Taxpayer granted extra time to elect current deduction of drilling costs

Plain-English summary

The IRS granted a taxpayer 120 additional days to make an election under IRC § 263(c) to deduct intangible drilling and development costs. The taxpayer's disregarded LLC had incurred those costs, but a tax professional failed to recognize them and capitalized the expenses instead of making the election. The IRS found that the taxpayer acted in good faith and that the relief would not prejudice the government because it would not reduce the taxpayer's aggregate tax liability after considering the time value of money. The taxpayer could make the election on an amended return for the relevant year.

Ruling snapshot

• Question: Could the taxpayer receive more time to elect current deduction of intangible drilling and development costs?
• Outcome: Approved.
• Key authorities: IRC § 263(c); Treas. Reg. §§ 1.612-4 and 301.9100-1 through 301.9100-3; IRC § 6110(k)(3).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201403011
Third Party Communication: None
Release Date: 1/17/2014
Date of Communication: Not Applicable
Index Number: 263.02-01, 9100.02-05
Person To Contact:
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Telephone Number:
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Refer Reply To:
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CC:PSI:B06
PLR-121489-13
Date:
September 23, 2013

LEGEND:

Taxpayer = ----------------------------------------------------- Company = -------------------------------------------------------
Date 1 = -------------------------
Year 1 = ------
Year 2 = ------

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 § 263(c) of the Internal Revenue Code for the taxable year Year 1.

According to the information submitted, Taxpayer is the sole owner of a limited liability company, Company, that is treated as a disregarded entity for U.S. tax purposes. Company was formed on Date 1 to purchase oil and gas leases, and began accruing intangible drilling and development costs (IDCs) in Year 1.

From the time of its formation until Year 2, Taxpayer used an independent tax professional to prepare Taxpayer’s Federal tax returns and to provide tax advice. The tax professional did not realize that Company had incurred IDCs in Year 1, and instead capitalized the expenses on Taxpayer’s tax returns. As a result, Taxpayer did not make a timely election to currently expense IDCs on Taxpayer’s Year 1 tax return. Taxpayer represents that had it been aware of the election under § 263(c) to expense the IDCs, Taxpayer would have timely made the election on the Year 1 tax return.

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

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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 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.

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).

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 § 263(c) on an amended Year 1 tax return with the appropriate service center. A copy of this letter should be attached to the amended return. Alternatively, taxpayers filing their returns electronically may

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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 Taxpayer and Taxpayer’s representatives and accompanied by 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) and § 1.612-4.

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 representatives. We also are sending a copy of this letter to the appropriate Industry Director, LB&I.

Sincerely,

Associate Chief Counsel
(Passthroughs & Special Industries)

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

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