PLR 201046007: taxpayer granted more time to elect amortization of drilling and exploration costs

Plain-English summary

The IRS granted a taxpayer 120 additional days to elect under section 59(e) to amortize intangible drilling and development costs and exploration costs for three prior tax years. The taxpayer's return preparer was unaware that the taxpayer's geothermal and recovered-energy businesses had incurred the relevant costs, so the elections were not timely made. The IRS found that the taxpayer acted in good faith and that the relief would not prejudice the government because the taxpayer represented that its aggregate tax liability would not be lower than if the elections had been timely made. The ruling did not determine whether the taxpayer independently satisfied the requirements of sections 263(c), 617(a), or 59(e), and required the ruling to be attached to relevant returns. The relief was limited to the submitted facts and representations.

Ruling snapshot

• Question: May the taxpayer make late section 59(e) elections for intangible drilling and development costs and exploration costs?
• Outcome: Approved
• Key authorities: IRC §§ 59(e), 263(c), and 617(a); Treas. Reg. §§ 1.59-1(b)(1), 1.612-4(d), 1.617-1(c), 301.9100-1, 301.9100-2, and 301.9100-3

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201046007
Third Party Communication: None
Release Date: 11/19/2010
Date of Communication: Not Applicable
Index Number: 59.00-00, 9100.00-00
Person To Contact:
--------------------------------------------- ------------------------, ID No. ----------
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Telephone Number:
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Refer Reply To:
CC:PSI:06
PLR-123792-10
Date:
August 12, 2010

LEGEND:

Taxpayer = -----------------------------------------------------------
Subsidiary = ----------------------------------------------------
Firm = ----------------------------------------
Date 1 = --------------------------
Date 2 = --------------------------
Date 3 = --------------------------
State 1 = -------------
State 2 = ----------
Year 1 = -------
Year 2 = -------
Year 3 = -------
Year 4 = -------

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

This letter responds to a letter dated -----------------, from Taxpayer’s representative requesting permission, pursuant to §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations for an extension of time to make an election under § 59(e) of the Internal Revenue Code (Code) and § 1.59-1(b)(1) of the Income Tax Regulations to amortize intangible drilling and development costs (IDCs) and exploration costs (ECs) for the taxable years ending Date 1, Date 2 and Date 3. Taxpayer requests permission on behalf of its wholly owned Subsidiary with which Taxpayer files a consolidated federal income tax return.

According to the information submitted, Taxpayer is a public company incorporated in State 1 in Year 1 with its principal place of business in State 2. Taxpayer designs, develops, builds, owns, and operates geothermal power plants and recovered energy-based power plants worldwide. Subsidiary was founded in Year 2, and in Year 3, Subsidiary began to incur IDCs and ECs in its geothermal operations. Subsidiary did not incur any IDCs prior to Year 3.
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Taxpayer engaged Firm to prepare consolidated tax returns for taxable years ending Date 1, Date 2, and Date 3. Firm represents that it was unaware that Taxpayer or Subsidiary incurred any IDCs or ECs in its business operations at the time of filing the returns. As a result, Taxpayer did not timely make the election under § 59(e) for any of the taxable years ending Date 1, Date 2 or Date 3. Firm discovered the existence of IDCs and ECs in Year 4 during a detailed analysis of Taxpayer’s business projects, and subsequently, advised Taxpayer to seek an extension of time to file the § 59(e) elections under §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations. Firm represents that if it had all of the documentation and data needed to make an informed recommendation at the time the original returns were prepared, Firm would have advised Taxpayer to make § 59(e) elections for tax years ending Date 1, Date 2 and Date 3.

Taxpayer represents that granting the relief requested will not result in Taxpayer having a lower tax liability in the aggregate for the tax years affected by the election than Taxpayer would have had if the election had been timely made (taking into account the time value of money). Taxpayer represents that it acted in good faith and that granting relief will not result in prejudice to the interests of the Government.

Law and Analysis

Section 59(e)(1) allows a taxpayer to deduct ratably over a specified period any qualified expenditure to which an election under § 59(e)(1) applies.

Section 59(e)(2) includes in the definition of "qualified expenditure", any amount which, but for an election under § 59(e), would have been allowable as a deduction (determined without regard to § 291) for the taxable year in which paid or incurred under § 263(c) (relating to intangible drilling and development expenditures) and § 617(a) (relating to mining exploration expenditures).

Section 59(e)(1) allows the taxpayer to deduct ratably over the 10 year period beginning with the taxable year in which such expenditure was made or, in the case of a qualified expenditure for intangible drilling and development expenditures, to deduct the expenditure ratably over the 60 month period beginning with the month in which such expenditure was paid or incurred.

Section 59(e)(3) specifically prohibits the deduction of the qualified expenditures under any other section of the Code if this option is elected. Section 59(e)(4)(A) allows a taxpayer to make an election under § 59(e)(1) for any portion of any qualified expenditure.

Treas. Reg. § 1.59-1(b)(1) prescribes the time and manner of making the § 59(e)(1) election. According to § 1.59-1(b)(1), an election under § 59(e) shall only be
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made by attaching a statement to the taxpayer's income tax return (or amended return) for the taxable year in which the amortization of the qualified expenditures subject to the
§ 59(e) election begins. The taxpayer must file the statement 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 263(c) allows a taxpayer an election, under regulations prescribed by the Secretary, to deduct IDCs. The regulations appear under § 1.612-4. Under § 1.612- 4(d), the taxpayer may exercise the election by claiming IDCs as a deduction on the taxpayer's return for the first taxable year in which the taxpayer pays or incurs such costs. No formal statement is necessary, but if the taxpayer fails to deduct the IDCs, the taxpayer is deemed to have elected to recover such costs through depletion to the extent that they are not represented by physical property and through depreciation to the extent that they are represented by physical property.

Section 617(a) allows a taxpayer an election to deduct expenditures paid or incurred during the taxable year for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral, and paid or incurred before the beginning of the development stage of mine. Under § 1.617-1(c), the taxpayer may exercise the election by deducting exploration expenditures either in the taxpayer’s return for such taxable year or in an amended return filed before the expiration of the period for filing a claim for credit or refund of income tax for such taxable year. Section 1.617-1(c)(1)(ii) requires a taxpayer who makes an election to deduct to state clearly on his income tax return for each taxable year for which he deducts exploration expenditures the amount of the deduction claimed under § 617(a) with respect to each property or mine.

Under § 301.9100-1(c) of the Procedure and Administration Regulations, the Commissioner in exercising the Commissioner's discretion may grant a reasonable extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3 to make a regulatory election, or a statutory election (but no more than six months except in the case of a taxpayer who is abroad), under all subtitles of the Code, except subtitles E, G, H, and I.

Sections 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. Section 301.9100-1(a).

Section 301.9100-2 allows automatic extensions of time for making certain elections. Section 301.9100-3 allows extensions of time for making elections that do not meet the requirements of § 301.9100-2.
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The Commissioner will grant requests for relief under § 301.9100-3 when the taxpayer provides the evidence (including affidavits described in § 301.9100-3(e)) 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(a). Section 301.9100-3(b) provides, in part, that a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer requests relief under § 301.9100-3 before the failure to make the regulatory election is discovered by the Internal Revenue Service, and the taxpayer failed to make the election because, after exercising reasonable diligence (taking into account the taxpayer's experience and the complexity of the return or issue), the taxpayer was unaware of the necessity for the election. Section 301.9100-3(c) provides, in part, that the Government's interest is considered prejudiced if granting relief would result in a taxpayer having a lower tax liability in the aggregate of 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).

Based solely on the information submitted and the representations made, we conclude that the requirements of §§ 301.9100-1 through 301.9100-3 have been satisfied. Accordingly, the Commissioner grants Taxpayer an extension of time of 120 days from the date of this letter to make the election under § 59(e) on the tax returns for years ending on Date 1, Date 2 and Date 3 with the appropriate service center.

The rulings contained in this letter are based upon information and representations submitted by Taxpayer and Taxpayer’s representative and accompanied by a penalty of perjury statements executed by the appropriate parties. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. Except as specifically set forth above, we express no opinion concerning the federal tax consequences of the facts described above under any other provision of the Code and the regulations thereunder. Specifically, we express no opinion concerning whether Taxpayer satisfies the requirements of § 263(c), § 617(a), or § 59(e).

This letter ruling is directed only to the taxpayer who requested it. Under § 6110(k)(3), a letter ruling may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, we are sending a copy of this ruling letter to your authorized representative. We also are sending a copy of this letter to the appropriate Industry Director, LMSB. A copy of this ruling must be
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attached to any income tax return to which it is relevant. Alternatively, taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter ruling.

Sincerely,

Associate Chief Counsel
(Passthroughs & Special Industries)

By: ____
Jaime C. Park
Senior Technician Reviewer, Branch 6
Office of Associate Chief Counsel
(Passthroughs & Special Industries)

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