Taxpayer receives extra time to elect alternative depreciation

Plain-English summary

An electric power generator used the general depreciation system for property placed in service during two tax years. Its accounting firm had not told it that it could elect the alternative depreciation system, and the taxpayer represented that it would have made that election if properly advised. The IRS found that the requirements for discretionary election relief were met. It granted the taxpayer 60 days to amend both returns and elect the alternative depreciation system for all covered real and personal tangible depreciable property placed in service during those years.

Ruling snapshot

• Question: Whether the taxpayer could receive extra time to elect the alternative depreciation system under section 168(g)(7)
• Outcome: Approved, with 60 days to file consistent amended returns
• Key authorities: I.R.C. §§ 167, 168(g)(7); Treas. Reg. §§ 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: 201541001                                              Third Party Communication: None
Release Date: 10/9/2015                                        Date of Communication: Not Applicable
Index Number: 9100.04-00
                                                               Person To Contact:
-------------------------------                                ----------------------------, ID No. --------------
------------------------------------------------------------   -----------------
-                                                              Telephone Number:
---------------------                                          ----------------------
 ------------------------------                                Refer Reply To:
                                                               CC:ITA:B07
                                                               PLR-100837-15
                                                               Date:
                                                               July 09, 2015


Re: --------------------------------------------------------------------------------------------------------------
------------

Legend

Taxpayer          = ----------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------

A                =     --------------------------------------------------------------

Date 1            =    ---------------------------

Date 2            =    ---------------------------


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

       This letter responds to a letter dated December 23, 2014, and supplemental
correspondence, submitted by Taxpayer requesting an extension of time pursuant to
§ 301.9100-3 of the Procedure and Administration Regulations to make the election
under § 168(g)(7) of the Internal Revenue Code to use the alternative depreciation
system (ADS) for real and personal tangible depreciable property placed in service in
the taxable years ended Date 1 and Date 2.

FACTS

         Taxpayer represents that the facts are as follows:

      Taxpayer uses the accrual method of accounting and files tax returns on a
calendar year basis. Taxpayer’s business activity is electric power generation.
Taxpayer reported a net loss on its federal tax returns for the taxable years ended Date
PLR-100837-15                                2

1 and Date 2. Further, on the returns, Taxpayer determined its depreciation deductions
using the general depreciation system of §168(a) instead of the ADS.
        Taxpayer relied on A, a certified accounting firm, to prepare its federal income
tax returns for taxable years ended Date 1 and Date 2. In preparing the returns, A did
not inform Taxpayer that Taxpayer could elect to use the ADS to determine depreciation
for certain or all classes of property placed in service during the taxable years ended
Date 1 and Date 2. If the officers of Taxpayer had been aware of this election,
Taxpayer would have made the election to use the ADS for real and personal tangible
depreciable property placed in service during the taxable years ended Date 1 and
Date 2.

RULING REQUESTED

      Taxpayer requests an extension of time pursuant to § 301.9100-3 of the
Procedure and Administration Regulations to make the election under § 168(g)(7) to
use the ADS method of depreciation for real and personal tangible depreciable property
placed in service during the taxable years ended Date 1 and Date 2.

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 § 168(g).

       In the case of any property to which an election under § 168(g)(7) applies,
§ 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). For most personal property, the recovery period is the
property’s class life. Section 168(g)(3) provides special rules for determining class life.

       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.
PLR-100837-15                                 3

        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.

       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.

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. Accordingly,
Taxpayer is granted 60 calendar days from the date of this letter to make the election
under § 168(g)(7) to use the ADS for determining depreciation for all real and personal
tangible depreciable property placed in service by Taxpayer during the taxable years
ended Date 1 and Date 2. This election must be made by Taxpayer filing an amended
federal income tax return for the taxable years ended Date 1 and Date 2 in a manner
that is consistent with the ADS election, with a statement indicating that Taxpayer is
electing to use the ADS under § 168(g)(7) for all real and personal tangible depreciable
property placed in service during the taxable year.

       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 the items of real and personal tangible depreciable
property placed in service by Taxpayer in the taxable years ended Date 1 and Date 2
are properly classified under § 168(e). Further, no opinion is expressed or implied on
whether the items of depreciable property Taxpayer placed in service in the taxable
PLR-100837-15                                 4

years ended Date 1 and Date 2 are required to use the ADS pursuant to § 168(g)(1)(A)
through (D).

        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 are also sending a copy
of this letter to the appropriate Industry Director, Large Business & International Division
(LB&I).

      This ruling 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.


                                       Sincerely,

                                       WILLIE E. ARMSTRONG, JR.

                                       WILLIE E. ARMSTRONG, JR.
                                       Senior Technician Reviewer, Branch 7
                                       Office of Associate Chief Counsel
                                       (Income Tax & Accounting)

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