Affiliated entities received more time to elect alternative depreciation

Plain-English summary

An individual owned several pass-through entities that used the general depreciation system for property placed in service during a redacted tax year. Using the alternative depreciation system instead could have reduced the depreciation passed through to the owner and preserved more of the owner's alimony deduction. Neither the entities' in-house preparers nor the owner's return preparer had advised the owner about making that election. The IRS found that the regulatory requirements for late-election relief were satisfied. It gave the entities 60 days to file amended returns and elect the alternative depreciation system for all covered property placed in service during that year.

Ruling snapshot

• Question: Could the affiliated entities receive an extension to elect the alternative depreciation system under Section 168(g)(7)?
• Outcome: Approved, with 60 days to make the election on amended returns.
• Key authorities: IRC §§ 167, 168(g), and 172(d)(4); Treas. Reg. §§ 301.9100-1, 301.9100-3, and 301.9100-7T.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201818011 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:
---------------------------- ----------------------
---------------------------- Refer Reply To:
CC:ITA:B07
PLR-133859-17
Date:
February 01, 2018

Re: Request for Extension of Time to Make the Election to Use the Alternative
Depreciation System

Legend

Taxpayer = ----------------------

P1 = --------------------------------------------------------------------------

P2 = -----------------------------------------------------

P3 = -------------------------------------------------

P4 = ---------------------------------------------------

P5 = --------------------------------------------------------------

Date 1 = ---------------------------

Date 2 = ------------------------

Date 3 = ----------------------------

A = -------

B = ---------------------------------------------------------------------------------------------------------------

C = --------------

PLR-133859-17 2

D = ------------------------------------------

E = ----------------------

F = -----------------------

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

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

correspondence, submitted by Taxpayer on behalf of his wholly owned pass-through
entities P1, P2, P3, P4, and P5 (hereinafter collectively referred to as “the affiliated
entities”), requesting an extension of time pursuant to § 301.9100-3 of the Procedure
and Administration Regulations to make the election under § 168(g)(7) of the Internal
Revenue Code to use the alternative depreciation system (“ADS”) under § 168(g) for all
property placed in service by the affiliated entities during the taxable year ended Date 1
(the A taxable year).

FACTS

    Taxpayer represents that the facts are as follows:

   Taxpayer is an individual who files Form 1040, U.S. Individual Income Tax Return,

on a calendar year basis. Taxpayer wholly owns the affiliated entities. The affiliated
entities each file either a Form 1065, U.S. Income Tax Return for a Partnership or Form
1120S, U.S. Income Tax Return for an S Corporation, as applicable, on a calendar year
basis and use an accrual method of accounting. The affiliated entities are in the trade
or business of B. The period of limitation on assessment under § 6501(a) for the A
taxable year has not expired as of the date of this letter.

    The affiliated entities depreciated all property placed in service in A using MACRS

and the general depreciation system (“GDS”) depreciation methods, recovery periods,
and conventions in accordance with § 168 and Rev. Proc. 87-56, 1987-2 C.B. 674. The
affiliated entities reported income to their shareholder/partner, Taxpayer, on Schedule
K-1 (1120S/1065), Shareholder’s/Partner’s Share of Income, Deductions, Credits, etc.,
taking into account the aforementioned depreciation deductions, and Taxpayer claimed
the depreciation deductions on his A Form 1040.

  Taxpayer paid $C of alimony during A and deducted the alimony payments on his

A Form 1040. Taxpayer reported a net loss on the return and was precluded from
carrying back or carrying over the net loss as a net operating loss (NOL) to the extent
the net loss was attributable to the alimony deduction under § 172(d)(4) and § 1.172-
3(a)(3) of the Income Tax Regulations (allowing nonbusiness deductions in the

PLR-133859-17 3

computation of NOLs only to the extent of nonbusiness income for taxpayers other than
corporations).

  Taxpayer could have preserved the benefit of the deduction for alimony on his A

return if the affiliated entities had minimized the depreciation deductions flowing through
to Taxpayer and eliminated his net loss. Specifically, the affiliated entities could have
elected to depreciate all property placed in service in A using ADS depreciation
methods, recovery periods, and conventions in accordance with § 168(g) on all property
placed in service in A, instead of GDS.

   The Forms 1065 and Forms 1120S of the affiliated entities are prepared in-house

by employees of the affiliated entities. The CFO of the affiliated entities is responsible
for the preparation of the returns, and the affiliated entities employ a full time staff,
including one or more Certified Public Accountants (“CPAs”), to prepare the federal
income tax returns and ensure compliance with all tax rules. Taxpayer generally
engages a third party tax professional to prepare his Form 1040. Taxpayer engaged D
to prepare his A Form 1040.

   Taxpayer was not advised by the affiliated entities’ in-house tax preparers or D,

and Taxpayer did not know independently, that Taxpayer could preserve the benefit of
the deduction for alimony on the A return by having the affiliated entities make the ADS
election for all property placed in service by the affiliated entities during the A taxable
year.

 Taxpayer’s A Form 1040 was timely filed on Date 2, and the affiliated entities’

Forms 1065 and Form 1120S were timely filed prior to Date 3.

   Taxpayer discovered the failure to make the ADS election in E after consulting

with D about his A Form 1040. Taxpayer consulted with F regarding potential remedies
for the failure to make the ADS election, and F advised Taxpayer to file this request for
relief under Treas. Reg. § 301.9100-3.

RULING REQUESTED

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

301.9100-3 to make the election under § 168(g)(7) to use the ADS method of
depreciation for property placed in service in the taxable year ended Date 1.

LAW AND ANALYSIS

   Section 167(a) provides that there shall be allowed as a depreciation deduction a

reasonable allowance for the exhaustion, wear and tear, and obsolescence of property
used in taxpayer’s trade or business.

PLR-133859-17 4

   The depreciation deduction provided by § 167(a) for tangible property placed in

service after 1986 generally is determined under § 168. Section 168 prescribes two
methods of accounting for determining depreciation allowances. One method is the
GDS in § 168(a) and the other method is the ADS.

   In the case of any property to which an election under § 168(g)(7) applies,

§ 168(g)(1) provides that the depreciation deduction provided by § 167(a) is determined
under the ADS. Pursuant to § 168(g)(2), the ADS is depreciation determined by using
the straight line method (without regard to salvage value), the applicable convention
determined under § 168(d), and a recovery period determined under the table
prescribed in § 168(g)(2)(C) or under the special rules provided in § 168(g)(3).

   Section 168(g)(7) permits a taxpayer to elect for any class of property for any

taxable year to use the ADS for determining depreciation for all property in that class
placed in service during that taxable year. However, in the case of nonresidential real
property, the election is made separately with respect to each property. Once made, an
election to use ADS is irrevocable.

    Section 301.9100-7T(a)(1) provides that the election under § 168(g)(7) must be

made for the taxable year in which the property is placed in service. Section 301.9100-
7T(a)(2)(i) further provides that this election must be made by the due date (including
extensions) of the tax return for the taxable year for which the election is to be effective.
Section 301.9100-7T(a)(3)(i) provides that the election under § 168(g)(7) is made by
attaching a statement to the tax return for the taxable year for which the election is to be
effective.

   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.

    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

PLR-133859-17 5

requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied. Accordingly, the
affiliated entities are granted 60 calendar days from the date of this letter to make the
§ 168(g)(7) election to use ADS under § 168(g) for all property placed in service by the
affiliated entities during the taxable year ended Date 1. This election must be made by
the affiliated entities filing either an amended Form 1065, U.S. Income Tax Return for a
Partnership or Form 1120S, U.S. Income Tax Return for an S Corporation, as
applicable, for the A taxable year, with a statement indicating that the affiliated entities
are electing to make the election under § 168(g)(7) to use the ADS method of
depreciation for all property placed in service during that taxable year.

    Except as specifically set forth above, we express no opinion concerning the

federal income tax consequences of the facts described above under any other
provisions of the Code (including other subsections of §168). Specifically, no opinion is
expressed or implied on whether any item of depreciable property placed in service by
the affiliated entities during the A taxable year is required to use the ADS pursuant to
§ 168(g)(1)(A) through (D).

    The rulings contained in this letter are based upon information and

representations submitted by the affiliated entities 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 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, we are sending a copy of this letter

ruling to the affiliated entities' authorized representative. We also are sending a copy of
this letter ruling to the appropriate operating division director.

                                              Sincerely yours,

                                              DEENA DEVEREUX

                                              DEENA DEVEREUX
                                              Senior Technician Reviewer, Branch 7
                                              Office of Associate Chief Counsel
                                              (Income Tax & Accounting)

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