Oil and gas partnership receives more time to expense drilling costs

Plain-English summary

An oil and gas joint venture taxed as a partnership failed to timely elect to deduct intangible drilling and development costs for a tax year. Without that election, the regulations generally treat the taxpayer as choosing to recover those costs through depletion or depreciation. The partnership explained why it missed the election and requested discretionary relief. The IRS found that the section 301.9100-3 requirements were met and granted 60 days to make the section 263(c) election. The ruling did not decide whether the partnership owned qualifying working interests or whether its costs qualified as intangible drilling and development costs.

Ruling snapshot

• Question: Could the partnership receive more time to elect to deduct intangible drilling and development costs?
• Outcome: Approved, with 60 days from the ruling date to make the election
• Key authorities: IRC § 263(c); Treas. Reg. §§ 1.612-4 and 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202341008                                             Third Party Communication: None
 Release Date: 10/13/2023                                      Date of Communication: Not Applicable
 Index Number: 263.00-00, 612.00-00,
               9100.00-00                                      Person To Contact:
                                                               ------------------------, ID No. -----------------
 -----------------------------------------------------------   Telephone Number:
 --------------------------------------------                  --------------------
 ----------------------------------                            Refer Reply To:
 -----------------------                                       CC:PSI:01
 ------------------------------------                          PLR-102153-23
                                                               Date:
                                                               July 17, 2023




                                                    LEGEND


 X          = --------------------------------------------------------------------------------------------------
              -----------------------
 State      = --------
 Date       = ---------------------
 1
 Year       = -------


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

This responds to a letter dated January 19, 2023, submitted on behalf of X by X's
authorized representative, requesting relief pursuant to § 301.9100-3 of the Procedure
and Administration Regulations that X be granted an extension of time to file an election
under § 263(c) of the Internal Revenue Code (“Code”).

                                                      FACT

The information submitted states that X was formed under the laws of State on Date 1.
X is an oil and gas joint venture treated as a partnership for federal income tax
purposes, is a cash method taxpayer that files a federal partnership income tax return
on a calendar year basis.

According to the information submitted, X did not timely make an election under
§ 263(c) for taxable year, Year. X has made representations explaining why the election
under § 263(c) was not timely filed.
PLR-102153-23                                2


                                  LAW AND ANALYSIS

Section 263(c) allows a taxpayer an election, under regulations prescribed by the
Secretary, to deduct IDC. Those regulations are set forth in § 1.612-4 of the Income Tax
Regulations.

Under § 1.612-4(d), a taxpayer may exercise the election to expense IDC by claiming
IDC as a deduction on the taxpayer's return for the first taxable year in which the
taxpayer pays or incurs IDC. No formal statement is necessary, but if the taxpayer fails
to deduct IDC, the taxpayer is deemed to have elected to recover IDC through depletion
to the extent that they are not represented by physical property and through
depreciation to the extent that they are represented by physical property.

Under § 1.612-4(e), an election under § 263(c) is binding on the taxpayer for the first
taxable year for which it is effective and for all subsequent taxable years.

Section 301.9100-1(c) of the Procedure and Administration Regulations provides that
the Commissioner may grant a reasonable extension of time to make a regulatory
election, or a statutory election (but no more than 6 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
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 an election. Section
301.9100-2 provides the rules governing automatic extensions of time for making
certain elections. Section 301.9100-3 provides the standards the Commissioner will
use to determine whether to grant an extension of time for regulatory elections that do
not meet the requirements of § 301.9100-2.

Under § 301.9100-3, a request for relief will be granted when the taxpayer provides
evidence (including affidavits described in § 301.9100-3(e)) to establish to the
satisfaction of the Commissioner that (1) the taxpayer acted reasonably and in good
faith, and (2) the grant of relief will not prejudice the interests of the Government.

                                     CONCLUSION

Based solely on the facts and representations submitted, we conclude that the
requirements of § 301.9100-3 have been satisfied with respect to the taxable year,
Year. Accordingly, an extension of time is hereby granted, until 60 days from the date of
this ruling, for X to make an election under § 263(c) for the taxable year, Year.

Except as specifically ruled upon above, we express or imply no opinion concerning the
federal tax consequences of the facts of this case under any other provision of the
PLR-102153-23                                 3

Code. Specifically, we express or imply no opinion concerning whether Taxpayer owns
working interests in oil and gas properties or whether any costs paid or incurred by
Taxpayer qualify as IDC under § 263(c) and § 1.612-4. In addition, §301.9100-1(a)
provides that the granting of an extension of time for making an election is not a
determination that the taxpayer is otherwise eligible to make the election.

The rulings contained in this letter are 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 request for rulings, it is subject to verification on examination.

This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) provides
that it may not be used or cited as precedent.


                                        Sincerely,

                                        Holly Porter
                                        Associate Chief Counsel
                                        (Passthroughs & Special Industries)



                                  By:
                                        Bradford R. Poston
                                        Special Counsel
                                        Office of Associate Chief Counsel
                                        (Passthroughs & Special Industries)


Enclosure
Copy for § 6110 purposes



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