Taxpayer receives late ADS and bonus-depreciation election relief

Plain-English summary

A foreign corporation depreciated several years of real property and leasehold improvements under the alternative depreciation system and consistently declined bonus depreciation for qualified property. Its returns and financial statements reflected those choices, but it omitted the election statements required for each affected year. The assessment periods for all of those years had closed. The IRS granted late-election relief on the condition that, at the start of the first open year, each property's adjusted basis reflect the greater of depreciation allowed or allowable as if the elections had been timely. The taxpayer received 60 days to file the ruling and election statements with the service centers that received the original returns. The IRS did not decide whether any property independently qualified for bonus depreciation or was otherwise required to use ADS.

Ruling snapshot

• Question: May the taxpayer make late elections to use ADS and decline additional first-year depreciation for property placed in service during closed years?
• Outcome: Approved
• Key authorities: IRC §§ 167, 168(g), 168(k), 6501(a); Treas. Reg. §§ 1.168(k)-1, 301.9100-1, 301.9100-3, 301.9100-7T

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201528018                                             Third Party Communication: None
Release Date: 7/10/2015                                       Date of Communication: Not Applicable
Index Number: 9100.04-00
                                                              Person To Contact:
------------------------------                                --------------------------, ID No. ----------------
-------------------------                                     ----------------
--------------------------------------                        Telephone Number:
----------------------                                        --------------------
-------------------------------                               Refer Reply To:
                                                              CC:ITA:B07
                                                              PLR-137145-14
                                                              Date:
                                                              April 01, 2015




Re: Request for Extension of Time to Make Elections to Use the Alternative
Depreciation System and Not to Deduct the Additional First Year Depreciation

Legend

Taxpayer          = ------------------------------------------------------------------------------------------------
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City              = ------------------

Country           = ------------------------------

Year 1            = ------

Year 2            = ------

Year 3            = ------

Year 4            = ------

Year 5            = ------

X                 = ----------


Dear ------------:
PLR-137145-14                                 2

       This letter responds to a letter dated October 1, 2014, and supplemental
correspondence, submitted on behalf of Taxpayer, requesting an extension of time
pursuant to § 301.9100-3 of the Procedure and Administration Regulations to make the
following two regulatory elections: (1) the election under § 168(g)(7) of the Internal
Revenue Code to use the alternative depreciation system under § 168(g) (ADS) for
nonresidential real property and qualified leasehold improvement property placed in
service in certain taxable years; and (2) the election under § 168(k)(2)(D)(iii) or under §
1.168(k)-1(e)(1)(ii)(B) of the Income Tax Regulations not to deduct the additional first
year depreciation for all classes of qualified property or 50-percent bonus depreciation
property, as applicable, placed in service in certain taxable years.

FACTS

       Taxpayer represents that the facts are as follows:

      Taxpayer is a X corporation, maintains executive offices in City, and is
incorporated under the laws of the Country. Taxpayer files federal income tax returns
on a calendar year basis and uses an accrual method of accounting.

        During Year 1 and Year 2 but before October 23, 2004, Taxpayer placed in
service nonresidential real property that also is qualified leasehold improvement
property (as defined in § 168(k)(3)) for purposes of § 168(k). During Year 2 and Year 3
but after October 22, 2004, Taxpayer placed in service qualified leasehold improvement
property (as defined in § 168(e)(6)) that also is qualified leasehold improvement
property (as defined in § 168(k)(3)) for purposes of § 168(k). None of these properties
are described in § 168(g)(1)(A) through (D). On its timely filed federal income tax
returns for the Year 1, Year 2, and Year 3 taxable years, Taxpayer claimed depreciation
for these properties as though it had made an election under § 168(g)(7) to use the
ADS. However, Taxpayer inadvertently failed to attach the election statement to use
the ADS for such properties to its federal income tax returns for the Year 1, Year 2, and
Year 3 taxable years.

        Taxpayer placed in service qualified property (as defined in § 168(k)(2)) or 50-
percent bonus depreciation property (as defined in § 168(k)(4) as in effect prior to the
date of enactment of the Economic Stimulus Act of 2008), as applicable, during Year 1,
Year 2, Year 4, and Year 5. Such property includes the aforementioned qualified
leasehold improvement property. On its timely filed federal income tax returns for the
Year 1, Year 2, Year 4, and Year 5 taxable years, Taxpayer did not claim the additional
first year depreciation under § 168(k)(1) or § 168(k)(4)(A) (as in effect prior to the date
of enactment of the Economic Stimulus Act of 2008), as applicable, with respect to any
qualified property or 50-percent bonus depreciation property, as applicable, placed in
service during each of these taxable years. However, Taxpayer inadvertently failed to
attach the election statement not to deduct the additional first year depreciation for such
PLR-137145-14                                3

property to its federal income tax returns for the Year 1, Year 2, Year 4, and Year 5
taxable years.

      The period of limitations on assessment under § 6501(a) has expired for the Year
1, Year 2, Year 3, Year 4, and Year 5 taxable years.

        Taxpayer has filed its federal income tax returns for the Year 1, Year 2, Year 3,
Year 4, and Year 5 taxable years and for all subsequent taxable years as if Taxpayer
had made timely the aforementioned elections to use the ADS and not to deduct the
additional first year depreciation. Taxpayer has disposed of some of the property
subject to this ruling request. For such disposed property for which Taxpayer
recognized gain or loss, Taxpayer reduced the basis of such property for the greater of
the allowed or allowable depreciation as if such elections had been made timely by
Taxpayer.

       Further, the tax provision in Taxpayer’s financial statements for the taxable years
at issue was calculated on the basis that Taxpayer had made timely the aforementioned
elections to use the ADS and not to deduct the additional first year depreciation.

RULINGS REQUESTED

        Taxpayer requests an extension of time pursuant § 301.9100-3 to make the
following elections: (1) an election under § 168(g)(7) to use the ADS for the
nonresidential real property placed in service in Year 1 and Year 2 but before October
23, 2004, that also is qualified leasehold improvement property for purposes of § 168(k);
(2) an election under § 168(g)(7) to use the ADS for the qualified leasehold
improvement property placed in service in Year 2 and Year 3 but after October 22,
2004; and (3) an election under § 168(k)(2)(D)(iii) or § 1.168(k)-1(e)(1)(ii)(B), as
applicable, to not deduct the additional first year depreciation provided by § 168(k) for
all classes of qualified property or 50-percent bonus depreciation property, as
applicable, placed in service in Year 1, Year 2, Year 4, and Year 5.

LAW AND ANALYSIS

       Section 167(a) provides that there shall be allowed as a depreciation deduction a
reasonable allowance for the exhaustion, wear and tear, and obsolescence of property
used in taxpayer’s trade or business.

       The depreciation deduction provided by § 167(a) for tangible property placed in
service after 1986 generally is determined under § 168. Section 168 prescribes two
methods of accounting for determining depreciation allowances. One method is the
general depreciation system in § 168(a) and the other method is the ADS.

      In the case of any property to which an election under § 168(g)(7) applies,
PLR-137145-14                                 4

§ 168(g)(1) provides that the depreciation deduction provided by § 167(a) is determined
under the ADS. Pursuant to § 168(g)(2), the ADS is depreciation determined by using
the straight line method (without regard to salvage value), the applicable convention
determined under § 168(d), and a recovery period determined under the table
prescribed in § 168(g)(2)(C) or under the special rules provided in § 168(g)(3). For
nonresidential real property, the recovery period under the ADS is 40 years pursuant to
the table in § 168(g)(2)(C). Qualified leasehold improvement property (as defined in §
168(e)(6)) placed in service after October 22, 2004, is classified as 15-year property
pursuant to § 168(e)(3)(E)(iv) and, consequently, its recovery period under the ADS is
39 years pursuant to the table in § 168(g)(3)(B).

       Section 168(g)(7) permits a taxpayer to elect for any class of property for any
taxable year to use the ADS for determining depreciation for all property in that class
placed in service during that taxable year. However, in the case of nonresidential real
property, the election is made separately with respect to each property. Once made, an
election to use ADS is irrevocable.

       Accordingly, in the case of the nonresidential real property placed in service by
Taxpayer in Year 1 and Year 2 but before October 23, 2004, that also is qualified
leasehold improvement property (as defined in § 168(k)(3)) for purposes of § 168(k), the
election under § 168(g)(7) is made separately for each such property. Further, in the
case of the qualified leasehold improvement property (as defined in § 168(e)(6)) placed
in service in Year 2 and Year 3 but after October 22, 2004, the election under §
168(g)(7) applies to all 15-year property placed in service by Taxpayer during the Year
2 and Year 3 taxable years.

        Section 301.9100-7T(a)(1) provides that the election under § 168(g)(7) must be
made for the taxable year in which the property is placed in service. Section 301.9100-
7T(a)(2)(i) further provides that this election must be made by the due date (including
extensions) of the tax return for the taxable year for which the election is to be effective.
Section 301.9100-7T(a)(3)(i) provides that the election under § 168(g)(7) is made by
attaching a statement to the tax return for the taxable year for which the election is to be
effective.

       Section 168(k)(1) provides a 50-percent additional first year depreciation
deduction in the placed-in-service year for qualified property acquired by a taxpayer
after December 31, 2007, and before September 9, 2010, or acquired after September
8, 2010, and generally before January 1, 2015, and placed in service by the taxpayer
generally before January 1, 2015.

       Prior to the Economic Stimulus Act of 2008, § 168(k)(1) provided a 30-percent
additional first year depreciation deduction in the placed-in-service year for qualified
property acquired by a taxpayer after September 10, 2001, and generally before
January 1, 2005, and placed in service by the taxpayer generally before January 1,
PLR-137145-14                                 5

2005, and § 168(k)(4) provided a 50-percent additional first year depreciation deduction
in the placed-in-service year for 50-percent bonus depreciation property acquired by a
taxpayer after May 5, 2003, and generally before January 1, 2005, and placed in service
by the taxpayer generally before January 1, 2005.

       Section 168(k)(2)(A) defines qualified property, subject to certain exceptions and
additions, as including MACRS property with a recovery period of 20 years or less, and
property that is qualified leasehold improvement property (as defined in § 168(k)(3) and
§ 1.168(k)-1(c)). Prior to the Economic Stimulus Act of 2008, § 168(k)(4)(B) provided a
similar definition for 50-percent bonus depreciation property. See also § 1.168(k)-
1(b)(2)(i).

       Section 168(k)(2)(D)(i)(I) provides that qualified property does not include any
property to which the ADS applies, but determined without regard to the election into the
ADS provided by § 167(g)(7). Prior to the Economic Stimulus Act of 2008, § 168(k)(4)
provided a similar rule for 50-bonus depreciation property. See also §§ 1.168(k)-
1(b)(2)(ii)(A)(2) and 1.168(k)-1(b)(2)(ii)(B)(1).

        Section 168(k)(2)(D)(iii) provides that a taxpayer may elect not to deduct the
additional first year depreciation for any class of property placed in service during the
taxable year. Section 1.168(k)-1(e)(1)(ii) provides that for any class of property that is
50-percent bonus depreciation property placed in service during the taxable year, a
taxpayer may elect (A) to deduct the 30-percent, instead of the 50-percent, additional
first year depreciation, or (B) not to deduct both the 30-percent and the 50-percent
additional first year depreciation.

        The term “class of property” is defined in § 1.168(k)-1(e)(2) as meaning, in
relevant part, generally each class of property described in § 168(e) (for example, 5-
year property), or qualified leasehold improvement property as defined in § 1.168(k)-
1(c) and depreciated under § 168. See section 5.01 of Rev. Proc. 2008-54, 2008-2 C.B.
722, and section 3.01 of Rev. Proc. 2011-26, 2011-16 I.R.B. at 665 (rules similar to the
rules in § 1.168(k)-1 for “qualified property” or for “30-percent additional first year
depreciation deduction” apply for purposes of § 168(k) as currently in effect).

        Section 1.168(k)-1(e)(1) provides that the election not to deduct the additional
first year depreciation for a class of property applies to all qualified property or 50-
percent bonus depreciation property, as applicable, that is in that class of property and
placed in service in the same taxable year.

        Section 1.168(k)-1(e)(3)(i) provides that the election not to deduct the additional
first year depreciation must be made by the due date (including extensions) of the
federal tax return for the taxable year in which the property is placed in service by the
taxpayer.
PLR-137145-14                                 6

        Section 1.168(k)-1(e)(3)(ii) provides that the election not to deduct the additional
first year depreciation must be made in the manner prescribed on Form 4562,
“Depreciation and Amortization,” and its instructions. The instructions to Form 4562 for
the Year 1, Year 2, Year 4, and Year 5 taxable years provided that the election not to
deduct the additional first year depreciation is made by attaching a statement to the
taxpayer's timely filed tax return (including extensions) indicating that the taxpayer is
electing not to deduct the additional first year depreciation and the class of property for
which the taxpayer is making the election.

       Under § 301.9100-1, 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 a
regulatory election.

       Sections 301.9100-1 through 301.9100-3 provide the standards the
Commissioner will use to determine whether to grant an extension of time to make an
election. 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.

        Section 301.9100-3(a) provides that requests for relief under § 301.9100-3 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 the grant of
relief will not prejudice the interests of the government.

       Section 301.9100-3(c)(1)(ii) provides, in relevant 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 this
section.

CONCLUSIONS

        Based solely on the facts and representations submitted, we conclude that the
requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied, provided that as of
the beginning of the first open year: (1) the adjusted basis of the nonresidential real
property placed in service in Year 1 and Year 2 but before October 23, 2004, that also is
qualified leasehold improvement property (as defined in § 168(k)(3)) for purposes of §
168(k), reflects the reduction in basis for the greater of the depreciation allowed or
allowable in the closed year(s) had the election under § 168(g)(7) to use the ADS for
such property been made timely by Taxpayer; (2) the adjusted basis of all 15-year
property placed in service in Year 2 and Year 3, including the qualified leasehold
improvement property (as defined in § 168(e)(6)) placed in service in Year 2 and Year 3
but after October 22, 2004, reflects the reduction in basis for the greater of the
PLR-137145-14                                 7

depreciation allowed or allowable in the closed year(s) had the election under §
168(g)(7) to use the ADS for such property been made timely by Taxpayer; and (3) the
adjusted basis of any qualified property or 50-percent bonus depreciation property, as
applicable, placed in service in Year 1, Year 2, Year 4, and Year 5 reflects the reduction
in basis for the greater of the depreciation allowed or allowable in the closed year(s) had
the election under § 168(k)(2)(D)(iii) or § 1.168(k)-1(e)(1)(ii)(B), as applicable, not to
deduct the additional first year depreciation for such property been made timely by
Taxpayer.

        Taxpayer is granted 60 calendar days from the date of this letter ruling to make
the elections: (1) under § 168(g)(7) to use the ADS for the nonresidential real property
placed in service in Year 1 and Year 2 but before October 23, 2004, that also is
qualified leasehold improvement property (as defined in §168(k)(3)) for purposes of §
168(k); (2) under § 168(g)(7) to use the ADS for 15-year property placed in service in
Year 2 and Year 3, including the qualified leasehold improvement property (as defined
in § 168(e)(6)) placed in service in Year 2 and Year 3 but after October 22, 2004; and
(3) under § 168(k)(2)(D)(iii) or § 1.168(k)-1(e)(1)(ii)(B), as applicable, to not deduct the
additional first year depreciation provided by § 168(k) for all classes of qualified property
or 50-percent bonus depreciation property, as applicable, placed in service in Year 1,
Year 2, Year 4, and Year 5. Because the Year 1, Year 2, Year 3, Year 4, and Year 5
taxable years are closed by the period of limitations on assessment under § 6501(a),
Taxpayer must make these elections by filing, with the IRS Service Center(s) where
Taxpayer filed its original federal income tax returns for such taxable years, a copy of
this letter ruling and a statement indicating that Taxpayer is making the aforementioned
elections.

       Except as specifically set forth above, we express no opinion concerning the
federal income tax consequences of the facts described above under any other
provisions of the Code, including other subsections of § 168. Specifically, no opinion is
expressed or implied on whether any item of depreciable property placed in service by
Taxpayer in Year 1, Year 2, Year 3, Year 4, or Year 5 is eligible for the additional first
year depreciation deduction provided by § 168(k) or is required to use the ADS pursuant
to § 168(g)(1)(A) through (D).

      In accordance with the power of attorney, we are sending a copy of this letter to
Taxpayer’s authorized representatives. We are also sending a copy of this letter to the
appropriate operating division director.
PLR-137145-14                                8



      The 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.


                                      Sincerely,

                                      KATHLEEN REED

                                      KATHLEEN REED
                                      Branch Chief, Branch 7
                                      Office of Associate Chief Counsel
                                      (Income Tax & Accounting)

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