Company may reverse elections made instead of bonus depreciation

Plain-English summary

A consolidated corporate group had elected under former section 168(k)(4) to forgo bonus depreciation and instead increase specified credit limitations. A later adviser determined that the former tax director's analysis was incomplete and that claiming bonus depreciation would have been economically preferable based on facts known when the returns were filed. The IRS found the regulatory-relief standards satisfied for the second extension round and allowed the group to elect out of section 168(k)(4) for that property. It also consented to revocation of the election for the third extension round. The group received 60 days to amend the affected consolidated returns, make tax and depreciation adjustments, notify relevant partnerships, and attach the ruling.

Ruling snapshot

• Question: Could the corporate group belatedly opt out of section 168(k)(4) for round 2 property and revoke its election for round 3 property?
• Outcome: approved, with 60 days to amend returns and make required notifications
• Key authorities: IRC § 168(k)(4); Treas. Reg. § 301.9100-3; Rev. Procs. 2008-65 and 2009-16

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201709007 Third Party Communication: None
Release Date: 3/3/2017 Date of Communication: Not Applicable
Index Number: 168.36-00, 9100.04-00
Person To Contact:
------------------------ --------------------------------, ID No. ----------
---------------------------------- ------------------
------------------------------- Telephone Number:
--------------------------------------------------------- ----------------------
---------------------------------------------- Refer Reply To:
CC:ITA:B07
PLR-118536-16
Date:
December 05, 2016

Re: Request for an Extension of Time to Make the Election Not to Apply § 168(k)(4) to
Round 2 Extension Property and Request to Revoke Election to Apply § 168(k)(4) to
Round 3 Extension Property

Legend

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

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

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

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

A = -------

B = -------

C = --------

D = -------

E = -------

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

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

I = -------
PLR-118536-16 2

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

    This letter responds to a letter dated June 9, 2016, and supplemental

correspondence, requesting (i) an extension of time pursuant to § 301.9100-3 of the
Procedure and Administration Regulations to make the election under § 168(k)(4)(I)(ii)
of the Internal Revenue Code not to apply § 168(k)(4) to round 2 extension property,
and (ii) to revoke the election under § 168(k)(4)(J)(iii) to apply § 168(k)(4) to round 3
extension property.

   All references in this letter ruling to § 168(k) are treated as a reference to §

168(k) as in effect on the day before the date of the enactment of the Protecting
Americans from Tax Hikes Act of 2015 (PATH Act), enacted as part of the Consolidated
Appropriations Act, 2016, Division Q, Pub. L. 114-113, 129 Stat. 2242 (December 18,
2015).

FACTS

    Taxpayer represents that the facts are as follows:

   Taxpayer is the common parent of an affiliated group of corporations as defined

under § 1504. The affiliated group of corporations files a consolidated federal income
tax return on a calendar-year basis.

    Taxpayer made the election to apply § 168(k)(4) (the § 168(k)(4) election) on its

timely filed consolidated federal income tax return for its first taxable year ending after
March 31, 2008, which is the taxable year ended Date 1 (the A taxable year). On its
timely filed consolidated federal income tax returns for the subsequent taxable years
through the D taxable year, Taxpayer applied the § 168(k)(4) election to eligible
qualified property, extension property, round 2 extension property, and round 3
extension property. Round 2 extension property was placed in service during the B and
C taxable years, and round 3 extension property was placed in service during the D
taxable year.

   Taxpayer’s former Director of Tax (the “former Tax Director”) was responsible for

the preparation of the A through D returns, including preparing the analyses associated
with the application of § 168(k)(4). No outside tax professional was engaged by
Taxpayer for the preparation of its A through D returns. The former Tax Director
departed Taxpayer in F.

   After such departure, Taxpayer engaged G to provide tax advice and assistance

with the IRS examination of the consolidated federal income tax returns for the E, B, C,
and D taxable years. In reviewing Taxpayer’s consolidated federal income tax returns
with respect to § 168(k)(4), G, if it had been asked to provide advice with respect to §
168(k)(4), would have advised Taxpayer not to apply § 168(k)(4) for the B, C, and D
PLR-118536-16 3

taxable years. Instead, G would have advised Taxpayer to claim the additional first year
depreciation for those years.

   G informed Taxpayer that throughout the years Taxpayer applied § 168(k)(4), §

168(k)(4) would not have resulted in greater tax savings for Taxpayer in comparison to
deducting additional first year depreciation. Based upon facts known when each return
was timely filed, applying § 168(k)(4) was not an economically prudent decision for
Taxpayer for the B, C, and D taxable years. Further, no facts have occurred
subsequent to the due date of the consolidated federal income tax return for the B
taxable year that now makes it more advantageous for Taxpayer not to apply §
168(k)(4) to round 2 extension property and round 3 extension property.

    Because the former Tax Director was no longer employed by Taxpayer during

G’s analysis of § 168(k)(4), current employees of Taxpayer reviewed existing company
documentation and conducted discussions with members of the current and former
executive management concerning the decision to make the § 168(k)(4) election. As a
result, it was determined that the former Tax Director did an incomplete analysis
associated with the application of § 168(k)(4). If a complete analysis was presented to
the executive management team, they would have instructed the former Tax Director
not to make the § 168(k)(4) election.

    The period of limitation on assessment for Taxpayer’s E, B, and C taxable years

has been extended, by agreement under § 6501(c)(4), to Date 2, and the period of
limitation on assessment for Taxpayer’s D taxable year is open under § 6501(a) to Date

3. Both of these dates are after the date of this letter ruling.

RULINGS REQUESTED

    Taxpayer requests (i) an extension of time pursuant to § 301.9100-3 to make the

election under § 168(k)(4)(I)(ii) not to apply § 168(k)(4) to round 2 extension property,
and (ii) to revoke the election under § 168(k)(4)(J)(iii) to apply § 168(k)(4) to round 3
extension property.

LAW AND ANALYSIS

   Prior to amendment by the Tax Relief, Unemployment Insurance

Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, 124 Stat. 3296
(December 17, 2010) (TRUIRJCA), § 168(k)(4) allowed a corporation or an S
corporation to elect not to claim the additional first year depreciation deduction
allowable under § 168(k) for eligible qualified property or extension property and instead
increase the business credit limitation under § 38(c) and the alternative minimum tax
(AMT) credit limitation under § 53(c). As a result, a corporation or S corporation was
able to claim unused credits from taxable years beginning before January 1, 2006, that
were allocable to research expenditures or AMT liabilities, and accelerate such credits
as either refundable credits in the case of a C corporation or credits against the §
PLR-118536-16 4

1374(a) tax in the case of an S corporation. With the exception of revised dates, eligible
qualified property or extension property is property eligible for the additional first year
depreciation deduction under § 168(k).

   Section 401(c) of TRUIRJCA amended § 168(k)(4) by adding § 168(k)(4)(I) to the

Code. Section 168(k)(4)(I) applied to property placed in service generally after 2010
and before 2013 (round 2 extension property). Section 331(c) of the American
Taxpayer Relief Act of 2012, Pub. L. No. 112-240, 126 Stat. 2313 (January 2, 2013)
(ATRA), amended § 168(k)(4) by adding § 168(k)(4)(J) to the Code. Section
168(k)(4)(J) applied to property placed in service generally after 2012 and before 2014
(round 3 extension property). With the exception of revised dates, round 2 extension
property and round 3 extension property is property eligible for the additional first year
depreciation deduction under § 168(k). Pursuant to § 168(k)(4)(I)(i) and (J)(i),
§ 168(k)(4) increased only the AMT credit limitation under § 53(c) for round 2 extension
property and round 3 extension property. As a result, § 168(k)(4) allowed a C
corporation or an S corporation to elect not to claim the additional first year depreciation
deduction allowable under § 168(k) for round 2 extension property and round 3
extension property and instead increase the AMT credit limitation under § 53(c).
Accordingly, a C corporation or S corporation was able to claim unused credits from
taxable years beginning before January 1, 2006, that were allocable to AMT liabilities
and accelerate such credits as either refundable credits in the case of a C corporation
or credits against the § 1374(a) tax in the case of an S corporation.

     Under § 168(k)(4)(A), a § 168(k)(4) election applies to a corporation’s first

taxable year ending after March 31, 2008, and to any subsequent taxable year.
However, under § 168(k)(4)(I)(ii)(I), a corporation that made the § 168(k)(4) election for
its first taxable year ending after March 31, 2008, or that made the § 168(k)(4) election
under § 168(k)(4)(H)(ii) for extension property for its first taxable year ending after
December 31, 2008, may elect not to have the § 168(k)(4) election apply to round 2
extension property.

   If a corporation does not have an election in effect under § 168(k)(4) for round 2

extension property, § 168(k)(4)(J)(iii) allows the corporation to elect to apply § 168(k)(4)
to round 3 extension property.

   Section 168(k)(4)(G)(i) provides that any election under § 168(k)(4) (including

any allocation under § 168(k)(4)(E)) may be revoked only with the consent of the
Secretary. Pursuant to section 4.06 of Rev. Proc. 2008-65, 2008-2 C.B. 1082, the
election to apply § 168(k)(4), once made, may be revoked only with the written consent
of the Commissioner of Internal Revenue and, to seek the Commissioner’s consent, the
taxpayer must submit a request for a letter ruling.

  Section 168(k)(4)(C)(iv) provides that all corporations that are treated as a single

employer under § 52(a) (generally any controlled group of corporations within the
meaning of § 1563(a), determined by substituting “more than 50 percent” for “more than
PLR-118536-16 5

80 percent” each place it appears in § 1563(a)(1)) shall be treated as one taxpayer for
purposes of § 168(k)(4) and as having elected the application of § 168(k)(4) if any such
corporation so elects. Hereinafter, such group of corporations is referred to as a
“controlled group.” See section 2.05 of Rev. Proc. 2009-16, 2009-6 I.R.B. 449, 450.

   Section 3.05 of Rev. Proc. 2009-16 provides guidance regarding the election to

apply § 168(k)(4) by a controlled group. Section 3.05(2)(b) of Rev. Proc. 2009-16
provides that if all members of a controlled group are members of an affiliated group of
corporations that file a consolidated return (“a consolidated group”), the common parent
(within the meaning of § 1.1502-77(a)(1)(ii) of the Income Tax Regulations) of the
consolidated group makes the § 168(k)(4) election on behalf of all members of the
consolidated group. The common parent makes this election within the time and in the
manner provided in section 3.01, 3.02, 3.03, or 3.04 of Rev. Proc. 2009-16, as
applicable.

   Under § 301.9100-1, the Commissioner of Internal Revenue 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.

    In this case, Taxpayer is the common parent of an affiliated group of corporations

that timely filed a consolidated federal income tax return for the taxable year ended
Date 1. On that return, Taxpayer made the § 168(k)(4) election. Further, Taxpayer’s
consolidated group on Date 1, was not a member of any other controlled group on that
date. Thus, this election is binding on all members of Taxpayer’s consolidated group on
Date 1, and applies to Taxpayer’s consolidated group for the taxable year ended Date
1, and any subsequent taxable year. (But see section 3.05(2)(d) of Rev. Proc. 2009-16
for guidance regarding members entering or leaving a controlled group.) However, if we
grant Taxpayer an extension of time to make the election under § 168(k)(4)(I)(ii) not to
apply § 168(k)(4) to round 2 extension property, Taxpayer will no longer have a §
168(k)(4) election in effect for round 2 extension property and will have to make an
election under § 168(k)(4)(J)(iii) to apply §168(k)(4) to round 3 extension property. By
Taxpayer applying § 168(k)(4) to round 3 extension property, we conclude that
Taxpayer is treated as making the election under § 168(k)(4)(J)(iii) to apply §168(k)(4)
to round 3 extension property.
PLR-118536-16 6

CONCLUSIONS

  Based solely on the facts and representations submitted and the law and

analysis as set forth above, we conclude that:

     (1) The requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied with

respect to round 2 extension property. Accordingly, Taxpayer is granted 60 calendar
days from the date of this letter to make the election under § 168(k)(4)(I)(ii) not to apply
§ 168(k)(4) to round 2 extension property. This election must be made by Taxpayer: (i)
filing an amended consolidated federal income tax return for the B taxable year with a
written statement indicating that Taxpayer is making the election under § 168(k)(4)(I)(ii)
not to apply § 168(k)(4) to round 2 extension property; (ii) filing an amended
consolidated federal income tax return for the C taxable year; (iii) filing an amended
consolidated federal income tax return for the D taxable year if Taxpayer or any
member of Taxpayer’s consolidated group placed in service round 2 extension property
in the D taxable year; and (iv) providing written notification to any partnership in which
Taxpayer or any member of Taxpayer’s consolidated group is a partner that Taxpayer is
making the election under § 168(k)(4)(I)(ii) not to apply § 168(k)(4) to round 2 extension
property. The amended consolidated federal income tax returns for the B, C, and D
taxable years must include the adjustment to tax liability, the adjustment to taxable
income for the amount of depreciation allowed or allowable for that taxable year for
round 2 extension property, and any collateral adjustments to taxable income or tax
liability; and

     (2) A revocation of Taxpayer’s election under § 168(k)(4)(J)(iii) to apply §

168(k)(4) to round 3 extension property is permitted under § 168(k)(4)(G)(i).
Accordingly, Taxpayer is granted 60 calendar days from the date of this letter to revoke
the election under § 168(k)(4)(J)(iii) to apply § 168(k)(4) to round 3 extension property.
This revocation must be made by Taxpayer: (i) filing an amended consolidated federal
income tax return for the D taxable year with a written statement indicating that
Taxpayer is revoking the election under § 168(k)(4)(J)(iii) to apply § 168(k)(4) to round 3
extension property; (ii) filing an amended consolidated federal income tax return for the I
taxable year, which is the taxable year subsequent to the D taxable year, if Taxpayer or
any member of Taxpayer’s consolidated group placed in service round 3 extension
property in the I taxable year; and (iii) providing written notification to any partnership in
which Taxpayer or any member of Taxpayer’s consolidated group is a partner that
Taxpayer is revoking the election under § 168(k)(4)(J)(iii) to apply § 168(k)(4) to round 3
extension property. The amended consolidated federal income tax returns for the D
and I taxable years must include the adjustment to tax liability, the adjustment to taxable
income for the amount of depreciation allowed or allowable for that taxable year for
round 3 extension property, and any collateral adjustments to taxable income or tax
liability.
PLR-118536-16 7

    A copy of this letter ruling must be attached to any federal income tax return to

which it is relevant. A copy is enclosed for that purpose. Alternatively, a taxpayer filing
its federal income tax return electronically may satisfy this requirement by attaching a
statement to the return that provides the date and control number of the letter ruling.

   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 (i) any item of depreciable property placed in service
by Taxpayer or any member of Taxpayer’s consolidated group in the A through I taxable
years is eligible for the additional first year depreciation deduction provided by §
168(k)(1) or (5), (ii) any item of depreciable property placed in service by Taxpayer or
any member of Taxpayer’s consolidated group in the A through I taxable years is, under
§ 168(k)(4), eligible qualified property, extension property, round 2 extension property,
or round 3 extension property, as applicable, or (iii) Taxpayer properly determined the
bonus depreciation amount under § 168(k)(4) for the A through I taxable years.

  The rulings contained in this letter are based upon information and

representations submitted by Taxpayer and accompanied by a penalty of perjury
statement executed by an appropriate party. While this office has not verified any of the
material submitted in support of the request for rulings, it is subject to verification on
examination.

  This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3)

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

  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.

                                              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