Extension of time for a corporate group to make a late section 59(e) election to amortize R&E expenses over 10 years

Plain-English summary

Companies that incur research and experimental (R&E) expenses can elect
under section 59(e) to spread the deduction ratably over 10 years instead
of taking it all at once, which can be useful for managing alternative
minimum tax and other timing effects. The election is made by attaching a
statement to the timely filed return. Here, a consolidated group of
corporations meant to make the election and actually reported its R&E
expenses on its return as if the election had been made, but it
inadvertently failed to attach the required election statement on time.
The group asked the IRS for more time under the section 9100 relief
rules. Finding that the group acted reasonably and in good faith and that
the government would not be harmed, the IRS granted a 120-day extension to
make the election on an amended return. The IRS did not decide whether
the expenses actually qualify under sections 59(e) or 174. This cures a
missed election that the group had already been following in practice.

Ruling snapshot

• Question: May the taxpayer receive an extension of time under Treas.
  Reg. §§ 301.9100-1 and 301.9100-3 to make a late section 59(e) election
  to amortize its R&E expenditures over 10 years?
• Outcome: Approved (120-day extension granted)
• Key authorities: IRC § 59(e); Treas. Reg. § 1.59-1(b)(1); IRC
  § 174(a); Treas. Reg. §§ 301.9100-1, 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                                        Department of the Treasury
                                                                 Washington, DC 20224

 Number: 202237009                                               [Third Party Communication:
 Release Date: 9/16/2022                                         Date of Communication: Month DD, YYYY]
 Index Number: 9100.02-03
                                                                 Person To Contact:
 --------------------------------                                ------------------------
 ------------------------------------------                                     ID No. -----------------
 -------------------------                                       Telephone Number:
 ---------------------------                                     --------------------
 ----------------------------                                    Refer Reply To:
                                                                 CC:PSI:B06
 In Re: Request for extension of time under                      PLR-125584-21
 §§ 301.9100-1 and 301.9100-3 of the                             Date:
 Procedure and Administration Regulations to                     June 15, 2022
 file an election pursuant to § 59(e) of the
 Internal Revenue Code

Legend

P                     =         [redacted]

S1                    =         [redacted]

S2                    =         [redacted]

S3                    =         [redacted]

Taxable Year          =        ----------------------------------------------------------

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

This letter responds to a letter dated December 16, 2021, submitted by P on behalf of
S1, S2, and S3 (hereinafter P, S1, S2, and S3 will be collectively referred to as
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 research and experimental (R&E) expenditures
incurred in Taxable Year under § 174(a). 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:

P is the common parent of an affiliated group of corporations, including S1, S2, and S3,
that files a consolidated federal income tax return on a calendar year basis using the
accrual method of accounting.

Taxpayer intended to make an election under § 59(e) and § 1.59-1(b)(1) to deduct
ratably over a 10-year period certain R&E expenditures for Taxable Year. On its timely
filed consolidated income tax return for Taxable Year, Taxpayer capitalized and
deducted ratably over a 10-year period certain R&E expenditures incurred for Taxable
Year as if the election had been timely made. Taxpayer has made representations
explaining why the statement required to make the election under § 59(e) and § 1.59-
1(b)(1) was inadvertently not timely filed.

Taxpayer represents that, in requesting an extension of time to make an election under
§ 59(e) for 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
an election under § 59(e) to capitalize and deduct ratably over a 10-year period certain
R&E expenditures incurred during Taxable Year.

                            LAW AND ANALYSIS

Section 59(e)(1) provides, in relevant part, that any qualified expenditure to which an
election under § 59(e)(1) applies shall be allowed as a deduction ratably over the 10-
year period 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
(determined without regard to § 291) for the taxable year in which paid or incurred under
§ 174(a) (relating to R&E expenditures).

Section 59(e)(3) provides that except as provided in § 59(e), no deduction shall be
allowed under any other section of the Code for any qualified expenditure to which an
election under § 59(e) applies.

Section 59(e)(4)(A) provides that an election may be made under § 59(e)(1) with
respect to any portion of any qualified expenditure.

Section 59(e)(4)(B) provides that any election 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).

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

In making the election for Taxable 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.

In accordance with the power of attorney on file with this office, we are sending a copy
of this letter to your authorized representatives.


                                          Sincerely,

                                          Associate Chief Counsel
                                          (Passthroughs and Special Industries)


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


Enclosure
Copy for § 6110 Purposes

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