Extra time for a manufacturer to make the section 59(e) election to amortize research costs over 10 years

Plain-English summary

A vehicle and engine manufacturer that files a consolidated return meant to elect under section 59(e) to write off its research and experimental (R&E) costs ratably over 10 years instead of deducting them all at once. Although it actually capitalized and amortized those costs on its return, it never attached the written statement that section 59(e) and Treasury Regulation section 1.59-1(b)(1) require to make the election, so the election was not validly made. The taxpayer asked the IRS for an extension under Treasury Regulations sections 301.9100-1 and 301.9100-3, representing that it acted reasonably and in good faith and that relief would not prejudice the government. The IRS agreed and granted 120 days from the ruling to make the election on an amended consolidated return, with the ruling attached. As usual, the IRS did not decide whether the costs actually qualify under section 59(e) or section 174, only that the taxpayer may still make the election. This is the standard fix for a missed election that the taxpayer clearly intended to make.

Ruling snapshot

• Question: Should the taxpayer get more time to make the section 59(e) election to amortize its R&E expenditures over 10 years after it failed to attach the required election statement?
• Outcome: Approved (120 days from the ruling to make the election on an amended return).
• Key authorities: IRC § 59(e); IRC § 174(a); Treas. Reg. § 1.59-1(b); Treas. Reg. §§ 301.9100-1, 301.9100-3.

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202209008                                             Third Party Communication: None
 Release Date: 3/4/2022                                        Date of Communication: Not Applicable
 Index Number: 9100.02-03
                                                               Person To Contact:
 -----------------------                                       ------------------------, ID No. -----------------
 ----------------------------                                  Telephone Number:
 ---------------------------------------------                 --------------------
 ---------------------------                                   Refer Reply To:
 -------------------                                           CC:PSI:B06
 ----------------------------                                  PLR-113595-21
                                                               Date:
                                                               December 10, 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

P                =         -----------------------------------------------
                          -------------------------

S                =        ------------------
                          -------------------------

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

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

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

        This letter responds to a letter dated May 12, 2021, and subsequent
correspondence, submitted by P on behalf of S 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 S's research and
experimental (R&E) expenditures described in § 174(a) 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 P.
PLR-113595-21                                2


                                         FACTS

       P represents that the facts are as follows:

        P is the common parent of an affiliated group of corporations, including S, that
files a consolidated federal income tax return on a fiscal year basis using the accrual
method of accounting (hereinafter P and S will be collectively referred to as Taxpayer).
Taxpayer manufacturers vehicles and engines and provides service parts for vehicles
and engines. Taxpayer also provides various financing services for its products.

      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 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
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.
PLR-113595-21                                3

      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
PLR-113595-21                                 4

       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 incurred for Tax Year. The § 59(e)
election must comply with the manner-of-election requirements of § 1.59-1(b)(1).

         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.


                                          Sincerely,

                                          Associate Chief Counsel
                                          (Passthroughs and Special Industries)

                                                 Jennifer A. 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
PLR-113595-21                                          5


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