Partnership received more time to elect out of bonus depreciation

Plain-English summary

A partnership intended not to claim additional first-year depreciation on property placed in service during its short final tax year. Its return preparer learned shortly before the filing deadline that some assets had been placed in service earlier than expected, filed the return without depreciation adjustments, and inadvertently omitted the statement required to elect out of bonus depreciation. The IRS found that the taxpayer acted reasonably and in good faith and that relief would not prejudice the government. It granted 60 days to file an amended partnership return electing out of additional first-year depreciation for every qualifying property class placed in service during the year. The ruling did not decide whether any particular asset qualified for bonus depreciation.

Ruling snapshot

• Question: Could the partnership make a late section 168(k)(7) election not to claim additional first-year depreciation?
• Outcome: approved, with 60 days to file an amended return and the required election statement
• Key authorities: IRC § 168(k)(7); Treas. Reg. §§ 1.168(k)-1(e), 301.9100-1, 301.9100-3; Rev. Proc. 2017-33

Full text (IRS public release)

Internal Revenue Service                                   Department of the Treasury
                                                           Washington, DC 20224

Number: 201921009                                          Third Party Communication: None
Release Date: 5/24/2019                                    Date of Communication: Not Applicable
Index Number: 9100.04-00
                                                           Person To Contact:
                                                           ------------------------, ID No. ------------------
                                                           ----------------------------------------------------
                                                           Telephone Number:
                                                           ----------------------
--------------------------------------                     Refer Reply To:
------------------------------                             CC:ITA:7
------------------------------------------------           PLR-125439-18
------------------------------------------                 Date:
                                                           February 15, 2019




Re: Request for an extension of time to make the election under § 168(k)(7) not to
deduct the additional first year depreciation

Legend

Taxpayer = ------------------------------
            ---------------------------
A        = --------------------------------------------------------------------------------------------------------------------
B        = ---------------
C        = ----------------------------
D        = -------------------------------
E        = ------------------------------------------------
F        = -----------------------
G        = ------------------
H        = ----------------
Year1    = -------------------------------------------------------------------
           ----------------------------------------
Date1    = ---------------------
Date2    = ---------------------
Date3    = ----------------------------
Date4    = --------------------
Date5    = --------------------

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

      This letter ruling responds to a letter dated July 17, 2018, and supplemental
correspondence, submitted by Taxpayer, requesting an extension of time pursuant to
§§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations to

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make the election under § 168(k)(7) of the Internal Revenue Code not to deduct the
additional first year depreciation for all classes of qualified property placed in service
during Year1.

       All references in this letter ruling to § 168(k) are treated as a reference to
§ 168(k) as in effect after 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). Further, all
references in this letter ruling to § 168(k) or § 708(b) are treated as a reference to
§ 168(k) or § 708(b), respectively, as in effect prior to amendment by the Tax Cuts and
Jobs Act, Pub. L. No. 115-97, 131 Stat. 2054 (December 22, 2017).

       FACTS

       Taxpayer represents that the facts are as follows:

      Taxpayer, a limited liability company that is treated as a partnership for federal
income tax purposes, files Form 1065, U.S. Return of Partnership Income, on a
calendar year basis. Taxpayer’s overall method of accounting is an accrual method.
Taxpayer is principally engaged in A located in B.

       During Year1, Taxpayer was owned by two corporate members and therefore
was treated as a partnership for federal income tax purposes. Up until Date1,
Taxpayer owned 100 percent of C, a limited liability company that was disregarded as
an entity separate from Taxpayer. After Date1, C was treated as a partnership for
federal income tax purposes due to its receipt of cash contributions from two new
members on Date2. C owned, and continues to own, 100 percent of D. D owns and
operates a E that is located in B. D also originally developed the E, which consists of F
assets. D is disregarded as an entity separate from its owner, which up until Date1,
was Taxpayer, and after Date1, was C.

       Based on the structure described above, up until Date1, Taxpayer was treated
for federal income tax purposes as owning the E assets. Due to C having received
cash contributions from new members on Date2, Taxpayer was treated, pursuant to
Rev. Rul. 99-5, 1999-1 C.B. 434 (Situation 2) as contributing all of the assets of C to a
partnership (C) in exchange for a partnership interest. The new members received
Class A interests in C in exchange for their cash contributions and Taxpayer received
Class B interests in exchange for its contribution of property. Therefore, on and after
Date2, Taxpayer’s only asset for federal income tax purposes was an investment in a
partnership. On Date3 (the last day of Year1), one of Taxpayer’s two partners
purchased the entire interest held by the other partner. Therefore, pursuant to Rev. Rul.
99-6, 1999-1 C.B. 432 (Situation 1), Taxpayer terminated as a partnership under
§ 708(b)(1)(A), resulting in a short final taxable year ended Date3 (Year1).

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       During Year1, the E was under development, and various G assets were placed
in service on different dates.

       Taxpayer expected that all of the G assets would be placed in service on or after
Date2, when C became a partnership for federal income tax purposes. The LLC
agreement for C required that (i) C make the election not to claim the additional first
year depreciation on the E assets and (ii) the additional first year depreciation shall not
be claimed on any of the E assets. The reason for the decision not to claim the
additional first year depreciation was because such depreciation would have resulted in
the Class A partners in C having a negative capital account sooner than desired and
thus having to agree to a larger deficit restoration obligation. Given this intent, to the
extent any G assets were unexpectedly placed in service prior to Date2, then Taxpayer
would have needed to elect not to claim the additional first year depreciation on its final
partnership federal tax return for the tax year ended Date3.

        H was engaged to prepare the final partnership return for Taxpayer for Year1.
This return was timely filed on the Date4, the extended due date for this return. Up until
shortly before Date4, H understood that all of the G assets were placed in service on or
after Date2. Accordingly, the final draft return that had been prepared for Taxpayer did
not reflect any regular or additional first year depreciation, since it was believed that no
G assets were placed in service before Date2, when Taxpayer was treated as the
owner of the E for federal income tax purposes.

       On Date5, which was shortly before Date4, H was informed that some G assets
where actually placed in service prior to Date2. However, there was no time before the
deadline to file Taxpayer’s final partnership federal tax return for the short taxable year
ended Date3, to obtain the additional information needed to properly make the
adjustments to such return before filing. Therefore, Taxpayer’s final partnership return
for Year1 was filed on Date4, reflecting no regular or additional first year depreciation,
with the intention to file an amended return to reflect the proper depreciation deductions,
including regular, but not additional first year depreciation. Unfortunately, H
inadvertently failed to attach the election statement required by § 1.168(k)-1(e)(3) of the
Income Tax Regulations and as prescribed on Form 4562, “Depreciation and
Amortization,” to Taxpayer’s final partnership return for Year1.

      Subsequently, H realized that it had inadvertently failed to attach the election
statement required by § 1.168(k)-1(e)(3) to Taxpayer’s final partnership return for
Year1. After learning of this omission, Taxpayer requested H to assist in preparing a
request for this ruling request.

       RULING REQUESTED

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

       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
placed in service by the taxpayer before January 1, 2020 (or January 1, 2021, for
qualified property described in §§ 168(k)(2)(B) or 168(k)(2)(C)).

       Section 168(k)(7) allows a taxpayer to elect not to deduct the additional first year
depreciation for any class of property placed in service by the taxpayer during the
taxable year. The term “class of property” is defined in § 1.168(k)-1(e)(2). 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(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 and its
instructions. The instructions to Form 4562 for Year1 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 for 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.

       Section 4.04 of Rev. Proc. 2017-33, 2017-19 I.R.B. 1236, 1240, provides
guidance regarding the election under § 168(k)(7) not to deduct the additional first year
depreciation (the § 168(k)(7) election). Section 4.04(1) of Rev. Proc. 2017-33 provides
that the rules for making the § 168(k)(7) election are similar to the rules for making the
election under § 168(k)(2)(D)(iii) as in effect before the enactment of the PATH Act. As
a result, the § 168(k)(7) election applies to all qualified property that is in the same class
of property and placed in service in the same taxable year. Section 4.04(2) of Rev.
Proc. 2017-33 provides that generally rules similar to the rules in § 1.168(k)-1(e)(2), (3),
(5), and (7) apply for purposes of § 168(k)(7).

       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.

PLR-125439-18                                  5

       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,
Taxpayer is granted 60 calendar days from the date of this letter ruling to make the
election under § 168(k)(7) not to deduct the additional first year depreciation for all
qualified property placed in service during Year1, that qualify for the additional first year
depreciation deduction. This election must be made by Taxpayer filing an amended
partnership return for Year1, with a statement indicating that Taxpayer is electing not to
deduct the additional first year depreciation for all classes of property placed in service
by Taxpayer in Year1.

       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
Taxpayer during Year1 is eligible for the additional first year depreciation deduction.

       The ruling contained in this letter is based upon information and representations
submitted by Taxpayer and accompanied by a penalty of perjury statement executed by
the appropriate parties. 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.

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

                                                 Sincerely,

                                                 Deena M. Devereux

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


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