IRS grants a corporation 120 more days to elect to amortize research expenses over 10 years

Plain-English summary

A corporation that files a consolidated return for its group wanted to elect, under Internal Revenue Code § 59(e), to deduct its research and experimental (R&E) expenditures ratably over 10 years instead of all at once. That election has to be made by attaching a statement to a timely filed return, and the company missed the deadline, even though on its return it had already capitalized and amortized the R&E amount as if the election were in place. The company asked the IRS for more time under the regulations (§§ 301.9100-1 and 301.9100-3), which let the Commissioner grant relief when a taxpayer acted reasonably and in good faith and giving relief will not prejudice the government. The IRS found those conditions met and granted 120 days from the date of the letter to make the election by attaching a copy of the ruling to an amended consolidated return. The IRS stressed that it was not deciding whether the company actually satisfies the requirements of § 59(e) or § 174. This is a routine "missed election" fix, common when a return is prepared consistently with an election that was never formally filed.

Ruling snapshot

• Question: May a corporation get an extension of time under § 301.9100-3 to make a late § 59(e) election to amortize R&E expenditures over 10 years?
• Outcome: approved (120-day extension granted)
• Key authorities: IRC §§ 59(e), 174(a); Treas. Reg. §§ 1.59-1(b), 301.9100-1, 301.9100-3; Rev. Proc. 2020-29

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202150008 Third Party Communication: None
Release Date: 12/17/2021 Date of Communication: Not Applicable
Index Number: 9100.02-03
Person To Contact:
----------------- ------------------------, ID No. -----------------
------------------------------------------ Telephone Number:
---------------------------- --------------------
------------------------------------- Refer Reply To:
------------------------------------- CC:PSI:B06
--------------------------- PLR-107628-21
Date:
September 16, 2021
Re: Request for extension of time
under §§ 301.9100-1 and 301.9100-3
of the Procedure and Administration
Regulations to file an election pursuant
to § 59(e) of the Internal Revenue
Code

LEGEND

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

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

Tax Year = ----------------------------------------------------------

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

   This letter responds to a letter dated April 6, 2021, and subsequent

correspondence, submitted on behalf of Taxpayer requesting an extension of time
under §§ 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 (Code) and § 1.59-
1(b)(1) of the Income Tax Regulations to deduct ratably over a 10-year period
Taxpayer's research and experimental (R&E) expenditures described in § 174(a) paid
or incurred in Tax Year. This letter is being issued electronically in accordance with
Rev. Proc. 2020-29, 2020-21 I.R.B. 859. A paper copy will not be mailed to Taxpayer.

                                                FACTS

    Taxpayer represents that the facts are as follows:

  Taxpayer is the common parent of an affiliated group of corporations that files a

consolidated federal income tax return on a calendar year basis using the accrual
method of accounting. Taxpayer markets, designs, and manufactures products and
services for various industries.

   Taxpayer intended to make an election under § 59(e) and § 1.59-1(b)(1) to

deduct ratably over a 10-year period its R&E expenditures. On its consolidated federal
income tax return for Tax Year, Taxpayer capitalized and amortized its R&E
expenditures in the amount of $a paid or incurred during that year under § 59(e).
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 represents that, in requesting an extension of time to make a § 59(e)

election for Tax Year, it has 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 an election under § 59(e) to capitalize and amortize Taxpayer's R&E expenditures
paid or incurred during its Tax Year.

                              LAW AND ANALYSIS

   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 R&E
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) provides that 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 statement must be filed 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. Additionally, 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).

   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.

    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 that the term "regulatory election" includes an

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

  Sections 301.9100-1 through 301.9100-3 provide the standards used to

determine whether to grant an extension of time to make a regulatory election. Section
301.9100-1(a).

   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.

   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 representations made, we

conclude that the requirements of §§ 301.9100-1 and 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 an election under § 59(e) and § 1.59-1(b)(1) to deduct
ratably over a 10-year period its R&E expenditures paid or incurred for Tax Year.

    In making the election for Tax Year, Taxpayer must attach a copy of this letter

ruling to its amended consolidated federal income tax return. 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.

   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
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 §§ 59(e) or 174(a).

   This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)

of the Code provides that it may not be used or cited as precedent.

   We are sending a copy of this letter to the LB&I Policy Office.

                                   Sincerely,

                                   Associate Chief Counsel
                                   (Passthroughs and Special Industries)


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

Enclosure
Copy for § 6110 purposes

cc: