Grants 120 days for a late section 59(e) election on research expenditures

Plain-English summary

A corporation intended to file its return and elect under section 59(e) to deduct research and experimental expenditures ratably over ten years. Its internal tax accountant mistakenly believed Form 7004 and Form 1120 had already been filed electronically, so the return and election statement were not timely filed. The IRS found that the taxpayer acted reasonably and in good faith and that relief would not prejudice the government. It granted 120 days to make the section 59(e) election for the stated research expenditures, using the statement required by Treas. Reg. § 1.59-1(b). The relief does not extend the deadline for the federal income-tax return or decide whether the costs actually qualify under section 174.

Ruling snapshot

• Question: May the taxpayer make a late section 59(e) election for research and experimental expenditures?
• Outcome: Approved, with 120 days to elect
• Key authorities: IRC §§ 59(e) and 174(a); Treas. Reg. §§ 1.59-1(b) and 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201841004 [Third Party Communication:
Release Date: 10/12/2018 Date of Communication: Month DD, YYYY]
Index Number: 9100.02-00, 9100.02-
03 Person To Contact:
----------------------, ID No. ------------
-------------------------------- Telephone Number:
------------------------------------------- --------------------
----------------------------------------- Refer Reply To:
----------------------------- CC:PSI:B06
PLR-138019-17
In Re: ------------------------------------ Date:
June 18, 2018

LEGEND

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

Taxable Year = ----------------------------------------------

a = ------------------

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

   This is in response to a letter dated December 14, 2017, submitted on behalf of

Taxpayer requesting extensions of time under §§ 301.9100-1 and 301.9100-3 of the
Procedure and Administration Regulations to make a late election under § 59(e) of the
Internal Revenue Code (Code) for Taxable Year with respect to research and
experimental expenditures under § 174(a) paid and incurred in that year.

   According to the facts and information submitted, Taxpayer’s internal tax

accountant inadvertently failed to timely file Form 7004 and Form 1120 believing that
the forms had already been filed electronically. Consequently, Taxpayer failed to timely
make an election under § 59(e) to use the optional write-off of certain tax preferences to
deduct ratably research and experimental expenditures in the amount of $a. At all
times, it was Taxpayer’s intention and belief that its Taxable Year Form 1120 and its
regulatory elections were timely filed in accordance with a valid Form 7004 for Taxable
Year.

   Taxpayer has represented that, in requesting an extension of time to make a

separate late election under § 59(e) for Taxable Year, it acted reasonably and in good
faith and, further, there is no prejudice to the interest of the Government.

  Section 174(a) provides, in general, that a taxpayer may treat research and

experimental expenditures which are paid or incurred by him during the taxable year in
connection with his trade or business as expenses which are not chargeable to capital
account. The expenditures so treated are allowed as a deduction.

   Section 59(e)(1) allows a taxpayer, in general, to deduct ratably over the 10-year

period any qualified expenditure to which an election under § 59(e) applies, beginning
with the taxable year in which such expenditure was made.

  Section 59(e)(2)(B) includes in the definition of "qualified expenditure" any

amount which, but for an election under § 59(e), would have been allowable as a
deduction for the taxable year in which paid or incurred under § 174(a) (relating to
research and experimental expenditures).

  Section 59(e)(3) specifically prohibits the deduction of the qualified expenditures

under any other section of the Code if the option under § 59(e) is elected.

  Section 59(e)(4)(A) provides that an election under § 59(e)(1) may be made with

respect to any portion of any qualified expenditure.

  Section 59(e)(4)(B) provides that an election made under § 59(e) may be

revoked only with the consent of the Secretary.

   Section 1.59-1(b)(1) of the Income Tax Regulations prescribes the time and

manner of making the election under § 59(e). According to § 1.59-1(b)(1), an election
under § 59(e) shall only be made by attaching a statement to the taxpayer's income tax
return (or amended return) for the taxable year in which the amortization of the qualified
expenditures subject to the § 59(e) election begins. The taxpayer must file the
statement no later than the date prescribed by law for filing the taxpayer's original
income tax return (including any extensions of time) for the taxable year in which the
amortization of the qualified expenditures subject to the § 59(e) election begins and
include certain required information.

   Section 1.59-1(b)(2) provides, in part, that a taxpayer may make an election

under § 59(e) with respect to any portion of any qualified expenditure paid or incurred
by the taxpayer in the taxable year to which the election applies. An election under
§ 59(e) must be for a specific dollar amount and the amount subject to an election under
§ 59(e) may not be made by reference to a formula.

  Section 301.9100-1(a) provides that the regulations under this section and

§§ 301.9100-2 and 301.9100-3 establish the standards the Commissioner will use to
determine whether to grant an extension of time to make a regulatory election. An
extension of time is available for elections that a taxpayer is otherwise eligible to make.
However, the granting of an extension of time is not a determination that the taxpayer is
otherwise eligible to make the election.

   Section 301.9100-1(b) provides that the term “regulatory election” includes an

election whose due date is prescribed by a regulation published in the Federal Register.

   Section 301.9100-1(c) provides that the Commissioner may grant a reasonable

extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3 to make a
regulatory election, or a statutory election (but no more than six months except in the
case of taxpayer who is abroad), under all subtitles of the Code, except subtitles E, G,
H, and I.

   Section 301.9100-2 provides automatic extensions of time for making certain

elections. Section 301.9100-3 provides rules for requesting extensions of time for
regulatory elections that do not meet the requirements of § 301.9100-2.

    Section 301.9100-3 provides that requests for relief subject to this section 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 that granting
relief will not prejudice the interests of the Government.

    Based solely on the information submitted and representations made, we

conclude that the requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied.
Accordingly, Taxpayer is granted an extension of time of 120 days from the date of this
letter to make an election under § 59(e) to deduct ratably over the 10-year period
research and experimental expenditures paid and incurred for Taxable Year.

    The election under § 59(e) must comply with the requirements of § 1.59-1(b).

Section 1.59-1(b) requires, in part, that an election under § 59(e) be made by attaching
a statement to the taxpayer's income tax return (or amended return) for the taxable year
in which the amortization of the qualified expenditures subject to the election under
§ 59(e) begins. The statement must include the taxpayer's name, address, and taxpayer
identification number, and the type and amount of qualified expenditures identified in
§ 59(e)(2) that the taxpayer elects to deduct ratably over the applicable period
described in § 59(e)(1).

  In making the election, Taxpayer should also attach a copy of this letter to the

amended returns for Taxable Year. We have enclosed a copy of this letter for that
purpose.

  This letter ruling does not grant an extension of time for filing Taxpayer’s federal

income tax return for the Taxable Year.

   Except as specifically set forth above, we express no opinion concerning the

federal tax consequences of the facts described above. In particular, we express or
imply no opinion on whether Taxpayer satisfies the requirements of § 59(e) and the
regulations thereunder, or whether the expenditures at issue are research and
experimental expenditures under § 174(a), or whether the amounts of the research and
experimental expenditures at issue are correct.

  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.

  The rulings contained in this letter are based upon information submitted and

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

                                      Sincerely,

                                      Peter C. Friedman
                                      Peter C Friedman
                                      Senior Technician Reviewer, Branch 6
                                      Office of Associate Chief Counsel
                                      (Passthroughs & Special Industries)

Enclosures (2)

   Copy of this letter
   Copy for § 6110 purposes