Oil and gas company receives more time for an IDC amortization election

Plain-English summary

An onshore oil and gas company intended to elect under section 59(e) to deduct its intangible drilling and development costs ratably over sixty months. It failed to make the election by the original return deadline and requested discretionary relief. The company represented that it acted in good faith and that the late election would not reduce its aggregate tax liability compared with a timely election. The IRS found that the regulatory-relief requirements were met and granted sixty calendar days from the ruling date to make the election with the statement required by Treas. Reg. § 1.59-1(b). The ruling did not decide whether the company otherwise satisfied sections 263(c) or 59(e).

Ruling snapshot

• Question: Could the oil and gas company receive an extension to elect sixty-month amortization for intangible drilling and development costs?
• Outcome: Approved, with 60 calendar days to make the election
• Key authorities: IRC §§ 59(e) and 263(c); Treas. Reg. §§ 1.59-1(b) and 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201510036 Third Party Communication: None
Release Date: 3/6/2015 Date of Communication: Not Applicable
Index Number: 9100.02-04
Person To Contact:
--------------------- --------------------------, ID No. -----------
----------------------------- Telephone Number:
------------------------------ --------------------
------------------------------------ Refer Reply To:
---------------------------- CC:PSI:B06
In Re: Request for extension of time under PLR-127218-14
§§ 301.9100-1 and 301.9100-3 of the Date:
Procedure and Administration Regulations to November 17, 2014
file an election pursuant to § 59(e) of the
Internal Revenue Code

LEGEND:

Taxpayer = ---------------------------------
----------------------
Date A = ------------------

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

   This letter responds to a letter dated July 9, 2014, submitted on behalf of

Taxpayer requesting an extension of time pursuant to §§ 301.9100-1 through 301.9100-
3 of the Procedure and Administration Regulations to make an election under § 59(e) of
the Internal Revenue Code and § 1.59-1(b) of the Income Tax Regulations to deduct
ratably over a 60-month period its intangible drilling and development costs (IDC)
described in § 263(c) for its taxable year ended Date A.

                                               FACTS

    Taxpayer represents that the facts are as follows:

   Taxpayer is a U.S. onshore oil and gas company focused on the acquisition and

development of oil and gas resource plays. Taxpayer’s annual accounting period is the
calendar year, and its overall method of accounting is the accrual method. However,
during its taxable year ended Date A, Taxpayer was a fiscal year taxpayer.

   Taxpayer intended to make an election under § 59(e) and § 1.59-1(b) for its

taxable year ended Date A to amortize ratably over a 60-month period its IDC described
in § 263(c). Taxpayer has made representations explaining why the election under
§ 59(e) was not timely filed.

PLR-127218-14 2

   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 also represents that it acted in good faith and that
granting relief will not prejudice 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).

 Section 59(e)(1) allows a taxpayer to deduct intangible drilling and development

expenditures 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.

    Section 1.59-1(b)(1) prescribes the time and manner of making the election

under § 59(e). According to § 1.59-1(b)(1), an election under § 59(e) shall only be
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.

    Under § 301.9100-1(c), the Commissioner in exercising the Commissioner’s

discretion may grant a reasonable extension of time under the rules set forth in
§§ 301.9100-1 through 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 301.9100-1, 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-127218-14 3

   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)(1) 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 or the taxpayer 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.

    Section 301.9100-3(b)(3) provides, in part, that a taxpayer is deemed to have not

acted reasonably or 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 (taking into account any qualified amended return filed
within the meaning of § 1.6664-2(c)(3) of this chapter) and the new position requires or
permits a regulatory election for which relief is requested; the taxpayer was informed in
all material respects of the required election and related tax consequences, but chose
not to file the election; or the taxpayer uses hindsight in requesting relief.

     Section 301.9100-3(c)(1)(i) provides, in part, that the Government’s interests are

considered prejudiced if granting relief would result in a 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). Additionally, § 301.9100-3(c)(1)(ii) provides, in part, that the Government’s
interests ordinarily are 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.

                                 CONCLUSION

   Based solely on the facts and representations submitted, 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 60 calendar days from the
date of this letter to make the election under § 59(e) and § 1.59-1(b) to deduct ratably
over a 60-month period its IDC described in § 263(c) for its taxable year ended Date A.

   The § 59(e) election must comply with the manner-of-election requirements of

§ 1.59-1(b). Section 1.59-1(b) requires, in part, that an election under § 59(e) be 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 statement must include the taxpayer’s name, address, and
taxpayer identification number, and the type and amount of qualified expenditures

PLR-127218-14 4

identified in § 59(e)(2) that the taxpayer elects to deduct ratably over the applicable
period described in § 59(e)(1). Taxpayer should attach a copy of this letter to the tax
return. We have enclosed a copy for that purpose.

    The rulings contained in this letter are based upon information and

representations submitted by Taxpayer and Taxpayer’s representative and
accompanied by a penalties of perjury statement executed by an appropriate party.
While this office has not verified any of the material submitted in support of the request
for a ruling, 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 provisions of
the Code and the regulations thereunder. Specifically, we express or imply no opinion
on whether Taxpayer satisfies the requirements of § 263(c) or § 59(e).

  This letter 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, we are sending a

copy of this letter to Taxpayer’s authorized representative. We also are sending a copy
of this letter to the appropriate Industry Director, LB&I. A copy of this ruling 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.

                                      Sincerely,

                                      Associate Chief Counsel
                                      (Passthroughs & Special Industries)


                               By:    _______________________________
                                      Brenda M. Stewart
                                      Senior Counsel, Branch 6
                                      Office of Associate Chief Counsel
                                      Passthroughs & Special Industries

Enclosures (2):
Copy of this letter
Copy for § 6110 purpose

cc: