Taxpayer received 120 days for two late drilling cost elections

Plain-English summary

A taxpayer held interests in two oil exploration and production partnerships and incurred intangible drilling costs in two tax years. An accounting firm advising the taxpayer failed to explain that Section 59(e) elections were available to deduct those costs ratably over ten years. The taxpayer represented that it acted reasonably and in good faith and that relief would not prejudice the government. The IRS granted 120 days to make separate late elections for both years by filing the required statements with amended returns. The ruling did not determine whether the taxpayer otherwise qualified, whether the expenditures were eligible intangible drilling costs, or whether the reported amounts were correct.

Ruling snapshot

• Question: Could the taxpayer receive extra time to make Section 59(e) elections for intangible drilling costs incurred in two years?
• Outcome: Approved, with 120 days to make both elections.
• Key authorities: IRC §§ 59(e) and 263(c); Treas. Reg. §§ 1.59-1(b), 1.612-4(a), 301.9100-1, and 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201825017                                              Third Party Communication: None
Release Date: 6/22/2018                                        Date of Communication: Not Applicable
Index Number: 9100.02-00, 9100.02-
              03                                               Person To Contact:
                                                               ------------------------, ID No. -------------
----------------------                                         Telephone Number:
--------------------------------                               ----------------------
-----------------------------------------------------          Refer Reply To:
------                                                         CC:PSI:B06
----------------------------------------------                 PLR-130912-17
---------------------------------                              Date:
                                                               March 27, 2018




LEGEND


Taxpayer:                  =         -----------------------------------------------
------------------------------------------------------------

Taxable Year A:            =        ------------------------

Taxable Year B:            =        ------------------------




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

       This is in response to a letter dated October 4, 2017, requesting extensions of
time under §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration
Regulations to make separate late elections under § 59(e) of the Internal Revenue
Code (Code) for Taxable Year A and Taxable Year B, with respect to intangible drilling
cost under § 263(c) paid and incurred in these years.
PLR-130912-17                                2

       Taxpayer held an interest in two separate partnerships that were engaged in oil
exploration and production. Taxpayer had an internal tax director who had consulted
with an accounting firm. However, the accounting firm failed to inform Taxpayer that the
section 59(e) election was available for the intangible drilling costs associated with the
oil and gas activities of the partnerships described above.

        Taxpayer represented that, in requesting extensions of time to make separate
late elections under § 59(e) for Taxable Year A and Taxable Year B, it acted reasonably
and in good faith and, further, there is no prejudice to the interests of the Government.

       Section 263(c) of the Code authorizes the Secretary to prescribe regulations
under which taxpayers may elect to deduct intangible drilling and development costs in
the case of oil and gas wells located in the United States. Section 1.612-4(a) of the
regulations provides that taxpayers that hold a working or operating interest in an oil or
gas property may elect to deduct intangible drilling and development costs they incur
with respect to that property.

       Section 59(e)(1) allows a taxpayer, in general, to deduct ratably over the 10-year
period any qualified expenditure to which an election under § 59(e) applies, 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 for the taxable year in which paid or incurred under § 263(c) (relating to
intangible drilling and development costs in the case of oil and gas wells and
geothermal wells).

      Section 59(e)(3) specifically prohibits the deduction of the qualified expenditures
under any other section of the Code if the option under § 59(e) is elected.

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

      Section 59(e)(4)(B) provides that an election made under § 59(e) may be
revoked only with the consent of the Secretary.

       Section 1.59-1(b)(1) of the Income Tax Regulations 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 and
PLR-130912-17                                 3

include certain required information.

       Section 1.59-1(b)(2) provides, in part, that a taxpayer may make an election
under § 59(e) with respect to any portion of any qualified expenditure paid or incurred
by the taxpayer in the taxable year to which the election applies. An election under
§ 59(e) must be for a specific dollar amount and the amount subject to an election under
§ 59(e) may not be made by reference to a formula.

      Section 301.9100-1(a) provides that the regulations under this section and
§§ 301.9100-2 and 301.9100-3 establish the standards the Commissioner will use to
determine whether to grant an extension of time to make a regulatory election. An
extension of time is available for elections that a taxpayer is otherwise eligible to make.
However, the granting of an extension of time is not a determination that the taxpayer is
otherwise eligible to make the election.

       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.

       Section 301.9100-1(c) provides that the Commissioner may grant a reasonable
extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3 to make a
regulatory election, or a statutory election (but no more than six months except in the
case of taxpayer who is abroad), under all subtitles of the Code, except subtitles E, G,
H, and I.

        Section 301.9100-3 provides that requests for relief subject to this section 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 that granting
relief will not prejudice the interests of the Government.

        Based solely on the information submitted and representations made, we
conclude that the requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied.
Accordingly, Taxpayer is granted an extension of time of 120 days from the date of this
letter to deduct intangible drilling costs ratably over the 10-year period described above.

        The election under § 59(e) must comply with the requirements of § 1.59-1(b).
Section 1.59-1(b) requires, in part, that an election under § 59(e) 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 election under
§ 59(e) begins. 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).
PLR-130912-17                                4

        In making the elections, Taxpayer should also attach copies of this letter to the
amended returns for Taxable Year A and Taxable Year B. We have enclosed copies of
this letter (one for each election) for that purpose.

       Except as specifically set forth above, we express no opinion concerning the
federal tax consequences of the facts described above. In particular, we express or
imply no opinion on whether Taxpayer satisfies the requirements of § 59(e) and the
regulations thereunder, or whether the expenditures at issue are intangible drilling
expenditures under § 263(c) or whether the amounts of those expenditures are correct.

      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.

      The rulings contained in this letter are based upon information submitted and
representations made by Taxpayer and Taxpayer’s representatives and accompanied
by a penalty of perjury statement executed by an appropriate party. Although this office
has not verified any of the material submitted in support of the request for rulings, it is
subject to verification on examination.

                                          Sincerely,




                                          Patrick S. Kirwan
                                          Chief, Branch 6
                                          Office of Associate Chief Counsel
                                          (Passthroughs and Special Industries)


Enclosures (2)

       Copy of this letter
       Copy for § 6110 purposes


cc: