PLR 1141004: IRS grants time for environmental remediation elections

Plain-English summary

A real estate leasing company incurred qualified environmental remediation expenditures in two years but did not make the section 198 elections needed to deduct them in those years. It later claimed the amounts in a third year, and the IRS disallowed the earlier-year amounts during an examination. The IRS granted 60 days to make the elections for the first two years, subject to amended-return and Form 8082 filings. It also concluded that the mitigation provisions could correct the earlier closed-year error because the requirements for a double disallowance adjustment were met.

Ruling snapshot

• Question: Whether the taxpayer could make late section 198 elections and use the mitigation provisions for the affected years.
• Outcome: Approved.
• Key authorities: IRC § 198; IRC §§ 1311 through 1314; Rev. Proc. 98-47; Treas. Reg. §§ 301.9100-1 and 301.9100-3.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201141004 [Third Party Communication:
Release Date: 10/14/2011 Date of Communication: Month DD, YYYY]
Index Number: 9100.00-00
Person To Contact:
------------------- ----------------------, ID No. -------------
----------------------------- Telephone Number:
-------------------------- ---------------------
---------------------------------- Refer Reply To:
CC:ITA:B03
PLR-106784-11
Date:
July 12, 2011

              TY: ---------------

              LEGEND:

              Taxpayer = -----------------------------
              Year 1 = ------
              Year 2 = -------
              Year 3 = -------
              Year 4 = -------
              Filing Date = -------------------
              Report Date = ----------------
              Extension Date= -------------------
              $A = --------------------
              $B = --------------------
              $C = -------------

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

This is in response to your letter dated -----------------------. In your letter, you requested
an extension of time to claim a deduction for qualified environmental remediation
expenditures under section 198 of the Internal Revenue Code for the tax years ending
December 31, Year 1 and December 31, Year 2. The request is based on sections
301.9100-1 and 301.9100-3 of the Procedure and Administrative Regulations for Years
1 and 2, and sections 1311 through 1314 of the Code for Year 1.

FACTS

Taxpayer, a limited liability company, is engaged in the business of leasing real estate.
Taxpayer owned certain land in need of environmental remediation in the tax years at
issue. In Year 1, Taxpayer incurred $A of qualified environmental remediation
expenditures and reported the amount on its income tax return for Year 1 as a deferred
project expense. Taxpayer did not claim a deduction for the amount in Year 1. In Year
PLR-106784-11 2

2, Taxpayer incurred $B of qualified environmental remediation expenditures and
reported the sum of $A and $ B as a deferred project expense and again claimed no
deduction. In Year 3, Taxpayer incurred $C of qualified environmental remediation
expenditures and claimed a deduction on its return for Year 3 for the sum of all three
amounts ($A, $B, and $C). Taxpayer filed its return for Year 3 on or around the Filing
Date. Taxpayer relied on its accounting firm to prepare its returns for Years 1 through 3
and believed the accounting firm was taking all necessary steps to preserve its right to
deduct qualified environmental remediation expenditures. Taxpayer was not aware
that, for Taxpayer to be able to claim any deduction for qualified environmental
remediation expenditures, the law required Taxpayer to make a section 198 election
and deduct the expenditures on the income tax return of the taxable year in which they
were incurred.

The IRS began to examine Taxpayer’s income tax return for Year 3 two years later in
Year 4. It proposed an adjustment for Year 3 on the Report Date disallowing the sum of
$A and $B on the basis that the amounts were not paid or incurred in Year 3. Taxpayer
and its members agreed to the proposed adjustment for Year 3 by executing Form 870-
PT, Agreement for Partnership Items & Partnership Level Determinations as to
Penalties, Additions to Tax, and Additional Amounts. While the period of limitations on
assessment for Year 1 is closed, the IRS and Taxpayer have agreed to extend the
period of limitations on assessment for Year 2 until the Extension Date.

LAW AND ANALYSIS

Section 198, a provision under subtitle A, provides that a taxpayer may elect to treat any
qualified environmental remediation expenditure which is paid or incurred by the
taxpayer as an expense which is not chargeable to capital account. The taxpayer may
deduct any expenditure so treated in the taxable year in which it is paid or incurred.

Under section 198(b), a "qualified environmental remediation expenditure" means any
expenditure which is otherwise chargeable to capital account and which is paid in
connection with the abatement or control of hazardous substances at a qualified
contaminated site.

Rev. Proc. 98-47, 1998-2 C.B. 319, provides the procedures for taxpayers to make the
election under section 198 to deduct qualified environmental remediation expenditures.
Under section 3.01 of Rev. Proc. 98-47, the election must be made on or before the due
date (including extensions) for filing the income tax return for the taxable year in which
the qualified environmental remediation expenditures are paid or incurred. In addition,
persons other than individuals are required to make the election by including the total
amount of section 198 expenses on the line for "Other Deductions" on their appropriate
federal tax return. On a schedule attached to the return that separately identifies each
expense included in "Other Deductions," the taxpayer must write "Section 198 Election"
on the line on which the section 198 expense amounts separately appear. See section
PLR-106784-11 3

3.02(2) of Rev. Proc. 98-47.

Section 3.03 of Rev. Proc. 98-47 provides that, if for any taxable year, the taxpayer
pays or incurs more than one qualified environmental remediation expenditure, the
taxpayer may make a section 198 election for any one or more of such expenditures for
that year. Thus, the taxpayer may make a section 198 election with respect to a
qualified environmental remediation expenditure even though the taxpayer chooses to
capitalize other such expenditures (whether or not they are of the same type or paid or
incurred with respect to the same qualified contaminated site). Further, a section 198
election for one year has no effect for other years. Thus, a taxpayer must make a
section 198 election for each year in which the taxpayer intends to deduct qualified
environmental remediation expenditures.

Sections 301.9100-1 through 301.9100-3 of the Procedure and Administration
Regulations provide the standards the Commissioner uses to determine whether to
grant an extension of time to make a regulatory 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 section
301.9100-2.

Section 301.9100-1(b) defines the term "regulatory election" as an election whose due
date is prescribed by a regulation published in the Federal Register, or a revenue ruling,
procedure, notice or announcement published in the Internal Revenue Bulletin.

Section 301.9100-1(c) provides that the Commissioner may grant a reasonable
extension of time 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.

Section 301.9100-3 provides extensions of time to make a regulatory election under
Code sections other than those for which section 301.9100-2 expressly permits
automatic extensions. Requests for extensions of time for regulatory elections will be
granted when the taxpayer provides evidence (including affidavits described in the
regulations) to establish to the satisfaction of the Commissioner that the taxpayer acted
reasonably and in good faith, and granting relief will not prejudice the interests of the
government.

Section 301.9100-3(b)(1) states that a taxpayer will be deemed to have acted
reasonably and in good faith if the taxpayer --

(i) requests relief before the failure to make the regulatory election is discovered by the
Service;

(ii) failed to make the election because of intervening events beyond the taxpayer's
PLR-106784-11 4

control;

(iii) failed to make the election because, after exercising due diligence, the taxpayer was
unaware of the necessity for the election;

(iv) reasonably relied on the written advice of the Service; or

(v) reasonably relied on a qualified tax professional, and the tax professional failed to
make, or advise the taxpayer to make, the election.

Under section 301.9100-3(b)(3), a taxpayer will not be considered to have 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 (taking
into account section 1.6664-2(c)(3)) and the new position requires or permits a
regulatory election for which relief is requested;

(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 since the original
deadline that make the election advantageous to a taxpayer, the Service will not
ordinarily grant relief.

Taxpayer in this case has represented that it reasonably relied on a qualified tax
professional, and that the tax professional failed to make, or advise the taxpayer to
make, the election. Thus, under section 301.9100-3(b)(1)(v), Taxpayer will be deemed
to have acted reasonably and in good faith. Taxpayer has also represented that none
of the circumstances listed in section 301.9100-3(b)(3) apply.

Section 301.9100-3(c)(1)(i) provides, in part, that the interests of the government are
prejudiced if granting relief would result in the 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).
Section 301.9100-3(c)(1)(ii) provides, in part, that the interests of the government are
ordinarily 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.

Section 1311(a) provides that if a determination (as defined in section 1313) is
described in one or more of the paragraphs of section 1312 and, on the date of the
determination, correction of the effect of the error referred to in the applicable paragraph
PLR-106784-11 5

of section 1312 is prevented by the operation of any law or rule of law, other than this
part and other than section 7122 (relating to compromises), then the effect of the error
shall be corrected by an adjustment made in the amount and in the manner specified in
section 1314.

Section 1312(4) states that a double disallowance of a deduction or credit has occurred
when the determination disallows a deduction or credit which should have been allowed
to, but was not allowed to, the taxpayer for another taxable year.

Section 1311(b)(2)(B) further provides that in the case of a determination described in
section 1312(4) (relating to the double disallowance of a credit or deduction), an
adjustment shall be made only if credit or refund of the overpayment attributable to the
deduction or credit which should have been allowed to the taxpayer was not barred by
any law or rule of law at the time the taxpayer first maintained in writing that he or she
was entitled to such deduction or credit for the taxable year to which the determination
relates.

Section 1313(a)(2) provides that the term “determination” includes a closing agreement
made under section 7121.

Under these criteria, the interests of the government are not prejudiced for either tax
year at issue. Taxpayer has represented that granting relief would not result in a lower
tax liability in the aggregate for all taxable 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). Furthermore, the taxable year in which one of the regulatory elections
should have been made, Year 2, and any taxable years that would have been affected
had it been timely made, are not closed by the period of limitations on assessment.

The mitigation provisions of sections 1311 through 1314 permit an administrative
adjustment for Year 1. The Form 870-PT, signed by the IRS and Taxpayer constitutes
a determination under section 1313(a)(2). The determination disallowed a deduction
under section 198 for Year 3, which should be allowed to Taxpayer for another taxable
year, Year 1. Without mitigation, correction of the failure to claim the deduction in Year
1 would not be possible because the three-year period of limitations under section
6227(a) for filing a request for administrative adjustment for Year 1 has expired.
Taxpayer and its members, however, qualify for adjustment under section 1312(4). The
period of limitation for filing a request for administrative adjustment under section
6227(a) for Year 1 expired before the date of determination (the date Form 870-PT was
signed), which Taxpayer represents to be subsequent to Report Date. See section
1311(a). Additionally, Taxpayer’s period of limitation for filing a request for
administrative adjustment under section 6227(a) for Year 1 was open when Taxpayer
first maintained its claim of entitlement to a deduction on its Year 3 return, Filing Date.
See section 1311(b)(2)(B). Therefore, Taxpayer and its members may correct the Year
1 error because Taxpayer and its members have satisfied the requirements of sections
PLR-106784-11 6

1311 through 1314. See example (1) of section 1.1312-4(b) of the regulations; see also
Rev. Rul. 73-82, 1973-1 C.B. 375.

CONCLUSION

Taxpayer's election is a regulatory election, as defined under section 301.9100-1(b),
because the due date of the election is prescribed in section 3.01 of Rev. Proc. 98-47.
In the present situation, the requirements of sections 301.9100-1 and 301.9100-
3(b)(1)(v) of the regulations have been satisfied. The information and representations
Taxpayer made establish that Taxpayer acted reasonably and in good faith.
Furthermore, granting an extension will not prejudice the interests of the Government.
Taxpayer represented that it will not have a lower tax liability in the aggregate for all
taxable years affected by the election if given permission to make the election than
Taxpayer would have had if the election were made by the original deadline for making
the election. Taxpayer also represented that the period of limitation on assessment for
Year 2 will not be closed before receipt of a ruling. While the period of limitation on
filing a request for administrative adjustment for Year 1 is closed, the mitigation
provisions of sections 1311 through 1314 apply for that year. Accordingly, Taxpayer is
granted an extension of time to elect to treat certain expenditures for Years 1 and 2 as
qualified environmental remediation expenditures until 60 days following the date of this
ruling. The election should be made by filing an amended return for Years 1 and 2 in
compliance with the relevant provisions of Rev. Proc. 98-47, and by filing requests for
administrative adjustments for Years 1 and 2 on Form 8082 (including a copy of this
ruling with all filings).

Except as expressly provided herein, no opinion is expressed or implied concerning the
federal income tax consequences of any aspect of any transaction or item discussed or
referenced in this ruling.

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.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

A copy of this letter must be 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.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
PLR-106784-11 7

by an appropriate party. 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.

                                  Sincerely,



                                  Robert Casey
                                  Senior Technical Reviewer, Branch 3
                                  (Income Tax & Accounting-)