Taxpayer receives 60 days to elect out of bonus depreciation

Plain-English summary

A corporate group calculated stock basis before its termination and contributed cash to eliminate an excess loss account in a subsidiary's stock. When preparing the consolidated return, the tax department claimed bonus depreciation on the subsidiary's five-year and seven-year property without considering the resulting reduction in stock basis. The subsidiary therefore missed the election not to claim additional first-year depreciation under section 168(k). The IRS found that the regulatory relief requirements were met and allowed 60 days to make the election through an amended consolidated return. The ruling did not determine whether any property actually qualified for bonus depreciation.

Ruling snapshot

• Question: Could the taxpayer receive additional time to elect out of bonus depreciation for its five-year and seven-year qualified property?
• Outcome: approved
• Key authorities: IRC § 168(k); Treas. Reg. §§ 1.168(k)-1(e), 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                   Department of the Treasury
                                                           Washington, DC 20224

Number: 201736003                                          Third Party Communication: None
Release Date: 9/8/2017                                     Date of Communication: Not Applicable
Index Number: 9100.04-00
                                                           Person To Contact:
-------------------------------------------                ------------------------, ID No. ------------------
-------------------------------------------------          ----------------------------------------------------
--------------------------                                 Telephone Number:
----------------------------------                         ----------------------
Re: Request for Extension of Time to Make                  Refer Reply To:
the Election Not to Deduct the Additional First            CC:ITA:7
Year Depreciation                                          PLR-102627-17
                                                           Date:
                                                           June 05, 2017



P             = ------------------------------------------------------------------------------------------------
                -----------
                ---------------------------
Taxpayer      = -------------------------------------------------------------
                -------------------------
Year1         = -------
Date1         = ----------------------
Date2         = ------------------
A             = ----------------------------------------
                ---------------------------
B             = -------------------
C             = ---------------------------------------------------------------------------------

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

       This letter responds to a letter dated December 17, 2016, and supplemental
correspondence, submitted by P on behalf of 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
deduction under § 168(k)(1) of the Internal Revenue Code for certain qualified property
placed in service by Taxpayer during the taxable year ended Date1 (the Year1 taxable
year).

       All references in this letter to § 168(k) are treated as a reference to § 168(k) as in
effect prior to amendment by § 143(b) 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).

PLR-102627-17                                2

                                          FACTS

       P represents that the facts are as follows:

       In the taxable year ended Date1, P was a general limited partnership that elected
to be a domestic corporation and was the common parent of an affiliated group of
corporations that included Taxpayer and A (the “B”). A is the direct parent of Taxpayer.
P was converted into a single-member limited liability company as of Date2 (the day
after Date1), resulting in the liquidation of P and the termination of the B.

        To ensure that the termination of the B would not cause the inclusion of income
or gain as a result of any excess loss accounts, members of P’s tax department
calculated the stock basis of each member of the B, including Taxpayer, in the month
before the end of the Year1 taxable year. This calculation was based on the best
available information at that time, including an estimated computation of federal taxable
income for the Year1 taxable year. This estimated federal taxable income computation
did not include any additional first year depreciation deduction for qualified property
placed in service during the Year1 taxable year. The calculation of stock basis showed
that A’s basis in Taxpayer’s stock was negative. As a result of this analysis and before
the end of the Year1 taxable year, Taxpayer was equity capitalized with additional cash
to entirely eliminate A’s excess loss account in Taxpayer’s stock.

       During the Year1 taxable year, Taxpayer was engaged in C, and placed in
service 5-year and 7-year property that is qualified property (as defined in § 168(k)(2)).

       P timely filed its consolidated federal income tax return for the Year1 taxable
year. On that return, Taxpayer deducted the additional first year depreciation for 5-year
and 7-year property that is qualified property placed in service during the Year1 taxable
year. The members of P’s tax department who prepared and reviewed the consolidated
federal income tax return for the Year1 taxable year failed to consider the detrimental
effect of this deduction on A’s basis in Taxpayer’s stock and, as a result, Taxpayer did
not make the election not to deduct the additional first year deprecation for 5-year and
7-year property that is qualified property placed in service by Taxpayer in the Year1
taxable year.

                                 RULING REQUESTED

        Taxpayer requests an extension of time pursuant to § 301.9100-3 to make the
election not to deduct the additional first year depreciation deduction under § 168(k)(1)
for all 5-year and 7-year property that is qualified property placed in service by Taxpayer
during the Year1 taxable year.

PLR-102627-17                                 3

                                   LAW AND ANALYSIS

       Section 168(k)(1) allows, in the taxable year that qualified property is placed in
service, a 50-percent additional first year depreciation deduction for qualified property
(i) acquired by a taxpayer after December 31, 2007, and before September 9, 2010, or
after December 31, 2011 (or December 31, 2012, for qualified property described in
§§ 168(k)(2)(B) or 168(k)(2)(C)) and before January 1, 2016, 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 168(k)(2)(C)) and before
January 1, 2016 (or January 1, 2017, for qualified property described in §§ 168(k)(2)(B)
or 168(k)(2)(C)).

        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).

       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 Year1
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
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 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.

PLR-102627-17                                 4

        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
not to deduct the additional first year depreciation under § 168(k)(1) for all 5-year and 7-
year property placed in service by Taxpayer during the taxable year ended Date1, that
qualify for the additional first year depreciation deduction. This election must be made
by P filing an amended consolidated federal income tax return for such taxable year,
with a statement indicating that Taxpayer is electing not to deduct the additional first
year depreciation for all 5-year and 7-year property placed in service during that taxable
year.

       Except as specifically set forth above, we express no opinion concerning the
federal 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 Taxpayer
during the taxable year ended Date1, is eligible for the additional first year depreciation
deduction.

      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.

       We are 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)