Late elections to amortize drilling costs were allowed

Plain-English summary

An affiliated group intended to elect under section 59(e) to deduct its intangible drilling and development costs ratably over 60 months for five tax years, but it did not timely file the required election statements. The group represented that it acted reasonably and in good faith, and that allowing the late elections would not reduce its aggregate tax liability compared with timely elections. The IRS concluded that the requirements for discretionary regulatory-election relief were met. It gave the group 60 days to make the elections on amended consolidated returns in the manner required by the regulations. The ruling did not allow otherwise barred recalculations and did not decide whether the costs themselves qualified under sections 59(e) or 263(c).

Ruling snapshot

• Question: May the affiliated group make late section 59(e) elections to amortize intangible drilling and development costs over 60 months?
• Outcome: approved, with 60 days to make the elections
• Key authorities: IRC §§ 59(e), 263(c); Treas. Reg. §§ 1.59-1(b), 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201733011                                             Third Party Communication: None
Release Date: 8/18/2017                                       Date of Communication: Not Applicable
Index Number: 9100.02-04
                                                              Person To Contact:
---------------------                                         ---------------------------, ID No. -------------
----------------------------------                            Telephone Number:
----------------------------------------------------------    ----------------------
---------------------------                                   Refer Reply To:
---------------------------                                   CC:PSI:B06
                                                              PLR-139691-16
In Re: Request for extension of time under                    Date: May 12, 2017
§§ 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                      =       -------------------------------------------------------------------------------------
                               -------------


Date A                 =       ---------------------------

Date B                 =       ---------------------------

Date C                 =       ---------------------------

Date D                 =       ---------------------------

Date E                 =       ---------------------------



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


       This letter responds to a letter dated December 14, 2016, and supplemental
correspondence, submitted by P on behalf of S (hereinafter P and S will be collectively
referred to as Taxpayer), requesting an extension of time pursuant to §§ 301.9100-1
PLR-139691-16                                2

and 301.9100-3 of the Procedure and Administration Regulations to make elections
under § 59(e) of the Internal Revenue Code and § 1.59-1(b)(1) of the Income Tax
Regulations to deduct ratably over a 60-month period its intangible drilling and
development costs (IDC) described in § 263(c) for its taxable years ended Date A, Date
B, Date C, Date D, and Date E.

                                         FACTS

      Taxpayer represents that the facts are as follows:

        Taxpayer is an affiliated group of corporations of which P is the common parent.
Taxpayer uses the overall accrual method of accounting and files a consolidated federal
income tax return on the basis of a calendar year. Taxpayer is primarily in the business
of oil and gas exploration and production.

       Taxpayer timely filed its consolidated federal income tax returns for its taxable
years ended Date A, Date B, Date C, Date D, and Date E and intended to make
elections under § 59(e) and § 1.59-1(b)(1) to deduct ratably over a 60-month period its
IDC described in § 263(c). Taxpayer has made representations explaining why the
statements required to make the elections under § 59(e) and § 1.59-1(b)(1) were not
timely filed.

       Taxpayer represents that granting the relief requested will not result in Taxpayer
having a lower tax liability in the aggregate for the tax years affected by the elections
than Taxpayer would have had if the elections had been timely made (taking into
account the time value of money). Taxpayer also represents that it acted reasonably
and in good faith and that granting relief will not prejudice the interests of the
Government.

                                          LAW

        Section 59(e)(1) allows a taxpayer to deduct ratably over a specified period any
qualified expenditure to which an election under § 59(e)(1) applies.

       Section 59(e)(2) 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
§ 263(c) (relating to IDC).

       Section 59(e)(1) allows a taxpayer to deduct IDC ratably over the 60-month
period beginning with the month in which such expenditure was paid or incurred.

      Section 59(e)(3) specifically prohibits the deduction of the qualified expenditures
under any other section of the Code if this option is elected. Section 59(e)(4)(A) allows
PLR-139691-16                                3

a taxpayer to make an election under § 59(e)(1) for any portion of any qualified
expenditure.

        Section 1.59-1(b)(1) prescribes the time and manner of making the election
under § 59(e). According to § 1.59-1(b)(1), 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 taxpayer must file the statement 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, 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 in exercising the Commissioner's
discretion may grant a reasonable extension of time under the rules set forth in
§§ 301.9100-1 through 301.9100-3 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.

       Sections 301.9100-1, 301.9100-2, and 301.9100-3 provide the standards the
Commissioner will use 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 allows extensions of time for making 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).

       Section 301.9100-3(b)(1) provides, in part, that a taxpayer is deemed to have
acted reasonably and in good faith if the taxpayer requests relief under § 301.9100-3
before the failure to make the regulatory election is discovered by the Internal Revenue
Service or the taxpayer reasonably relied on a qualified tax professional, including a tax
professional employed by the taxpayer, and the tax professional failed to make, or
advise the taxpayer to make, the election.

       Section 301.9100-3(b)(3) provides, in part, that a taxpayer is deemed to have not
acted reasonably or in good faith if the taxpayer seeks to alter a return position for
PLR-139691-16                                4

which an accuracy-related penalty has been or could be imposed under § 6662 at the
time the taxpayer requests relief (taking into account any qualified amended return filed
within the meaning of § 1.6664-2(c)(3) of this chapter) and the new position requires or
permits a regulatory election for which relief is requested; the taxpayer was informed in
all material respects of the required election and related tax consequences, but chose
not to file the election; or the taxpayer uses hindsight in requesting relief.

         Section 301.9100-3(c)(1)(i) provides, in part, that the Government's interests are
considered prejudiced if granting relief would result in a taxpayer having a lower tax
liability in the aggregate for all taxable years affected by the election than the taxpayer
would have had if the election had been timely made (taking into account the time value
of money). Additionally, § 301.9100-3(c)(1)(ii) provides, in part, that the Government's
interests ordinarily are prejudiced if the taxable year in which the regulatory election
should have been made or any taxable years that would have been affected by the
election had it been timely made are closed by the period of limitations on assessment
under § 6501(a) before the taxpayer's receipt of a ruling granting relief under
§ 301.9100-3.

                                      CONCLUSION

        Based solely on the facts and representations submitted, we conclude that the
requirements of §§ 301.9100-1 through 301.9100-3 have been satisfied. Accordingly,
the Commissioner grants Taxpayer an extension of time of 60 calendar days from the
date of this letter to make the elections under § 59(e) and § 1.59-1(b) to deduct ratably
over a 60-month period its IDC described in § 263(c) for its taxable years ended Date A,
Date B, Date C, Date D, and Date E. The § 59(e) elections must comply with the
manner-of-election requirements of § 1.59-1(b)(1). This extension of time allows
Taxpayer to make the elections as required by § 1.59-1(b)(1); it does not permit
recalculation of those amounts unless otherwise permitted by applicable statutes of
limitation.

        In making the elections, Taxpayer must attach a copy of this letter ruling to its
amended consolidated federal income tax returns. We have enclosed copies (one for
each election) for that purpose. Alternatively, if Taxpayer files its amended consolidated
federal income tax returns electronically, it may satisfy this requirement by attaching a
statement to its amended returns that provides the date and control number of the letter
ruling.

        The rulings contained in this letter are based upon information and
representations submitted by Taxpayer and Taxpayer’s representatives and
accompanied by a penalties 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.
PLR-139691-16                                5

       Except as specifically set forth above, we express no opinion concerning the
federal tax consequences of the facts described above under any other provisions of
the Code and the regulations thereunder. Specifically, we express or imply no opinion
on whether Taxpayer satisfies the requirements of § 263(c) or § 59(e).

      This letter ruling is directed only to the taxpayer requesting it. Section 6110(k)(3)
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 Taxpayer's authorized representatives. We also are sending a
copy of this letter to the appropriate Director, LB&I.


                                          Sincerely,

                                          Associate Chief Counsel
                                          (Passthroughs & Special Industries)



                                   By:    _______________________________
                                          Patrick S. Kirwan
                                          Chief, Branch 6
                                          Office of Associate Chief Counsel
                                          Passthroughs & Special Industries


Enclosures (2):
Copies of this letter
Copy for § 6110 purposes


cc: