IRS lets a taxpayer revoke and re-make its section 59(e) elections after a rare natural event caused it to miss drilling and mining costs

Plain-English summary

An affiliated group of corporations asked the IRS for two things: permission to revoke its existing tax elections under section 59(e) and extra time to make fresh ones. Section 59(e) lets a taxpayer spread certain deductions, here intangible drilling costs (section 263(c)) and mining exploration costs (section 617(a)), ratably over 60 months or 10 years instead of deducting them all at once, which this taxpayer does routinely so it can fully use its production tax credits. A rare natural event damaged one facility and generated extra qualifying expenditures that the taxpayer's systems were not set up to catch, so those costs were left out of its timely elections. The IRS agreed the situation was the kind of "rare and unusual circumstances" that Treasury Regulation § 1.59-1(c) requires before it will let a taxpayer revoke a section 59(e) election, and it found the taxpayer acted reasonably and in good faith with no prejudice to the government under the section 9100 relief rules. The IRS granted 120 days to revoke the old elections and make new, complete ones. It expressed no opinion on whether the underlying expenditures actually qualify.

Ruling snapshot

• Question: May a taxpayer revoke its section 59(e) elections and get an extension to make new, complete ones after a rare natural event caused it to miss some qualifying drilling and mining expenditures?
• Outcome: Approved (revocation consent plus a 120-day section 9100 extension granted).
• Key authorities: IRC § 59(e); Treas. Reg. §§ 1.59-1(b), 1.59-1(c); Treas. Reg. §§ 301.9100-1, 301.9100-3; IRC §§ 263(c), 617(a).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202224006 Third Party Communication: None
Release Date: 6/17/2022 Date of Communication: Not Applicable
Index Number: 59.05-04, 9100.02-04,
9100.02-06 Person To Contact:
------------------------, ID No. -----------------
------------------ Telephone Number:
----------------------------------------- --------------------
---------------------------------- Refer Reply To:
---------------------- CC:PSI:B06
---------------------- PLR-120528-21
--------------------------- Date:
March 22, 2022

LEGEND

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

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

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

b = -------------

c = -------------

d = -------------

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

Natural Event = ------------------------------------------

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

   This letter responds to a letter dated October 1, 2021, and subsequent

correspondence, submitted by P on behalf of S (hereinafter P and S are collectively
referred to as Taxpayer), requesting permission to (1) revoke its existing elections under
§ 59(e) of the Internal Revenue Code, and (2) to make new and late elections under
§ 59(e) to deduct ratably over a specified period its intangible drilling and development
PLR-120528-21 2

and mining exploration expenditures under §§ 263(c) and 617(a) (Expenditures) for its
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.

                                      FACTS

   Taxpayer 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 calendar year basis using the accrual
method of accounting.

     At the time Taxpayer originally filed its income tax return for Tax Year, Taxpayer

separately elected under § 59(e) and § 1.59-1(b)(1) of the Income Tax Regulations to
deduct ratably over a 60-month period $a of § 263(c) intangible drilling and
development expenditures and over a 10-year period $b of § 617(a) mining exploration
expenditures. At the time of Taxpayer’s original § 59(e) elections, these Expenditures
represented all Expenditures Taxpayer had identified. Taxpayer historically made
§ 59(e) elections for all its Expenditures because it regularly has production tax credits
that it uses to offset tax owed. Taxpayer makes § 59(e) elections so that it can
maximize use of these credits.

     For Tax Year, Taxpayer discovered that it failed to include $c of its intangible

drilling expenditures and $d of its mining exploration expenditures in its timely filed
§ 59(e) elections. Taxpayer incurred the missed Expenditures as a direct result of an
unforecastable, localized, and rare natural event (Natural Event) that severely damaged
one of its facilities, rendering the facility inoperable. Taxpayer had never incurred
Expenditures related to an event like the Natural Event and, as a result, its internal
budgeting and tax accounting procedures were not equipped to identify that such
Expenditures were eligible for § 59(e) elections. Prior to Tax Year, Taxpayer’s
procedures allowed it to appropriately identify Expenditures for inclusion in its § 59(e)
elections. Taxpayer represents that, but for the Natural Event, Taxpayer would have
captured all its Expenditures and included them in its § 59(e) elections to allow it to use
available production tax credits.

   Taxpayer wants to revoke its original § 59(e) elections so that it can make new

§ 59(e) elections for all its Expenditures for Tax Year. Taxpayer represents that, in
requesting an extension of time to make new § 59(e) elections for Tax Year, it has acted
reasonably and in good faith and, further, there is no prejudice to the interests of the
government.
PLR-120528-21 3

                                RULINGS REQUESTED

   Taxpayer requests two rulings:

   (1) Taxpayer requests consent to revoke its original § 59(e) elections to capitalize
       and amortize Expenditures for Tax Year; and

   (2) if the Commissioner grants Taxpayer’s first request, Taxpayer requests an
       extension of time under §§ 301.9100-1 and 301.9100-3 of the Procedure and
       Administration Regulations to make new elections under § 59(e) to capitalize
       and amortize its Expenditures for Tax Year.

                                           LAW

     Section 59(e)(1) allows a taxpayer, in general, to deduct ratably over a specified

period any qualified expenditure to which an election under § 59(e) applies, beginning
with the taxable year in which such expenditure was made (or, in the case of intangible
drilling and development expenditures, beginning with the month in which such
expenditure was paid or incurred).

   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 § 263(c) (relating to
intangible drilling and development expenditures) and § 617(a) (relating to mining
exploration 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).
PLR-120528-21 4

   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 1.59-1(c)(1) provides that an election under § 59(e) may be revoked only

with the consent of the Commissioner and that such consent will only be granted in rare
and unusual circumstances. The revocation, if granted, will be effective in the first
taxable year in which the § 59(e) election was applicable. However, if the period of
limitations for the taxable year the § 59(e) election was applicable has expired, the
revocation, if granted, will be effective in the earliest taxable year for which the period of
limitations has not expired.

   Section 1.59-1(c)(2) provides, in part, that a taxpayer requesting consent to

revoke a § 59(e) election must submit the request prior to the end of the taxable year
the applicable amortization period described in § 59(e)(1) ends.

   Section 1.59-1(c)(3) provides that a request to revoke a § 59(e) election must

contain all of the information necessary to demonstrate the rare and unusual
circumstances that would justify granting revocation.

    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).
PLR-120528-21 5

                                     ANALYSIS

   The Internal Revenue Service (IRS) has a strong administrative need for

elections to be final. Allowing taxpayers to revoke elections without restriction places an
undue administrative burden on the IRS’s enforcement of the tax law, particularly when
revoking an election requires a recalculation of tax liability for several taxable years.
This need for finalization in elections is reflected in § 1.59-1(c)(1), where the Commissioner
is authorized by the Secretary to permit a taxpayer to revoke a § 59(e) election only in “rare
and unusual circumstances.” Although the term “rare and unusual” is not specifically
defined in the regulations, based on the plain meaning of the term, it is only satisfied when
the facts and circumstances present an infrequent or uncommon occurrence.

    Here, Taxpayer has demonstrated that the totality of its facts and circumstances

constitute “rare and unusual circumstances” as required by § 1.59-1(c). But for the
unforecastable, localized, and rare Natural Event, Taxpayer would have made § 59(e)
elections for Tax Year for all its Expenditures. Because of the Natural Event, Taxpayer
was not prepared to identify, and, therefore, did not identify those Expenditures that
were directly attributable to the Natural Event. Taxpayer requests to revoke its existing
§ 59(e) elections solely so that it can request § 301.9100-3 relief to make new and late
§ 59(e) elections for all its Expenditures for Tax Year, including those related to the
Natural Event. Taxpayer is not seeking to revisit a choice that it made to make its
existing § 59(e) elections for certain Expenditures because of a subsequent occurrence;
rather, it is seeking to include Expenditures in the elections that it missed at the time of
the election because of the Natural Event. Moreover, Taxpayer has a historic practice
of making § 59(e) elections for all its Expenditures to maximize its use of production tax
credits and would have done the same in Tax Year had it timely identified the missed
Expenditures. Therefore, the elections are no more advantageous to Taxpayer now
than they would have been at the time of the original elections. Because Taxpayer’s
facts, taken together, demonstrate an infrequent or uncommon occurrence, we find that
they satisfy the “rare and unusual circumstances” standard in § 1.59-1(c).

    Additionally, based solely on the information submitted and the representations

made, we conclude that the requirements of §§ 301.9100-1 and 301.9100-3 have been
satisfied.

                                       CONCLUSION

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

conclude that the requirements of § 1.59-1(c)(1) are satisfied, and, therefore, Taxpayer
may revoke its § 59(e) elections for Tax Year. Additionally, 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 (1) revoke its existing § 59(e) elections for Expenditures and (2) make new and
late elections under § 59(e) and § 1.59-1(b)(1) to deduct ratably over a 60-month period
its intangible drilling and development expenditures and over 10-year period its mining
exploration expenditures. The § 59(e) elections for Tax Year must comply with the
PLR-120528-21 6

manner-of-election requirements of § 1.59-1(b)(1).

     In making the elections 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 the 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 ruling request, it is subject to verification on examination. Except as
specifically set forth above, we express or imply 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), 263(c) and 617(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.

     In accordance with the Power of Attorney on file with this office, a copy of this

letter is being sent to your authorized representatives.

                                    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

cc: