Taxpayer may revoke bonus depreciation opt-out for open years

Plain-English summary

A consolidated corporate group elected out of additional first-year depreciation for several years after receiving incorrect internal advice that its fixed-asset system could not handle the deduction. An outside tax professional later determined that the system could accommodate the necessary changes. The IRS consented to revocation for years whose assessment periods remained open and gave the group 60 days to file amended consolidated returns. Those returns must reflect the depreciation change and collateral tax adjustments, and affected later years must also be corrected. The ruling did not determine whether any property actually qualified for the additional deduction.

Ruling snapshot

• Question: May the taxpayer revoke its election not to claim additional first-year depreciation for still-open tax years?
• Outcome: Approved, with 60 days to file amended returns and make all related adjustments
• Key authorities: IRC §§ 168(k) and 6501(a); Treas. Reg. § 1.168(k)-1(e)(7)(i)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201603009 Third Party Communication: None
Release Date: 1/15/2016 Date of Communication: Not Applicable
Index Number: 168.36-00
Person To Contact:
------------------------, ID No. ------------------
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Telephone Number:
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------------------------------------------------------------ Refer Reply To:
----------------- CC:ITA:7
---------------------- PLR-112604-15
-------------------------- Date:
---------------------------------- October 05, 2015

Re: Request to revoke the election not to deduct the additional first year depreciation

Legend

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PLR-112604-15 2

Date1 = ---------------------------
Date2 = ---------------------------
Date3 = ---------------------------
Date4 = ---------------------------
Date5 = ---------------------------
Date6 = --------------------

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

   This letter ruling responds to a letter dated April 8, 2015, and supplemental

correspondence, submitted by P on behalf of itself and S1, S2, S3, S4, S5, S6, and S7
(hereinafter P, S1, S2, S3, S4, S5, S6, and S7 will be collectively referred to as
Taxpayer), requesting the consent of the Commissioner of Internal Revenue to revoke
Taxpayer's election not to deduct the additional first year depreciation provided by
§ 168(k) of the Internal Revenue Code for all classes of qualified property placed in
service by Taxpayer during the taxable years for which the period of limitation on
assessment under § 6501(a) has not expired (“open taxable years”).

    FACTS

    Taxpayer represents that the facts are as follows:

 Taxpayer files a consolidated federal income tax return on a calendar year basis.

Taxpayer’s overall method of accounting is the accrual method.

    Taxpayer is in the business of A. Taxpayer placed in service qualified property

(as defined in § 168(k)(2)) during the taxable years ending Date1 (the Year1 taxable
year), through Date4 (the Year2 taxable year).

    P prepared Taxpayer’s consolidated federal income tax returns for the Year1

through Year2 taxable years. On its timely filed consolidated federal income tax returns
for the Year1 through Year2 taxable years, Taxpayer made the election under
§ 168(k)(2)(D)(iii) not to claim the 50-percent and 100-percent additional first year
depreciation deduction for all classes of qualified property placed in service during those
taxable years. Taxpayer made this election based on the erroneous advice of a
member of P’s Tax Department.

    This person incorrectly determined that Taxpayer’s fixed asset system could not

accommodate the changes necessary to implement the additional first year depreciation
deduction for the Year1 taxable year and concluded that Taxpayer should make the
election not to deduct the additional first year depreciation for all classes of qualified
property. For the taxable years after the Year1 taxable year through the Year2 taxable
year, this initial decision was continued without a detailed review. Subsequently, a
qualified professional outside tax preparer reviewed Taxpayer’s fixed asset system and
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determined that it could accommodate the changes necessary to implement the
additional first year depreciation deduction. Except for routine system updates and
patches, Taxpayer’s fixed asset system did not change in any significant way during the
years at issue.

   The period of limitation on assessment under § 6501(a) is extended for the

taxable years ending Date3, through Date4, until Date5. The period of limitation on
assessment under § 6501(a) expired for the taxable years ending Date1, and Date2, on
Date6, which is before the date of this letter.

  Taxpayer did not make the election under § 168(k)(4) to accelerate alternative

minimum tax credits and research credits in lieu of the additional first year depreciation
deduction.

   RULING REQUESTED

   Consequently, Taxpayer requests to revoke the election not to deduct any

additional first year depreciation provided by § 168(k) for all classes of qualified property
placed in service by Taxpayer during the taxable years ending Date1, through Date4,
that are open taxable years.

   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.
PLR-112604-15 4

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)(7)(i) provides that an election not to deduct the additional

first year depreciation for a class of property that is qualified property, once made, may
be revoked only with the written consent of the Commissioner of Internal Revenue. To
seek the Commissioner's consent, the taxpayer must submit a request for a letter ruling.

   CONCLUSIONS

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

revocation of Taxpayer's election not to deduct any additional first year depreciation
under § 168(k)(1) and (k)(5) for all classes of qualified property placed in service by
Taxpayer in the taxable years ending Date1, through Date4, that are open taxable years
as of the date provided in the next sentence, is permitted under § 1.168(k)-1(e)(7)(i).
Accordingly, Taxpayer is granted 60 calendar days from the date of this letter to revoke
its election not to deduct the additional first year depreciation for all classes of qualified
property placed in service by Taxpayer in the taxable years ending on Date1, through
Date2, that are open taxable years as of the date provided in this sentence. The
revocation must be made by filing amended consolidated federal income tax returns for
such taxable years. These amended returns must include:

   (i) the adjustment to taxable income attributable to the revocation of the election

not to deduct the additional first year depreciation deduction for all classes of qualified
property and any collateral adjustments to taxable income or to tax liability (for example,
adjust the amount of the “regular” depreciation deduction allowable for the qualified
property; adjust the amount and character of gain or loss recognized on any disposition
of qualified property placed in service during the taxable years at issue); and

  (ii) a written statement revoking the election not to deduct the additional first year

depreciation for all classes of qualified property placed in service during that taxable
year.

Further, such collateral adjustments also must be made on amended consolidated
federal income tax returns or informal claims, as applicable, for any affected succeeding
taxable year. In addition, a copy of this letter ruling must be attached to these amended
returns or informal claims, as applicable. A copy is enclosed for that purpose.

   Except as specifically ruled upon above, no opinion is expressed or implied

concerning the 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
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Taxpayer in the taxable years ended Date 1, through Date 4, is eligible for the 50-
percent or 100-percent additional first year depreciation deduction under § 168(k).

  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 Industry Director, Large Business & International Division (LB&I).

  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,

                                              Kathleen Reed

                                              Kathleen Reed
                                              Chief, Branch 7
                                              Office of Associate Chief Counsel
                                              (Income Tax and Accounting)

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