141562-09 3

which the amortization of the qualified expenditures subject to the § 59(e) election
begins. The statement must be filed no later than the date prescribed by law for filing
the taxpayer’s original income tax return (including any extensions of time) for the
taxable year in which the amortization of the qualified expenditures subject to the §
59(e) election begins.

  Section 168(k)(1) provides a 50-percent additional first year depreciation

deduction for the taxable year in which qualified property is placed in service by a
taxpayer.

   Section 168(k)(2)(D)(iii) provides that a taxpayer may elect not to deduct the 50-

percent additional first year depreciation for any class of property placed in service
during the taxable year. The term “class of property” is defined in § 1.168(k)-1(e)(2) as
meaning, in general, each class of property described in § 168(e) (for example, 5-year
property).

   Section 1.168(k)-1(e)(3)(i) provides that the election not to deduct additional first

year depreciation must be made by the due date (including extensions) of the federal
tax return for the taxable year in which the property is placed in service by the taxpayer.

   Section 1.168(k)-1(e)(3)(ii) provides that the election not to deduct additional first

year depreciation must be made in the manner prescribed on Form 4562, “Depreciation
and Amortization,” and its instructions. The instructions to Form 4562 for the A taxable
year provided that the election not to deduct the additional first year depreciation is
made by attaching a statement to the taxpayer’s timely filed tax return indicating the
class of property for which the taxpayer is making the election and that, for such class
the taxpayer is not claiming any additional first year depreciation.

   Under § 301.9100-1, the Commissioner has discretion to grant a reasonable

extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3 to make a
regulatory election.

   Sections 301.9100-1 through 301.9100-3 provide the standards the

Commissioner will use to determine whether to grant an extension of time to make an
election. Section 301.9100-2 provides automatic extensions of time for making certain
elections. Section 301.9100-3 provides extensions of time for making elections that do
not meet the requirements of § 301.9100-2.

    Section 301.9100-3(a) provides that requests for relief under § 301.9100-3 will be

granted when the taxpayer provides 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.

CONCLUSIONS
PLR-141562-09 4

   Based solely on the facts and representations submitted, we conclude that the

requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied. Accordingly, an
extension of time is hereby granted for P (1) to make the election not to deduct the
additional first year depreciation under § 168(k) for all classes of qualified property
placed in service by Taxpayer in the taxable year ended Date1 and (2) to make the
election under § 59(e) to deduct IDC incurred by Taxpayer in the taxable year ended
Date 1 over the 60-month period. In this regard, we will consider both of these elections
made by P for itself and S1 and S2 on P’s consolidated federal income tax return for the
A taxable year filed on Date4 to be timely made.

    Except as specifically set forth above, no opinion is expressed or implied

concerning the federal income tax consequences of the facts described above.
Specifically, no opinion is expressed or implied on whether any item of depreciable
property placed in service by Taxpayer in the A taxable year is eligible for the additional
first year depreciation deduction. Further, this letter ruling does not grant an extension
of time for filing P’s consolidated federal income tax return for the taxable year ended
Date1.

  In accordance with the power of attorney, we are sending copies of this letter to

Taxpayer’s authorized representatives. We are also sending a copy of this letter to the
appropriate Industry Director, LMSB.

  This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3)

provides that it may not be used or cited as precedent.

                                             Sincerely,

                                             Kathleen Reed

                                             Kathleen Reed
                                             Chief, Branch 7
                                             Office of Associate Chief Counsel
                                             (Income Tax and Accounting)

Enclosures (2):
copy of this letter
copy for section 6110 purposes