Partnership may make late election out of bonus depreciation

Plain-English summary

A partnership claimed additional first-year depreciation on qualified property even though its transaction documents and financial projections reflected an intent not to claim it. The return preparer had not reviewed those agreements before filing the partnership return and discovered the mismatch later. The IRS found that the partnership met the standards for discretionary relief and granted 60 days to file an amended Form 1065 electing out of additional first-year depreciation for all qualifying property classes placed in service that year. The ruling did not decide whether any particular property qualified for the deduction.

Ruling snapshot

• Question: May the partnership make a late election not to deduct additional first-year depreciation for its qualifying property classes?
• Outcome: Approved
• Key authorities: IRC § 168(k)(2)(D)(iii); Treas. Reg. §§ 1.168(k)-1(e), 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201552004 Third Party Communication: None
Release Date: 12/24/2015 Date of Communication: Not Applicable
Index Number: 9100.04-00
Person To Contact:
----------------------------------------------------- --------------------------------, ID No. ----------
------------------------------- ------------------
------------------------------------- Telephone Number:
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Refer Reply To:
CC:ITA:B07
PLR-110841-15
Date:
September 22, 2015

Re: Request for Extension of Time to Make the Election Not to Deduct the Additional
First Year Depreciation

Legend

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

Owner 1 = ------------------------------------------------------------------

Owner 2 = ---------------------------------------------------------------

New Owner = --------------------------------------------------------

Company 1 = ------------------------------------------

Company 2 = --------------------------------------------------------

Company 3 = -------------------------------------------------------------------

Company 4 = ----------------------------------------------------------

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

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

Date 3 = ---------------------------

Date 4 = ---------------------------

A = -------

B = ---------------------------------------------------------------------------------------
PLR-110841-15 2

C = ----------------

D = --------------

E = --

F = --------------

G = -------------------------------------------------------------------

H = ------------------------------------------------------------------------------------------------------

I = ----------------------------------------------------------------------

J = --------------------------------------

K = ------------------------

L = --------------

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

   This letter ruling responds to a letter dated March 26, 2015, submitted by

Taxpayer requesting an extension of time pursuant to §§ 301.9100-1 and 301.9100-3 of
the Procedure and Administration Regulations to make the election not to deduct the
additional first year depreciation under § 168(k) of the Internal Revenue Code for all
classes of qualified property placed in service by Taxpayer during the taxable year
ended Date 1 (the A taxable year).

FACTS

     Taxpayer represents that the facts are as follows:

   Taxpayer is a limited liability company. Taxpayer is in the business of B. For

federal income tax purposes, Taxpayer is treated as a partnership and, for the relevant
period, Owner 1 and Owner 2 are treated as its partners. On Date 2, New Owner, a
limited liability company that is treated as a partnership for federal income tax purposes,
acquired all of the outstanding member interests of Taxpayer. Taxpayer uses the
accrual method of accounting for federal income tax purposes and in maintaining its
books and records and has a C year end.
PLR-110841-15 3

     Owner 1 is a limited liability company that is treated as a partnership for federal

income tax purposes. Owner 2 and Company 1 are treated as its partners. Owner 2 is
a corporation that is a member of an affiliated group headed by Company 3. This
affiliated group has elected to join in the filing of consolidated federal income tax
returns. Company 4 is a foreign corporation that, directly and indirectly through its
foreign affiliates, owns 100 percent of Company 3.

   Company 2 is a limited liability company. Company 2 is wholly owned by Owner

2 and is an entity that is disregarded as separate from its owner for federal income tax
purposes.

    Taxpayer timely filed its federal tax return on Form 1065, U.S. Return of

Partnership Income, for its taxable year ended Date 1, on Date 3 (“Taxpayer’s A
Return”). During it’s A taxable year, Taxpayer placed in service qualified property (as
defined in § 168(k)(2)) with a total cost of $D, all of which was E-year property (the
“Taxpayer Projects Property”). On Taxpayer’s A Return, Taxpayer claimed additional
first year depreciation with respect to such property of $F.

   Owner 1 has leased all of the Taxpayer Projects Property since it was placed in

service by Taxpayer pursuant to the G dated Date 4 (the “Master Lease”). In addition to
the Master Lease, Taxpayer is a party to the H dated Date 4 (the “Owner Operating
Agreement”), and Owner 1 is a party to the I dated Date 4 (the “Tenant Operating
Agreement”).

   Schedule E to the Tenant Operating Agreement, entitled “J” (the “Projections”)

are financial projections relating to the Taxpayer Projects Property and show that
Taxpayer is not to claim additional first year depreciation with respect to the property
placed in service during it’s A taxable year. The Projections reflect the intent of the
partners of Taxpayer (Owner 1 and Owner 2) that additional first year depreciation not
be claimed with respect to property placed in service by Taxpayer during it’s A taxable
year. This intent is evidenced by Article 4.01(b)(xix) of the Owner Operating
Agreement, in which Company 2 represents that the Projections have been prepared in
good faith, and were based upon all material matters actually known to Company 2 and
assumptions believed to be reasonable at the time of such preparation.

   Taxpayer’s A Return was prepared by K. K is a L tax practitioner and the Vice

President of Taxation for Company 4. Neither K nor any other member of Company 4’s
tax department was involved in negotiating or preparing the Owner Operating
Agreement or the Tenant Operating Agreement, including any schedules attached
thereto. In addition, neither K nor any other member of Company 4’s tax department
reviewed these agreements and attached schedules prior to the preparation of the
Taxpayer’s A Return.
PLR-110841-15 4

  Subsequent to the filing of Taxpayer’s A Return, K received and reviewed

Schedule E to the Tenant Operating Agreement and determined that such return should
have been prepared with no additional first year depreciation claimed and with the
appropriate election to not claim additional first year depreciation attached.

  Prior to the acquisition of Owner’s 1 and Owner’s 2 member interests in

Taxpayer by New Owner, Taxpayer did not dispose of any qualified property for which
they had claimed additional first year depreciation on its Form 1065 for the A taxable
year.

RULING REQUESTED

    Taxpayer requests an extension of time pursuant to §§ 301.9100-1 and

301.9100-3 to make the election under § 168(k)(2)(D)(iii) not to deduct the additional
first year depreciation under § 168(k) for all classes of property placed in service during
the A taxable year that qualify for the additional first year depreciation deduction.

LAW AND ANALYSIS

   Section 168(k)(1) provides a 50-percent additional first year depreciation

deduction for the placed-in-service year for qualified property (i) acquired by a taxpayer
after December 31, 2007, and before September 9, 2010, or acquired by a taxpayer
generally after December 31, 2011, and before January 1, 2015, and (ii) placed in
service by the taxpayer before September 9, 2010, or after December 31, 2011 (or
December 31, 2012, for qualified property described in § 168(k)(2)(B) or (C)), and
before January 1, 2015 (or January 1, 2016, for qualified property described in §
168(k)(2)(B) or (C)).

   Section 168(k)(5) provides a 100-percent additional first year depreciation

deduction for the placed-in-service year for qualified property acquired by a taxpayer
after September 8, 2010, and generally before January 1, 2012, and placed in service
by the taxpayer after September 8, 2010, and before January 1, 2012 (or January 1,
2013, for qualified property described in § 168(k)(2)(B) or (C)). See section 3 of Rev.
Proc. 2011-26, 2011-16 I.R.B. 664, 665.

    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. The term “class of property” is defined in § 1.168(k)-1(e)(2) of the Income
Tax Regulations as meaning, in general, each class of property described in § 168(e)
(for example, 5-year property). 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).
PLR-110841-15 5

   Section 1.168(k)-1(e)(1) provides that the election not to deduct additional first

year depreciation for a class of property applies to all qualified property 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 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.

   Section 1.168(k)-1(e)(3)(ii) provides that the election not to deduct 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 A taxable
year 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.

CONCLUSION

   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
not to deduct the additional first year depreciation under § 168(k) for all classes of
property placed in service during the A taxable year that qualify for the additional first
year depreciation deduction. This election must be made by Taxpayer filing an
amended Form 1065 for the A taxable year, with a statement indicating that Taxpayer is
electing not to deduct the additional first year depreciation for all classes of property
placed in service during that taxable year.
PLR-110841-15 6

   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
during the A taxable year is eligible for the additional first year depreciation deduction.

  In accordance with the power of attorney, 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 LB&I Director.

  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.

                                             Sincerely yours,

                                             KATHLEEN REED

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

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