Late environmental-remediation elections receive relief

Plain-English summary

A limited partnership incurred environmental-remediation costs while developing a low-income housing project under a state brownfield program. Its tax preparer capitalized the costs and failed to advise the partnership to make annual elections under section 198 to deduct them. The IRS concluded that the partnership acted reasonably and in good faith by relying on a qualified tax professional and that late-election relief would not prejudice the government. The ruling did not determine whether the costs actually qualified as environmental-remediation expenditures.

Ruling snapshot

• Question: May the partnership obtain additional time to make section 198 elections for remediation expenditures incurred in two prior years?
• Outcome: Approved under the regulatory-election relief standards.
• Key authorities: IRC § 198; Treas. Reg. §§ 301.9100-1 and 301.9100-3; Rev. Proc. 98-47.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201515008 Third Party Communication: None
Release Date: 4/10/2015 Date of Communication: Not Applicable
Index Number: 9100.22-00, 198.01-00
Person To Contact:
------------------------------------------------- ---------------------------, ID No. ---------------
----------------------------------- -----------------
------------------------------- Telephone Number:
----------------------
------------------------------------ Refer Reply To:
CC:ITA:B01
PLR-122444-14
Date:
December 3, 2014

Legend

Taxpayer = -------------------------------------------------
Tax Preparer = ----------------------
Year 1 = -------
Year 2 = -------

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

  This letter responds to a letter dated June 3, 2014, submitted by Tax

Professional on behalf of Taxpayer, requesting an extension of time under § 301.9100-1
and § 301.9100-3 of the Procedure and Administration Regulations for Taxpayer to
make an election under §198 of the Internal Revenue Code to deduct qualified
environmental remediation expenditures (QER expenditures) for Year 1 and Year 2.

  Taxpayer is a limited partnership engaged in the development of a low income

housing project. The project was carried out under a state Brownfield Cleanup
Program. For Year 1 and Year 2, the 99% limited partner in Taxpayer was ultimately
owned by an entity that is tax-exempt under § 501(c)(4) of the Code.

   In Year 1 and Year 2, Taxpayer paid or incurred QER expenditures. Tax

Professional prepared Taxpayer’s federal income tax returns for Year 1 and Year 2, but
did not file a §198 election for the QER expenditures for Year 1 or Year 2. The QER
expenditures were capitalized to the land and the buildings under development.
Taxpayer represented that it reasonably relied on a qualified tax professional, Tax
Professional, and Tax Professional failed to make (or advise Taxpayer to make) the
election. Taxpayer represented that it was not aware of the availability of the §198
election at the time the Year 1 and Year 2 returns were filed.
PLR-122444-14 2

  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), 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 provides the procedures for taxpayers to make the election

under § 198 to deduct any QER expenditures. Under § 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. Additionally, the §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 301.9100-1 of the Regulations generally provides an extension of time

for making regulatory elections. For this purpose, § 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 301.9100-3(a) provides that requests for extensions of time for regulatory

elections will be granted when the taxpayer provides evidence 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(c)(1) provides 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. Generally, the interests of
the Government are prejudiced if (i) 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) or (ii) 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 this section.
However, the IRS may condition a grant of relief on the taxpayer providing the IRS with
a statement from an independent auditor (other than an auditor providing an affidavit
pursuant to § 301.9100-3(e)(3)) certifying that the interests of the Government are not
prejudiced under the standards set forth in § 301.9100-3(c)(1)(i).
PLR-122444-14 3

   The information and representations Taxpayer and Tax Professional submitted

explaining the circumstances that resulted in the failure to timely file the § 198 election
demonstrate that Taxpayer acted reasonably and in good faith as it reasonably relied on
Tax Professional, a qualified tax professional. Tax Professional has provided a
statement certifying that the interests of the Government are not prejudiced under the
standards set forth in § 301.9100-3(c)(1)(i).

   Based solely on the facts and representations submitted, we conclude that

Taxpayer acted reasonably and in good faith, and granting relief will not prejudice the
interests of the government, satisfying the requirements of § 301.9100-3.

   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.

  The ruling contained in this letter is based upon information and representations

submitted by Taxpayer and accompanied by a penalty 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 ruling, it is subject to verification on examination.

  This letter is directed only to the taxpayer requesting it. Section 6110(k)(3) of the

Code 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.

                                   Sincerely,



                                   Lewis K. Brickates
                                   Branch Chief, Branch 1
                                   (Income Tax & Accounting)