Oil and gas group gets 120 days to elect five-year IDC amortization

Plain-English summary

An affiliated oil and gas group incurred substantial intangible drilling and development costs and intended to elect to deduct a specified portion ratably over 60 months under Section 59(e). Its consolidated return capitalized and amortized part of those costs, but the group did not timely attach the statement required to make the election. The taxpayer represented that it acted reasonably and in good faith and that late relief would not prejudice the government. The IRS found that the discretionary-relief standards were satisfied and granted 120 days to make the election on an amended consolidated return. The election statement must identify the taxpayer and specify the type and amount of costs being amortized. The IRS did not determine whether the taxpayer otherwise satisfied Sections 59(e) or 263(c).

Ruling snapshot

• Question: May the affiliated group make a late Section 59(e) election to amortize specified intangible drilling costs over 60 months?
• Outcome: Approved: the group received 120 days to make the election.
• Key authorities: IRC §§ 59(e), 263(c), and 291; Treas. Reg. §§ 1.59-1(b), 301.9100-1, and 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202122003 Third Party Communication: None
Release Date: 6/4/2021 Date of Communication: Not Applicable
Index Number: 9100.02-04
Person To Contact:
---------------------- -----------------------, ID No. ------------
--------------------------------------- Telephone Number:
---------------------------------- --------------------
-------------------------------------------- Refer Reply To:
--------------------------- CC:PSI:B06
PLR-119792-20
Re: Request for extension of time under Date:
§§ 301.9100-1 and 301.9100-3 of the March 10, 2021
Procedure and Administration Regulations to
file an election pursuant to § 59(e) of the
Internal Revenue Code

LEGEND:

P: = ------------------------------------------------------------

S: = --------------------------------------------------------------------------

Year: = -------

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

    This letter responds to a letter dated August 31, 2020, submitted by P on behalf

of S, requesting an extension of time pursuant to §§ 301.9100-1 and 301.9100-3 of the
Procedure and Administration Regulations to make an election under § 59(e) of the
Internal Revenue Code and § 1.59-1(b)(1) of the Income Tax Regulations to deduct
ratably over a 60-month period S’s intangible drilling and development costs (IDC)
described in § 263(c) incurred in the Year taxable year.

                                                FACTS

    P represents that the facts are as follows:

  P is a holding company. P is the common parent of an affiliated group of

corporations that includes S (hereinafter P and S will be collectively referred to as
Taxpayer), and that files a consolidated federal income tax return on a calendar year

PLR-119792-20 2

basis using the accrual method of accounting. Taxpayer is engaged in oil and gas
exploration and production.

   Due to the nature of its business, Taxpayer regularly incurs substantial IDCs with

respect to its oil and gas wells. On its consolidated federal income tax return for its
Year taxable year, Taxpayer capitalized and amoritzed a portion of its IDCs incurred
during that year. Taxpayer intended to make an election under § 59(e) and § 1.59-
1(b)(1) to deduct ratably over a 60-month period its IDCs described in § 263(c).
Taxpayer has made representations explaining why the statement required to make the
election under § 59(e) and § 1.59-1(b)(1) was not timely filed.

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

§ 59(e) election for the Year taxable year, it acted reasonably and in good faith and,
further, there is no prejudice to the interests of the Government.

                                 RULING REQUESTED

   Taxpayer requests an extension of time under §§ 301.9100-1 and 301.9100-3 to

make the election under § 59(e) to capitalize a specified portion of Taxpayer’s IDCs
incurred during its Year taxable year.

                                 LAW AND ANALYSIS

    Section 59(e)(1) allows a taxpayer to deduct ratably over a specified period any

qualified expenditure to which an election under § 59(e)(1) applies. In the case of IDCs,
§ 59(e)(1) allows a taxpayer to deduct such costs ratably over the 60-month period
beginning with the month in which such expenditure was paid or incurred.

   Section 59(e)(2)(C) includes in the definition of “qualified expenditure” any

amount which, but for an election under § 59(e), would have been allowable as a
deduction (determined without regard to § 291) for the taxable year in which paid or
incurred under § 263(c) (relating to IDCs.)

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

under any other section of the Code if this option is elected.

  Section 59(e)(4)(A) allows a taxpayer to make an election under § 59(e)(1) for

any portion of any qualified expenditure. Section 59(e)(4)(B) provides that an election
under § 59(e) may be revoked only with the consent of the Secretary.

    Section 1.59-1(b)(1) 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

PLR-119792-20 3

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. Additionally, the statement must
include the taxpayer’s name, address, 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).

    Under § 301.9100-1(c), the Commissioner may grant a reasonable extension of

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

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

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

   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 a
regulatory election. Section 301.9100-1(a).

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

elections. Section 301.9100-3 allows extensions of time for making elections that do
not meet the requirements of § 301.9100-2.

   The Commissioner will grant requests for relief under § 301.9100-3 when the

taxpayer provides the evidence (including affidavits described in § 301.9100-3(e)) 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. Section 301.9100-3(a).

                                     CONCLUSION

    Based solely on the information submitted and the representations made, we

conclude that the requirements of §§ 301.9100-1 through 301.9100-3 have been
satisfied. Accordingly, the Commissioner grants Taxpayer an extension of time of 120
days from the date of this letter to make the election under § 59(e) and § 1.59-1(b) to
deduct ratably over a 60-month period its IDCs described in § 263(c) for its Year 1
taxable year. The § 59(e) election must comply with the manner-of-election
requirements of § 1.59-1(b)(1).

    In making the election, Taxpayer must attach a copy of this letter ruling to its

amended consolidated federal income tax return. We have enclosed a copy for that
purpose. Alternatively, if Taxpayer files its amended consolidated federal income tax
return electronically, it may satisfy this requirement by attaching a statement to its
amended return that provides the date and control number of the letter ruling.

PLR-119792-20 4

   The rulings contained in this letter are based upon information and

representations submitted by Taxpayer and accompanied by a penalties 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 a ruling, it is subject to verification on
examination. Except as specifically set forth above, we express no opinion concerning
the federal tax consequences of the facts described above under any other provision of
the Code and the regulations thereunder. Specifically, we express or imply no opinion
concerning whether Taxpayer satisfies the requirements of § 263(c) or § 59(e).

  This letter ruling is directed only to the taxpayer who requested it. Under

§ 6110(k)(3), a letter ruling may not be used or cited as precedent.

  In accordance with the power of attorney on file with this office, we are sending a

copy of this letter to your authorized representative.

                                      Sincerely,

                                      Associate Chief Counsel
                                      (Passthroughs and Special Industries)



                               By:    _______________________________
                                      Jennifer A. Records
                                      Senior Technician Reviewer, Branch 6
                                      Office of the Associate Chief Counsel
                                      Passthroughs & Special Industries

Enclosures (2):
Copy
Copy for § 6110 purposes

cc: