PLR 1046007: 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. ----------
---------------------------------- Telephone Number:
--------------------- ---------------------
---------------------------- 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.
PLR-123792-10 2

    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
PLR-123792-10 3

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.
PLR-123792-10 4

    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
PLR-123792-10 5

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