Landlord received more time for a tenant-improvement disposition election

Plain-English summary

A partnership owned an office building and removed an earlier tenant's improvements while preparing the space for a new tenant. Its accounting firm knew about the tenant change and build-out but did not ask for the cost information needed to make a partial disposition election on the partnership's return. The partnership requested late-election relief so it could report the gain, loss, or other deduction associated with the disposed improvements. The IRS found that the regulatory relief standards were met and granted 60 days to file an amended Form 1065 making the election. It did not decide whether each improvement was eligible, whether the depreciation details and basis were correct, or whether the partnership held a depreciable interest in the improvements.

Ruling snapshot

• Question: Could the partnership make a late partial disposition election for removed tenant improvements?
• Outcome: Approved, with 60 days to file an amended Form 1065.
• Key authorities: Treas. Reg. §§ 1.168(i)-8(d)(2), 301.9100-1, and 301.9100-3.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201818004 Third Party Communication: None
Release Date: 5/4/2018 Date of Communication: Not Applicable
Index Number: 9100.04-00
Person To Contact:
----------------------------- ----------------------------, ID No. --------------
---------------------------- -----------------
----------------------------------- Telephone Number:
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---------------------------------- Refer Reply To:
CC:ITA:B07
PLR-124312-17
Date:
February 02, 2018

Re: Request for Extension of Time to Make the Partial Disposition Election

Legend

Taxpayer = ------------------------------------------------------------
Tenant1 = --------------------------
Tenant2 = --------------------------
Date1 = ---------------------------
Date2 = ---------------------------
Date3 = ----------------------
A = -------
B = -------
C = ----------------
D = --------------

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

   This letter responds to a letter dated August 4, 2017, and subsequent

correspondence, submitted by Taxpayer requesting an extension of time pursuant to §
301.9100-3 of the Procedure and Administration Regulations to make the partial
disposition election under § 1.168(i)-8(d)(2) of the Income Tax Regulations for the
taxable year ended on Date1 (the A taxable year).

FACTS

     Taxpayer represents that the facts are as follows:

    Taxpayer, a calendar-year taxpayer, is a limited liability company that is

classified as a partnership for federal tax purposes. Taxpayer acquires and owns office
buildings for lease to tenants.
PLR-124312-17 2

    Taxpayer acquired and placed in service an office building on Date2, and leased

it to Tenant1. Tenant1 vacated the office building in the fall of B. On Date3, Taxpayer
leased the office building to Tenant2. Before Tenant2 moved into the office building,
Taxpayer undertook and completed a tenant build-out project for the office building in A.
In connection with the construction of the new tenant improvements for Tenant2,
Taxpayer, in A, removed and disposed of the tenant improvements that Taxpayer had
placed in service on Date2, for use by Tenant1. The total cost of the disposed tenant
improvements was C for which a total of D in depreciation had been claimed.

   Taxpayer engaged an accounting firm to prepare Taxpayer’s Form 1065, U.S.

Return of Partnership Income, for the A taxable year. The accounting firm knew that
Tenant1 had vacated the office building and that Taxpayer undertook the above tenant
build-out project. However, the accounting firm did not make appropriate inquiries of
Taxpayer regarding the cost of the tenant improvements disposed of in connection with
this build-out project. As a result, a partial disposition election for such disposed tenant
improvements was not made on Taxpayer’s Form 1065 for the A taxable year.

RULING REQUESTED

  Taxpayer requests an extension of time pursuant to §§ 301.9100-1 and

301.9100-3 to make a partial disposition election under § 1.168(i)-8(d)(2) on its Form
1065 for the taxable year ended on Date1, for the tenant improvements that were
placed in service by Taxpayer on Date2, for use by Tenant1, and disposed of by
Taxpayer during the taxable year ended on Date1.

LAW AND ANALYSIS

   Pursuant to § 1.168(i)-8(a), § 1.168(i)-8 provides rules applicable to dispositions

of MACRS property (as defined in § 1.168(b)-1(a)(2)) and also applies to dispositions
described in § 1.168(i)-8(d)(1) of a portion of such property. Except as provided in §
1.168(i)-1(e)(3), § 1.168(i)-8 does not apply to dispositions of assets included in a
general asset account.

   Section 1.168(i)-8(b)(2) provides that, for purposes of § 1.168(i)-8, disposition

occurs when ownership of the asset is transferred or when the asset is permanently
withdrawn from use either in the taxpayer's trade or business or in the production of
income. A disposition includes the sale, exchange, retirement, physical abandonment,
or destruction of an asset. A disposition also occurs when an asset is transferred to a
supplies, scrap, or similar account, or when a portion of an asset is disposed of as
described in § 1.168(i)-8(d)(1). If a structural component, or a portion thereof, of a
building is disposed of in a disposition described in § 1.168(i)-8(d)(1), a disposition also
includes the disposition of such structural component or such portion thereof.
PLR-124312-17 3

    Section 1.168(i)-8(c)(1) provides that the manner of disposition (for example,

normal retirement, abnormal retirement, ordinary retirement, or extraordinary retirement)
is not taken into account in determining whether a disposition occurs or gain or loss is
recognized.

   Section 1.168(i)-8(c)(3)(i) provides that § 1.168(i)-8 also applies to a lessor of

leased property that made an improvement to that property for the lessee of the
property, has a depreciable basis in the improvement, and disposes of the
improvement, or disposes of a portion of the improvement under § 1.168(i)-8(d)(1),
before or upon the termination of the lease with the lessee.

   Section 1.168(i)-8(c)(4)(i) provides that for purposes of applying § 1.168(i)-8, the

facts and circumstances of each disposition are considered in determining what is the
appropriate asset disposed of. The asset for disposition purposes may not consist of
items placed in service by the taxpayer on different dates, without taking into account
the applicable convention. For purposes of determining what is the appropriate asset
disposed of, the unit of property determination under § 1.263(a)-3(e) or in published
guidance in the Internal Revenue Bulletin under § 263(a) does not apply.

   In addition to the general rules in § 1.168(i)-8(c)(4)(i) for purposes of applying §

1.168(i)-8, § 1.168(i)-4(c)(4)(ii)(A) provides that each building, including its structural
components, is the asset except as provided in § 1.1250-1(a)(2)(ii) or in § 1.168(i)-
8(c)(4)(ii)(B) or (D). Section 1.168(i)-8(c)(4)(ii)(D) provides that if the taxpayer places in
service an improvement or addition to an asset after the taxpayer placed the asset in
service, the improvement or addition and, if applicable, its structural components, are a
separate asset.

   Section 1.168(i)-8(d)(1)(i) provides that for purposes of applying § 1.168(i)-8, a

disposition includes a disposition of a portion of an asset as a result of a casualty event
described in § 165, a disposition of a portion of an asset for which gain, determined
without regard to § 1245 or § 1250, is not recognized in whole or in part under § 1031 or
§ 1033, a transfer of a portion of an asset in a transaction described in § 168(i)(7)(B), or
a sale of a portion of an asset, even if the taxpayer does not make the election under
paragraph § 1.168(i)-8(d)(2)(i) for that disposed portion. For other transactions, a
disposition includes a disposition of a portion of an asset only if the taxpayer makes the
election under § 1.168(i)-8(d)(2)(i) for that disposed portion.

   Section 1.168(i)-8(d)(2)(i) provides that a taxpayer may make an election to apply

§ 1.168(i)-8 to a disposition of a portion of an asset. If the asset is properly included in
one of the asset classes 00.11 through 00.4 of Rev. Proc. 87–56, 1987-2 C.B. 674, a
taxpayer may make an election to apply § 1.168(i)-8 to a disposition of a portion of such
asset only if the taxpayer classifies the replacement portion of the asset under the same
asset class as the disposed portion of the asset.
PLR-124312-17 4

   Section 1.168(i)-8(d)(2)(ii)(A) provides that except as provided in § 1.168(i)-

8(d)(2)(iii) or (iv), a taxpayer must make the election specified in § 1.168(i)-8(d)(2)(i) by
the due date, including extensions, of the original federal tax return for the taxable year
in which the portion of an asset is disposed of by the taxpayer.

   Section 1.168(i)-8(d)(2)(ii)(B) provides that except as provided in § 1.168(i)-

8(d)(2)(iii) or (iv), a taxpayer must make the election specified in § 1.168(i)-8(d)(2)(i) by
applying the provisions of § 1.168(i)-8 for the taxable year in which the portion of an
asset is disposed of by the taxpayer, by reporting the gain, loss, or other deduction on
the taxpayer's timely filed, including extensions, original federal tax return for that
taxable year, and, if the asset is properly included in one of the asset classes 00.11
through 00.4 of Rev. Proc. 87–56, by classifying the replacement portion of such asset
under the same asset class as the disposed portion of the asset in the taxable year in
which the replacement portion is placed in service by the taxpayer. Except as provided
in § 1.168(i)-8(d)(2)(iii) or (iv)(B) or except as otherwise expressly provided by other
guidance published in the Internal Revenue Bulletin, the election specified in § 1.168(i)-
8(d)(2)(i) may not be made through the filing of an application for change in accounting
method.

   Section 1.168(i)-8(e) provides that, solely for purposes of § 1.168(i)-8(e), the

term “asset” is an asset within the scope of § 1.168(i)-8 or the portion of such asset that
is disposed of in a disposition described in § 1.168(i)-8(d)(1) (disposition of a portion of
an asset). Except as provided by § 280B and § 1.280B-1, the following rules apply
when an asset is disposed of during a taxable year:

   (1) If an asset is disposed of by sale, exchange, or involuntary conversion, gain

or loss must be recognized under the applicable provisions of the Internal Revenue
Code.

   (2) If an asset is disposed of by physical abandonment, loss must be recognized

in the amount of the adjusted depreciable basis (as defined in § 1.168(b)-1(a)(4)) of the
asset at the time of the abandonment, taking into account the applicable convention.
However, if the abandoned asset is subject to nonrecourse indebtedness, § 1.168(i)-
8(e)(1) applies to the asset instead of § 1.168(i)-8(e)(2). For a loss from physical
abandonment to qualify for recognition under § 1.168(i)-8(e)(2), the taxpayer must
intend to discard the asset irrevocably so that the taxpayer will neither use the asset
again nor retrieve it for sale, exchange, or other disposition.

   (3) If an asset is disposed of other than by sale, exchange, involuntary

conversion, physical abandonment, or conversion to personal use (as, for example,
when the asset is transferred to a supplies or scrap account), gain is not recognized.
Loss must be recognized in the amount of the excess of the adjusted depreciable basis
of the asset at the time of the disposition, taking into account the applicable convention,
PLR-124312-17 5

over the asset's fair market value at the time of the disposition, taking into account the
applicable convention.

    Section 1.168(i)-8(f)(3) applies only when a taxpayer disposes of a portion of an

asset and § 1.168(i)-8(d)(1) applies to that disposition. For computing gain or loss, the
adjusted basis of the disposed portion of the asset is the adjusted depreciable basis of
that disposed portion at the time of its disposition, as determined under the applicable
convention for the asset.

   Section 1.168(i)-8(g)(1) provides that, except as provided in § 1.168(i)-8(g)(2)

(asset disposed of is in a multiple asset account) or (3) (disposition of a portion of an
asset), a taxpayer must use the specific identification method of accounting to identify
which asset is disposed of by the taxpayer. Under this method of accounting, the
taxpayer can determine the particular taxable year in which the asset disposed of was
placed in service by the taxpayer. Section 1.168(i)-8(g)(3) (disposition of a portion of an
asset) applies only if it is impracticable from the taxpayer’s records to determine the
particular taxable year in which the asset that included the disposed portion was placed
in service.

   Section 1.168(i)-8(h)(1) provides that depreciation ends for an asset at the time

of the asset's disposition, as determined under the applicable convention for the asset.
See § 1.167(a)-10(b). If a taxpayer disposes of a portion of an asset and § 1.168(i)-
8(d)(1) applies to that disposition, depreciation ends for that disposed portion of the
asset at the time of the disposition of the disposed portion, as determined under the
applicable convention for the asset.

  Section 1.446-1(e)(2)(ii)(d)(3)(iii) provides that generally the making of a late

depreciation or amortization election or the revocation of a timely valid depreciation or
amortization election is not a change in method of accounting, except as otherwise
expressly provided by the Internal Revenue Code, the regulations under the Internal
Revenue Code, or other guidance published in the Internal Revenue Bulletin. A
taxpayer may request consent to make a late election or revoke a timely valid election
by submitting a request for a private letter ruling.

   Under § 301.9100-1, the Commissioner of Internal Revenue has discretion to

grant a reasonable extension of time under the rules set forth in §§ 301.9100-2 and
301.9100-3 to make a regulatory election.

   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 automatic extensions of time for making certain
elections. Section 301.9100-3 provides extensions of time for making elections that do
not meet the requirements of § 301.9100-2.
PLR-124312-17 6

    Section 301.9100-3(a) provides that requests for relief under § 301.9100-3 will be

granted when the taxpayer provides evidence 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.

CONCLUSION

   Based solely on the facts and representations submitted, we conclude that the

requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied. Accordingly,
Taxpayer is granted 60 calendar days from the date of this letter to make the partial
disposition election under § 1.168(i)-8(d)(2) for the tenant improvements that were
placed in service by Taxpayer on Date2, for use by Tenant1, and disposed of by
Taxpayer during the taxable year ended on Date1. This election must be made by
Taxpayer filing an amended Form 1065 for the taxable year ended on Date1, and
reporting the gain, loss, or other deduction from the disposition of such tenant
improvements on that amended return. Please attach a copy of this letter ruling to the
amended return.

   Except as expressly 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 (including other subsections of § 168) or regulations. Specifically, no opinion
is expressed or implied concerning whether: (1) the disposition of each tenant
improvement that was placed in service by Taxpayer on Date2, for use by Tenant1, and
disposed of by Taxpayer during the A taxable year is eligible for the partial disposition
election; (2) Taxpayer’s depreciation method, recovery period, convention, and placed-
in-service date for any asset are correct; (3) the adjusted depreciable basis of the tenant
improvements for which Taxpayer is making the partial disposition election is correct;
and (4) Taxpayer has a depreciable interest in the tenant improvements for which
Taxpayer is making the partial disposition election.

  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 the ruling, it is subject to verification on examination.

  This letter ruling is directed only to Taxpayer who requested it. Section

6110(k)(3) provides that it may not be used or cited as precedent.
PLR-124312-17 7

In accordance with the power of attorney, we are sending a copy of this letter ruling to
Taxpayer’s representative. We also are sending a copy of this letter ruling to the
appropriate operating division director.

                                  Sincerely yours,

                                  KATHLEEN REED
                                  KATHLEEN REED
                                  Chief, Branch 7
                                  Office of Associate Chief Counsel
                                  (Income Tax & Accounting)

Enclosures (2):
copy of this letter
copy for section 6110 purposes