PLR 1319008: Partnership granted more time to elect capitalization of carrying charges

Plain-English summary

The IRS granted a partnership an additional 30 days to make a section 266 election to capitalize interest, property taxes, and other carrying charges for two taxable years. The partnership had deducted some of the charges and capitalized others without making the required election statement. The IRS found that the partnership acted reasonably and in good faith and that granting relief would not prejudice the government's interests. The ruling does not determine whether the partnership's items were otherwise properly chargeable to capital account under section 266.

Ruling snapshot

• Question: Could the partnership receive an extension to file its section 266 election statement?
• Outcome: Approved.
• Key authorities: IRC §§ 266 and 6501; Treas. Reg. §§ 1.266-1 and 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201319008 Third Party Communication: None
Release Date: 5/10/2013 Date of Communication: Not Applicable
Index Number: 9100.05-00
Person To Contact:
-------------------------------- ----------, ID No. ---------------
--------------------------------------------------------- Telephone Number/Fax Number:
-------------------------------- ------------------- --------------------
----------------------------------- Refer Reply To:
CC:ITA:6
PLR-137244-12
Date: February 6, 2013

In re: Request for Extension of Time to File Election to Capitalize Items Under § 266.

Legend

Partnership = --------------------------------
---------------------

A = ----------------------------
----------------------

B = -----------------------------
----------------------

C = ---------------------------------
----------------------

D = ---------------------------
----------------------

Preparer = ---------------------------

Tax Professional = -------------------------

Date 1 = --------------------------

Date 2 = --------------------------

Date 3 = -------------------------------

Month = -------------
PLR-137244-12 2

State =---

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

This letter is in reply to a private letter ruling request dated August 28, 2012, filed by
Partnership. Partnership requests an extension of time under § 301.9100-1(c) of the
Procedure and Administration Regulations to file an election under § 266 of the
Internal Revenue Code to capitalize carrying charges. This request was made in
accordance with § 301.9100-3.

Partnership is a limited liability company organized under the laws of State. Partnership
is treated as a partnership for federal tax purposes. All of the outstanding partnership
interests of Partnership are owned by four nonresident alien individual taxpayers A, B, C
and D.

During the taxable years ending Date 1 and Date 2, Partnership incurred interest,
property taxes, and other carrying charges (“Carrying Charges”) with respect to
unimproved and unproductive real property. On its original tax return for the taxable
year ending Date 1, Partnership deducted the Carrying Charges. Partnership filed an
amended return for the taxable year ending Date 1 on which it capitalized Carrying
Charges. On its original tax return for the taxable year ending Date 2, Partnership
deducted the Carrying Charges, except for all property taxes paid that year, which it
capitalized. No election was made to capitalize these taxes under § 266. The original
tax returns for the year ending Date 1 and Date 2 were prepared by Preparer. The
amended return for the taxable year ending Date 1 was prepared by Tax Professional.

Partnership relied on Preparer to advise it regarding any elections that should be made
in computing taxable income on its federal tax return for the taxable years ending Date 1
and Date 2. Further, taking into account only facts that were known at the time
Partnership filed its federal tax returns for these taxable years, Partnership would have
made the § 266 elections to capitalize the Carrying Charges, had Partnership been
advised by Preparer of the tax consequence of failing to make the § 266 elections. No
facts have changed since the due date for making the elections that would make the
elections more advantageous to Partnership than they would have been if they had
been timely made.

Partnership engaged Tax Professional in Month. During its engagement Tax
Professional informed Partnership of the advantages of making an election to capitalize
the Carrying Charges under § 266 for the taxable years ending Date 1 and Date 2.
Further, because A, B, C and D were not aware of a requirement to file federal income
tax returns and did not timely file federal income tax returns for taxable years ending
Date 1 and Date 2, Tax Professional informed them of the requirement to file federal
income tax returns. A, B, C and D filed their federal income tax returns for taxable
PLR-137244-12 3

years ending Date 1 and Date 2 on Date 3. A, B, C and D's tax returns were prepared
by Tax Professional.

Section 266 provides that a taxpayer may elect to capitalize amounts paid or accrued
for certain taxes and carrying charges chargeable to capital account with respect to
property, under regulations prescribed by the Secretary.

Section 1.266-1(a)(1) of the Income Tax Regulations provides that items enumerated in
§ 1.266-1(b) may be capitalized at the election of the taxpayer. Thus, taxes, interest
and other carrying charges with respect to property of the type described in § 1.266-1
are chargeable to capital account at the election of the taxpayer, notwithstanding that
they are otherwise expressly deductible under provisions of Subtitle A of the Code. No
deduction is allowable for any items so treated.

Section 1.266-1(b)(1)(i) provides that the taxpayer may elect, as provided in § 1.266-
1(c), to treat as chargeable to capital account either as a component of original cost or
other basis, for the purposes of § 1012, or as an adjustment to basis, for the purpose of
§ 1016(a)(1), in the case of unimproved and unproductive real property: annual taxes,
interest on a mortgage, and other carrying charges.

Section 1.266-1(c)(2)(i) provides that an election with respect to an item described in
§ 1.266-1(b)(1)(i) is effective only for the year in which it is made. Section 1.266-1(c)(3)
provides that if the taxpayer elects to capitalize an item or items under § 266, such
election shall be exercised by filing with the original return for the year in which the
election is made a statement indicating the item or items which the taxpayer elects to
treat as chargeable to capital account.

Section 301.9100-1(c) provides that 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 certain regulatory elections. Section 301.9100-1(b) defines a regulatory
election as 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 301.9100-2 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.

Requests for relief under § 301.9100-3 will be granted when a taxpayer provides
evidence to establish to the satisfaction of the Commissioner (1) that the taxpayer acted
reasonably and in good faith, and (2) that granting relief will not prejudice the interests of
the Government. See § 301.9100-3(a).
PLR-137244-12 4

A taxpayer is generally deemed to have acted reasonably and in good faith if the
taxpayer requests relief before the failure to make the regulatory election is discovered
by the Internal Revenue Service. See § 301.9100-3(b). However, the taxpayer will not
be considered to have acted reasonably and in good faith if the taxpayer 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 and the new position requires or
permits a regulatory election for which relief is requested. Additionally, if the taxpayer
was informed in all material respects of the required election and related tax
consequences but chose not to file the election, or uses hindsight in requesting relief,
the taxpayer ordinarily will not be considered to have acted reasonably and in good
faith. See § 301.9100-3(b)(3).

The interests of the Government are prejudiced if granting relief would result in
taxpayers affected by the election having a lower tax liability in the aggregate. See
§ 301.9100-3(c)(i). In addition, the interests of the Government are ordinarily prejudiced
if the taxable year in which the regulatory election should have been made is closed by
the period of limitations on assessment under § 6501(a). See § 301.9100-3(c)(ii).

Section 6501(a) provides the period of limitations for assessing any tax imposed by Title
26 of the United States Code, including tax attributable to partnership and affected
items. See Bufferd v. Commissioner, 506 U.S. 523, 527 (1993). This period runs from
the filing date of a tax return rather than from the filing date of a pass-through entity
information return (such as a partnership return). Id. In this case, A, B, C and D’s tax
returns for the taxable years ending Date 1 and Date 2 remain open.

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, we
hereby grant an extension of time for Partnership to file the necessary statement
indicating the items which Partnership elects to treat as chargeable to capital account
for the taxable years ending Date 1 and Date 2. This extension shall be for a period of
30 days from the date of this ruling. Please attach a copy of this ruling to the
Partnership’s amended returns for the taxable years ending Date 1 and Date 2.

The ruling contained in this letter is based upon information and representations
submitted by Partnership and accompanied by a penalty of perjury statement executed
by the appropriate party. Further, this ruling is null and void should any of Partnership’s
partners take a position on any return that is inconsistent with the requested relief being
granted. While this office has not verified any of the materials submitted in support of
the request for rulings, such material is subject to verification on examination.

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, we express no opinion as to whether Partnership’s items are
properly chargeable to capital account under § 266.
PLR-137244-12 5

This ruling is directed only to Partnership, who requested 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 Partnership’s authorized representative.

                                              Sincerely,




                                              ROY HIRSCHHORN
                                              Chief, Branch 6
                                              Office of Associate Chief Counsel
                                              (Income Tax & Accounting)

Enclosure:
copy for section 6110 purposes