Late election to capitalize employee lease costs granted

Plain-English summary

A partnership incurred employee compensation costs while entering into a long-term office lease and intended to elect to capitalize those costs. Its return preparer included the election in the draft return but mistakenly failed to file the extension request, making the later return and election untimely. The IRS found reasonable reliance on a qualified tax professional, good faith, and no prejudice to the government. It granted 45 days to refile the return with the election and a copy or identifying statement for the ruling. The IRS did not decide whether the particular costs were eligible for capitalization, and any otherwise applicable penalties and interest remained in effect.

Ruling snapshot

• Question: May the partnership make a late election to capitalize employee compensation costs related to an office lease?
• Outcome: Approved, with 45 days to refile the return and make the election
• Key authorities: Treas. Reg. §§ 1.263(a)-4(e)(4), 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201535002 Third Party Communication: None
Release Date: 8/28/2015 Date of Communication: Not Applicable
Index Number: 9100.22-00, 263.16-00
Person To Contact:
-------------------------------- -------------------------, ID No. -----------------
------------------- ----------------------------------------------------
----------------------------- Telephone Number:
-------------------------------------- --------------------
Refer Reply To:
------------------------ CC:ITA:B01
PLR-109587-15
Date:
May 28, 2015

Taxpayer = -----------------------------------------------------------------------------------------
-----------------------------------
Tax = ----------------------
Professional
Date A = -----------------------
Date B = -----------------------
Date C = ------------------
Date D = ------------------------
Date E = ------------------------
Date F = ------------------------
Date G = ------------------------
Taxable Year = --------------------------------------------

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

   This letter responds to a letter dated March 13, 2015, submitted on behalf of

Taxpayer, requesting an extension of time under § 301.9100-3 of the Procedure and
Administration Regulations to make an election under § 1.263(a)-4(e)(4)(iv) of the
Income Tax Regulations with respect to certain employee compensation costs paid or
incurred in the Taxable Year.

                                        FACTUAL BACKGROUND

  Taxpayer is a limited liability partnership that files a Form 1065, U.S. Return of

Partnership Income, on a taxable year ended September 30th fiscal year basis.
Taxpayer uses an overall cash method of accounting.
PLR-109587-15 2

  Taxpayer paid employee compensation costs during the Taxable Year in the

process of entering into an office space lease with an initial term of 20 years. Taxpayer
intended to elect to capitalize the employee compensation costs that were otherwise
deductible pursuant to § 1.263(a)-4(e)(4)(iv).

   Taxpayer engaged Tax Professional to prepare the Form 1065 return for Tax

Year, including extension requests if necessary. Tax Professional provided Taxpayer a
draft copy of the return for review prior to the original due date of the return for the
Taxable Year, Date A. The draft copy of the return reflected the election to capitalize
the employee compensation costs pursuant to §1.263(a)-4(e)(4)(iv).

   Because all of the information necessary to file a complete and accurate return

would not be available by Date A, Tax Professional prepared Form 7004, Application for
Automatic Extension of Time to File Certain Business Income Tax, Information, Other
Returns, for the Taxable Year. Tax Professional believed the Form 7004 had been
electronically filed with the Service on Date B.

   On Date D, Tax Professional provided draft Schedules K-1 to Taxpayer for

delivery to its partners. Taxpayer began distributing the Schedules K-1 to some
partners on Date E.

    On Date F, Tax Professional learned that the Form 7004 had not been timely

failed due to a clerical error. Tax Professional notified Taxpayer the following business
day, Date G, 2015.

  If the extension request had been timely filed, the due date for the return for the

Taxable Year would have been Date C.

  Taxpayer electronically filed the return for the Taxable Year on March 12, 2015.

The return reflected the election to capitalize the employee compensation costs under
§ 1.263(a)-4(e)(4)(iv).

    Taxpayer is requesting an extension of time to make an election under

§ 1.263(a)-4(e)(4)(iv) to capitalize the employee compensation costs to comply with the
within the timeframe proscribed under § 1.263(a)-4(e)(4)(iv) .

                     APPLICABLE AUTHORITY AND ANALYSIS

     Section 1.263-4(e)(1)(i) provides, in relevant part, that an amount is paid to

facilitate the acquisition or creation of an intangible if the amount is paid in the process
of investigating or otherwise pursuing the transaction. Whether an amount is paid in the
process or investigating or otherwise pursuing the transaction is determined based on
all of the facts and circumstances.
PLR-109587-15 3

     Section 1.263(a)-4(e)(4)(i) provides that for purposes of this section employee

compensation (within the meaning of §1.263(a)-4(e)(4)(ii)), overhead and de minimis
costs (within the meaning of §1.263(a)-4(e)(4)(iii)) are treated as amounts that do not
facilitate the acquisition or creation of an intangible.

    Section 1.263(a)-4(e)(4)(iv) provides that a taxpayer may elect to treat employee

compensation, overhead or de minimis costs paid in the process of investigating or
otherwise pursuing a transaction as amounts that facilitate the transaction and provides
the time and manner for making the election. Specifically, §1.263(a)-4(e)(4)(iv)
provides, in relevant0 part, that the election is made separately for each transaction and
applies to employee compensation, overhead, or de minimis costs, or to any
combination thereof. A taxpayer makes the election by treating the amounts to which
the election applies as amounts that facilitate the transaction in the taxpayer’s timely
filed original federal income tax return (including extensions) for the taxable year during
which the amounts are paid. In the case of a partnership, the election is made by the
partnership, and not by the partners. An election made is revocable with respect to
each taxable year for which made, only with the consent of the Commissioner.

   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.

   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 that granting
relief will not prejudice the interests of the government. See also § 301.9100-3(b) and
(c).

   Information, affidavits, and representations submitted by Taxpayer and Tax

Professional explain the circumstances that resulted in the failure to timely file a valid
election. The information establishes that Taxpayer reasonably relied on Tax
Professional, a qualified tax professional who failed to make the election as a result of
an inadvertent error, and that the request for relief was filed before the failure to make
the election was discovered by the Internal Revenue Service. See
§§ 301.9100-3(b)(1)(i) and (v).
PLR-109587-15 4

                                   CONCLUSION

    Based solely on the facts and information submitted, including the

representations made, we conclude that Taxpayer has shown it acted reasonably and in
good faith, and granting relief will not prejudice the interests of the government,
satisfying the requirements of § 301.9100-3. Accordingly, an extension of time is
granted under § 301.9100-3, until 45 days from the date on this letter, for Taxpayer to
make the election under §1.263(a)-4(e)(4)(iv) for the Taxable Year by refiling the return
with a copy of this letter attached. Alternatively, if Taxpayer is filing its return
electronically, Taxpayer may satisfy the requirement of attaching a copy of this letter by
attaching a statement to its return that provides the date and control number of the letter
ruling.

    We express no opinion as to whether the costs the Taxpayer seeks to elect to

capitalize are eligible to be capitalized under § 1.263(a)-4(e)(4)(iv). In addition, we
express no opinion as to the tax consequences of filing the election late under the
provisions of any other section of the Code and regulations, or as to the tax treatment of
any conditions existing at the time of, or resulting from, filing the election late that are
not specifically set forth in the above ruling. For purposes of granting relief under
§ 301.9100-3, we relied on certain statements and representations made by the
Taxpayer and its Tax Professional. However, the Director should verify all essential
facts. In addition, notwithstanding that an extension is granted under § 301.9100-3 to
file the election, penalties and interest that would otherwise be applicable, if any,
continue to apply.

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

provides that it may not be used or cited as precedent.

   Pursuant to the power of attorney on file in this office, a copy of this letter is being

sent to your authorized representative.

                                Sincerely,



                                Andrew M. Irving
                                Senior Counsel, Branch 1
                                Office of Chief Counsel
                                (Income Tax and Accounting)