IRS granted more time for a section 198 remediation election

Plain-English summary

The IRS granted a taxpayer 60 days to make a section 198 election to deduct qualified environmental remediation expenditures for an earlier tax year. The taxpayer had relied on an accountant who did not identify the election, then obtained a state environmental agency statement about the property. The IRS found that the taxpayer acted reasonably and in good faith, did not use hindsight, and would not prejudice the government. The ruling expressly did not decide whether the expenditures qualified under section 198.

Ruling snapshot

• Question: Could the taxpayer receive more time to make a section 198 election for remediation expenditures?
• Outcome: approved
• Key authorities: IRC §§ 198, 6501(a), 6662, and 6110(k)(3); Treas. Reg. §§ 301.9100-1 through 301.9100-3; Rev. Proc. 98-47.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201149016 Third Party Communication: None
Release Date: 12/9/2011 Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
---------------------- -----------------, ID No. -----------------
----------------- Telephone Number:
--------------------------------- ---------------------
Refer Reply To:
CC:ITA:B03
PLR-115693-11
------------------------------- Date:
------------------------------------------ August 31, 2011

LEGEND:

Taxpayer = ----------------------
LLC = --------------------------
State A = ----------------
Property = ---------------------------------------------------------------------------------------
-------------------------
Accountant = ------------------------
Accounting Firm = ---------------------------------------------------------------
Year 1 = -------
Year 2 = -------
Year 3 = -------
Year 4 = -------
Year 5 = -------
Year 6 = -------

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

This responds to your letter dated April 6, 2011, submitted by your authorized
representatives, requesting an extension of time under §§ 301.9100-1 and -3 of the
Procedure and Administration Regulations (the “Regulations”), for the Taxpayer to make
an election under § 198 of the Internal Revenue Code to deduct qualified environmental
remediation expenditures (“QER expenditures”) for Year 4.

FACTS

Since Year 1, the Taxpayer has been the sole member of a State A LLC, which has
been a disregarded entity for federal income tax purposes. The Taxpayer uses a
calendar taxable year and an overall cash method of accounting. The Taxpayer reports
income and expenses from the LLC on a federal income tax Schedule E.
PLR-115693-11 2

The LLC has been the owner of the Property since Year 2. At all times since its
acquisition until Year 3, the Property was leased as commercial property for light
industrial use. In Year 3, the LLC began redeveloping the Property from light industrial
use to retail use and the Property was ready for lease in Year 4. In the redevelopment
of the Property, the LLC incurred QER expenditures in Year 4.

The Taxpayer engaged the Accountant, a member of the Accounting Firm, to render tax
advice and to prepare the Taxpayer’s tax returns, including Schedule E relating to the
income of the LLC. The Taxpayer’s tax return for Year 4 prepared by the Accountant
capitalized expenditures related to environmental remediation to land. During the
preparation of the Taxpayer’s Year 4 federal income tax return, the Taxpayer was
unaware of the provisions of § 198 of the Code and the availability of an election under
that section to expense QER expenditures. Neither the Taxpayer’s attorney, who was
handling legal issues related to the redevelopment of the Property, nor the Taxpayer’s
environmental consultant advised the Taxpayer or the Accountant that Taxpayer could
obtain a statement from the State A Department of Environmental Protection that the
Property met the requirements of § 198(c)(1)(B) so that it could be considered a
qualified contaminated site for purposes of § 198.

The Taxpayer relied on the Accountant to identify the availability of all deductions,
including any deductions available as the result of elections. The Accountant submitted
an affidavit stating he (i) was aware that expenditures related to environmental
remediation had been incurred in Year 4 in preparing the Property for redevelopment,
(ii) was not aware that the Property could be considered a qualified contaminated site
as defined in §198(c) of the Code, (iii) was not aware that the Taxpayer had incurred
expenditures in Year 4 which could qualify for the election under § 198 as QER
expenditures, and (iv) did not request documentation from the Taxpayer that would
enable him to make that determination. In Year 6, while preparing the Taxpayer’s Year
5 tax return, the Accountant requested detailed project information and discovered that
the Taxpayer’s site would have qualified for the election provided under §198 for Year 4.
At that time, the Accountant advised the Taxpayer that an election should have been
filed for Year 4 to deduct QER expenditures under § 198 and should be filed for Year 5
for QER expenditures incurred in Year 5. At the behest of the Accountant, the Taxpayer
obtained a statement from the State A Department of Environmental Protection that the
LLC had paid or incurred certain QER expenditures with respect to the Property and
that the Property meets the requirements set forth in §198(c)(1)(B) of a qualified
contaminated site. The Taxpayer timely made the election for expenses incurred in
Year 5 on his Year 5 tax return, but because the time for making the election for Year 4
had expired, the Taxpayer is requesting relief under §§ 301.9100-1 and -3 of the
Regulations to make a late § 198 election for Year 4.

STATEMENT OF LAW
PLR-115693-11 3

Section 198 of the Code provides, in part, that a taxpayer may elect to treat any QER
expenditure which is paid or incurred by the taxpayer as an expense which is not
chargeable to capital account. Any expenditure which is so treated shall be allowed as
a deduction for the taxable year in which it is paid or incurred.

Under § 198(b) of the Code, 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 § 198 to deduct any QER expenditure. 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 QER expenditures are paid
or incurred. In addition, persons other than individuals are required to make the election
by including the total amount of § 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 § 198 expense amounts separately
appear. See section 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 QER expenditure, the taxpayer may make a § 198
election for any one or more of such expenditures for that year. Thus, the taxpayer may
make a § 198 election with respect to a QER 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
§ 198 election for one year has no effect for other years. Thus, a taxpayer must make a
§ 198 election for each year in which the taxpayer intends to deduct QER expenditures.

Section 301.9100-3 of the Regulations generally provides extensions of time for making
regulatory elections. For this purpose, § 301.9100-1(b) defines the term "regulatory
election" to mean an election whose due date is prescribed by a regulation published in
the Federal Register, or a revenue ruling, revenue procedure, notice or announcement
published in the Internal Revenue Bulletin.

Section 301.9100-3 of the Regulations provides that requests for extensions of time for
regulatory elections will be granted when the taxpayer provides 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 granting relief
will not prejudice the interests of the Government.

Section 301.9100-3(b)(1) of the Regulations states that a taxpayer is deemed to have
acted reasonably and in good faith if the taxpayer --
PLR-115693-11 4

(i) requests relief under this section before the failure to make the regulatory election is
discovered by the Internal Revenue Service;

(ii) failed to make the election because of intervening events beyond the taxpayer's
control;

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

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

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

A taxpayer will not be considered to have reasonably relied on a qualified tax
professional if the taxpayer knew or should have known that the professional was not
competent to render advice on the regulatory election or aware of all relevant facts.
Section 301.9100-3(b)(2) of the Regulations.

Under § 301.9100-3(b)(3) of the Regulations, a taxpayer is deemed to have not acted
reasonably or 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 § 6662 at the time the taxpayer requests relief (taking into
account any qualified amended return filed within the meaning of § 1.6664-2(c)(3) of the
Income Tax Regulations) 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 due date
for making the election that make the election advantageous to a taxpayer, the Internal
Revenue Service will not ordinarily grant relief. In such a case, the Internal Revenue
Service 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)(1) of the Regulations provides, in part, that the Commissioner
will grant a reasonable extension of time to make a regulatory election only when the
interests of the Government will not be prejudiced by the granting of relief.
PLR-115693-11 5

Section 301.9100-3(c)(1)(i) of the Regulations 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) of the Regulations 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 § 6501(a) before the taxpayer’s receipt of a ruling granting relief under
§ 301.9100-3.

ANALYSIS

In the present case, the Taxpayer acted reasonably and in good faith. The affidavits
provided by the Taxpayer and the Accountant demonstrated that the Taxpayer relied on
a qualified tax professional and the professional failed to make the election or advise
the Taxpayer to make the election for QERs for Year 4. The Taxpayer had no reason to
know that the professional was not competent to render advice on the regulatory
election or aware of all relevant facts. In addition, the Taxpayer is not seeking to alter a
return position for which an accuracy-related penalty has been or could be imposed
under § 6662 of the Code, the Taxpayer was not informed of the election and chose not
to file it, and the Taxpayer has represented that he did not use hindsight in seeking
relief.

In addition, based on the facts provided, the interests of the government will not be
prejudiced by granting relief in this case. The Taxpayer has represented that granting
relief will not 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. Further, the taxable year for which the Taxpayer is requesting
relief is not closed, nor will any closed taxable years be affected by the making of the
election for Year 4.

Because the 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, the Taxpayer
has met the requirements for an extension under § 301.9100-3 of the Regulations for
making the election under § 198 of the Code for Year 4. Accordingly, the Taxpayer is
granted an extension of 60 days from the date of this ruling letter to make the election
under § 198 by filing an amended federal income tax return for Year 4. The Taxpayer
must comply with all the requirements of Rev. Proc. 98-47 for the manner of making
such election upon his amended return. A copy of this letter ruling should be attached
to the Taxpayer’s amended return to which it is relevant.
PLR-115693-11 6

CAVEATS

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter. Specifically, no opinion is expressed as to whether the expenditures
discussed in this ruling constitute QER expenditures under § 198 of the Code. This
ruling simply extends the period of time in which the taxpayer may make an election
under § 198. 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, copies of this letter are
being sent to your authorized representatives.

Enclosed is a copy of the letter ruling showing the deletions proposed to be made in the
letter when it is disclosed under § 6110 of the Code.

This ruling contained in this letter is based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement. 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,



                                          Christopher F. Kane
                                          Branch Chief, Branch 3
                                          (Income Tax & Accounting)

Enclosure (1)