Late relief to elect out of bonus depreciation on rehabbed leasehold improvements

Plain-English summary

Two partnerships that buy, rehabilitate, and lease real estate placed qualified leasehold improvement property in service and claimed the § 47 rehabilitation credit on it. When you claim that credit, you generally do not also want the "additional first year" (bonus) depreciation deduction, so the partnerships intended to elect out of bonus depreciation under § 168(k)(2)(D)(iii). Their return preparer bungled it: instead of the election out of bonus depreciation, the returns attached the wrong statement, an election under § 168(f)(1) to opt the property out of the depreciation system entirely. The partnerships asked the IRS for extra time to make the correct election. Under Treas. Reg. § 301.9100-3, the IRS can grant a late regulatory election where the taxpayer acted reasonably and in good faith and the government is not prejudiced. Finding those conditions met, the IRS granted 60 days from the date of the letter to file the proper election out of bonus depreciation. The IRS expressed no view on whether the property actually qualified for either the bonus depreciation or the rehabilitation credit. Taxpayers whose preparer attached the wrong depreciation election would care: this is the standard fix.

Ruling snapshot

• Question: May the partnerships get a late extension under § 301.9100-3 to make the § 168(k)(2)(D)(iii) election not to deduct bonus depreciation, after their preparer filed the wrong election?
• Outcome: approved (60-day extension granted)
• Key authorities: IRC § 168(k)(1), (k)(2)(D)(iii); Treas. Reg. § 1.168(k)-1(e); Treas. Reg. §§ 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                     Department of the Treasury
                                                             Washington, DC 20224

Number: 201838001                                            Third Party Communication: None
Release Date: 9/21/2018                                      Date of Communication: Not Applicable
Index Number: 9100.04-00
                                                             Person To Contact:
[redacted]                                         [redacted], ID No. [redacted]
[redacted]                     [redacted]
[redacted]         Telephone Number:
[redacted]           [redacted]
[redacted]                            Refer Reply To:
[redacted]                                 CC:ITA:7
                                                             PLR-102757-18
                                                             Date:
                                                             June 22, 2018




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

Legend

TP1                                    = [redacted]
                                         [redacted]
TP2                                    = [redacted]
                                         [redacted]
Year1                                  = [redacted]
Date1                                  = [redacted]
Firm                                   = [redacted]
$a                                     = [redacted]


Dear [redacted]:

       This letter ruling responds to a letter dated December 29, 2017, and
supplemental correspondence, submitted by TP1 and TP2, requesting an extension of
time to make the election under § 168(k)(2)(D)(iii) of the Internal Revenue Code not to
deduct the additional first year depreciation under § 168(k)(1) for certain qualified
property placed in service by TP1 and TP2 during the taxable year ended Date1 (the
"Year1 taxable year"). This request is made pursuant to §§ 301.9100-1 and 301.9100-3
of the Procedure and Administration Regulations.

       All references in this letter ruling 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 Division Q of the Consolidated
Appropriations Act, 2016, Pub. L. No. 114-113, 129 Stat. 2242 (Dec. 18, 2015).

                                           FACTS

       TP1 and TP2 represent that the facts are as follows:

      TP1 and TP2 are partnerships for federal income tax purposes. TP1 and TP2
acquire real property to rehabilitate and lease primarily as office, retail, and residential
space. TP1 and TP2 file their federal tax returns on a calendar year basis.

       During the Year1 taxable year, TP1 and TP2 placed in service several items of
real and personal property that are qualified property (as defined in § 168(k)(2) before
the application of § 168(k)(2)(D)(iii)). Such property included qualified leasehold
improvement property (as defined in § 168(e)(6)).

       Firm was engaged to prepare TP1's and TP2's federal tax returns for the Year1
taxable year. For such returns, TP1 and TP2 advised Firm that the additional first year
depreciation deduction is not to be claimed for property for which a rehabilitation credit
under § 47 was being claimed and that the election not to deduct the additional first year
depreciation is to be made for such property. TP1 and TP2 claimed rehabilitation
credits for their qualified leasehold improvement property placed in service during the
Year1 taxable year.

       TP1 and TP2 timely filed their federal tax returns for the taxable year ending
Date1. On such returns, TP1 and TP2 did not deduct the additional first year
depreciation for any qualified leasehold improvement property placed in service during
that taxable year, but did deduct depreciation for such property under the general
depreciation system of § 168(a) by using the straight-line method of depreciation, a 15-
year recovery period, and the half-year convention. However, due to an inadvertent
error made by Firm, these returns included elections under §168(f)(1) to not apply §168
for qualified leasehold improvement property rather than elections under
§168(k)(2)(D)(iii) not to claim the additional first year depreciation under §168(k) for
such property.

       With respect to TP1, the § 168(f) election statement to exclude its qualified
leasehold improvement property from § 168 indicated that the depreciable basis of the
property subject to such election is zero. With respect to TP2, the § 168(f) election
statement to exclude its qualified leasehold improvement property from § 168 indicated
that the depreciable basis of the property subject to such election is $a. However,
TP2's Form 4562, "Depreciation and Amortization," for the Year1 taxable year shows
that TP2 depreciated qualified leasehold improvement property with a cost of $a under

the general depreciation system of § 168(a) by using the straight-line method of
depreciation, a 15-year recovery period, and the half-year convention. Subsequently,
TP2 filed an amended federal tax return for the Year1 taxable year to remove the
mistakenly filed § 168(f) election statement.

                                  RULING REQUESTED

       TP1 and TP2 request an extension of time to make the election under §
168(k)(2)(D)(iii) not to deduct the additional first year depreciation under § 168(k)(1) with
respect to any qualified leasehold improvement property placed in service during the
taxable year ended Date1.

                                            LAW

       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 the taxpayer after December 31, 2007, and before September 9, 2010, or
after December 31, 2011 (or after 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 after
December 31, 2012, for qualified property described in §§ 168(k)(2)(B) or 168(k)(2)(C))
and before January 1, 2016 (or before 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, among other things, qualified leasehold improvement
property as defined in § 1.168(k)-1(c) and depreciated under § 168. See section 5.01 of
Rev. Proc. 2008-54, 2008-2 C.B. 722 (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.

        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, TP1
and TP2 are granted an extension of 60 calendar days from the date of this letter ruling
to make the election not to deduct the additional first year depreciation under
§ 168(k)(1) for all qualified leasehold improvement property placed in service during the
taxable year ended Date1, that qualify for the additional first year depreciation
deduction.

        Except as specifically set forth above, no opinion is expressed or implied
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 (1) whether any item of depreciable property placed in service
by TP1 and TP2 during the taxable year ended Date1, is eligible for the additional first
year depreciation deduction, or (2) whether any qualified leasehold improvement
property placed in service by TP1 and TP2 during the taxable year ended Date1, is
eligible for the rehabilitation credit.

      This letter ruling is directed only to the taxpayers requesting it. Section
6110(k)(3) provides that this ruling may not be used or cited as precedent.

      In accordance with the power of attorney on file with this office, we are sending
copies of this letter ruling to TP1's and TP2's authorized representatives. We are also
sending a copy of this letter ruling to the appropriate operating division director.

                                                Sincerely,

                                                Kathleen Reed


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


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