Affiliated entities received more time to elect alternative depreciation

Plain-English summary

An individual owned several pass-through entities that used the general depreciation system for property placed in service during a redacted tax year. Using the alternative depreciation system instead could have reduced the depreciation passed through to the owner and preserved more of the owner's alimony deduction. Neither the entities' in-house preparers nor the owner's return preparer had advised the owner about making that election. The IRS found that the regulatory requirements for late-election relief were satisfied. It gave the entities 60 days to file amended returns and elect the alternative depreciation system for all covered property placed in service during that year.

Ruling snapshot

• Question: Could the affiliated entities receive an extension to elect the alternative depreciation system under Section 168(g)(7)?
• Outcome: Approved, with 60 days to make the election on amended returns.
• Key authorities: IRC §§ 167, 168(g), and 172(d)(4); Treas. Reg. §§ 301.9100-1, 301.9100-3, and 301.9100-7T.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201818011
Third Party Communication: None
Release Date: 5/4/2018
Date of Communication: Not Applicable
Index Number: 9100.04-00
Person To Contact:
------------------------------------------------------------ --------------------------------, ID No. ----------
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---------------------------------------------- Telephone Number:
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Refer Reply To:
CC:ITA:B07
PLR-133859-17
Date:
February 01, 2018

Re: Request for Extension of Time to Make the Election to Use the Alternative Depreciation System

Legend

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

P1 = --------------------------------------------------------------------------

P2 = -----------------------------------------------------

P3 = -------------------------------------------------

P4 = ---------------------------------------------------

P5 = --------------------------------------------------------------

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

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

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

A = -------

B = ---------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------

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

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

E = ----------------------

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

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

This letter responds to a letter dated August 4, 2017, and subsequent correspondence, submitted by Taxpayer on behalf of his wholly owned pass-through entities P1, P2, P3, P4, and P5 (hereinafter collectively referred to as “the affiliated entities”), 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”) under § 168(g) for all property placed in service by the affiliated entities during the taxable year ended Date 1 (the A taxable year).

FACTS

Taxpayer represents that the facts are as follows:

Taxpayer is an individual who files Form 1040, U.S. Individual Income Tax Return, on a calendar year basis. Taxpayer wholly owns the affiliated entities. The affiliated entities each file either a Form 1065, U.S. Income Tax Return for a Partnership or Form 1120S, U.S. Income Tax Return for an S Corporation, as applicable, on a calendar year basis and use an accrual method of accounting. The affiliated entities are in the trade or business of B. The period of limitation on assessment under § 6501(a) for the A taxable year has not expired as of the date of this letter.

The affiliated entities depreciated all property placed in service in A using MACRS and the general depreciation system (“GDS”) depreciation methods, recovery periods, and conventions in accordance with § 168 and Rev. Proc. 87-56, 1987-2 C.B. 674. The affiliated entities reported income to their shareholder/partner, Taxpayer, on Schedule K-1 (1120S/1065), Shareholder’s/Partner’s Share of Income, Deductions, Credits, etc., taking into account the aforementioned depreciation deductions, and Taxpayer claimed the depreciation deductions on his A Form 1040.

Taxpayer paid $C of alimony during A and deducted the alimony payments on his A Form 1040. Taxpayer reported a net loss on the return and was precluded from carrying back or carrying over the net loss as a net operating loss (NOL) to the extent the net loss was attributable to the alimony deduction under § 172(d)(4) and § 1.172- 3(a)(3) of the Income Tax Regulations (allowing nonbusiness deductions in the

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computation of NOLs only to the extent of nonbusiness income for taxpayers other than corporations).

Taxpayer could have preserved the benefit of the deduction for alimony on his A return if the affiliated entities had minimized the depreciation deductions flowing through to Taxpayer and eliminated his net loss. Specifically, the affiliated entities could have elected to depreciate all property placed in service in A using ADS depreciation methods, recovery periods, and conventions in accordance with § 168(g) on all property placed in service in A, instead of GDS.

The Forms 1065 and Forms 1120S of the affiliated entities are prepared in-house by employees of the affiliated entities. The CFO of the affiliated entities is responsible for the preparation of the returns, and the affiliated entities employ a full time staff, including one or more Certified Public Accountants (“CPAs”), to prepare the federal income tax returns and ensure compliance with all tax rules. Taxpayer generally engages a third party tax professional to prepare his Form 1040. Taxpayer engaged D to prepare his A Form 1040.

Taxpayer was not advised by the affiliated entities’ in-house tax preparers or D, and Taxpayer did not know independently, that Taxpayer could preserve the benefit of the deduction for alimony on the A return by having the affiliated entities make the ADS election for all property placed in service by the affiliated entities during the A taxable year.

Taxpayer’s A Form 1040 was timely filed on Date 2, and the affiliated entities’ Forms 1065 and Form 1120S were timely filed prior to Date 3.

Taxpayer discovered the failure to make the ADS election in E after consulting with D about his A Form 1040. Taxpayer consulted with F regarding potential remedies for the failure to make the ADS election, and F advised Taxpayer to file this request for relief under Treas. Reg. § 301.9100-3.

RULING REQUESTED

Taxpayer requests an extension of time pursuant to §§ 301.9100-1 and 301.9100-3 to make the election under § 168(g)(7) to use the ADS method of depreciation for property placed in service in the taxable year ended Date 1.

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.

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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 GDS in § 168(a) and the other method is the ADS.

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) or under the special rules provided in § 168(g)(3).

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.

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 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.

CONCLUSION

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

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requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied. Accordingly, the affiliated entities are granted 60 calendar days from the date of this letter to make the
§ 168(g)(7) election to use ADS under § 168(g) for all property placed in service by the affiliated entities during the taxable year ended Date 1. This election must be made by the affiliated entities filing either an amended Form 1065, U.S. Income Tax Return for a Partnership or Form 1120S, U.S. Income Tax Return for an S Corporation, as applicable, for the A taxable year, with a statement indicating that the affiliated entities are electing to make the election under § 168(g)(7) to use the ADS method of depreciation for all property placed in service during that 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 any item of depreciable property placed in service by the affiliated entities during the A taxable year is required to use the ADS pursuant to § 168(g)(1)(A) through (D).

The rulings contained in this letter are based upon information and representations submitted by the affiliated entities 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 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.

In accordance with the power of attorney, we are sending a copy of this letter ruling to the affiliated entities' authorized representative. We also are sending a copy of this letter ruling to the appropriate operating division director.

Sincerely yours,

DEENA DEVEREUX

DEENA DEVEREUX
Senior Technician Reviewer, Branch 7
Office of Associate Chief Counsel
(Income Tax & Accounting)

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