Partnership gets consent to undo its election out of bonus depreciation after a technical termination

Plain-English summary

A limited partnership placed depreciable equipment in service and, on its return,
elected under § 168(k)(7) NOT to take the 50% bonus (additional first-year)
depreciation, because the general partner expected losses and did not want the
extra deductions. What the general partner did not realize was that a new limited
partner needed those depreciation deductions passed through to its investors, and
that this "elect out" choice cannot be undone on an amended return without the
Commissioner's written consent. Complicating matters, the partnership had gone
through a "technical termination" under § 708(b)(1)(B) that year when a partner
sold its entire interest, splitting the year into two returns. The partnership
asked the IRS for permission to revoke the elect-out. The IRS agreed: the
regulations let this election be revoked with the Commissioner's consent, so the
partnership was granted 60 days to revoke it by filing an amended return, freeing
it to claim the bonus depreciation.

Ruling snapshot

• Question: May a partnership revoke its § 168(k)(7) election not to deduct bonus depreciation for its 5-year and 15-year property?
• Outcome: Approved (60-day window to revoke granted)
• Key authorities: IRC §§ 168(k), 708(b)(1)(B); Treas. Reg. § 1.168(k)-1(e)(7)(i); Rev. Proc. 2017-33

Full text (IRS public release)

Internal Revenue Service                                     Department of the Treasury
                                                             Washington, DC 20224

Number: 201839002                                            Third Party Communication: None
Release Date: 9/28/2018                                      Date of Communication: Not Applicable
Index Number: 168.36-00
                                                             Person To Contact:
--------------------------------------------                 ---------------------------, ID No. ---------------
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--------------------------------------------------           Telephone Number:
---------------------------------                            ----------------------
----------------------------                                 Refer Reply To:
                                                             CC:ITA:7
                                                             PLR-102556-18
                                                             Date:
                                                             July 3, 2018




Re: Request to Revoke Taxpayer’s Election Not to Deduct the Additional First Year
Depreciation

Legend

Taxpayer                               = --------------------------------------------------
                                         -----------------------------
GP                                     = ------------------------------------------------------------------
LP1                                    = ----------------------------------------------------
                                         -----------------------------
LP2                                    = ------------------------------------------------------------------------
Year1                                  = -------
Year2                                  = -------
Date1                                  = ---------------------
Date2                                  = ---------------------------
Final Return Period                    = -------------------------------------------------------
Initial Return Period                  = -----------------------------------------------------------
M%                                     = -------------------
N%                                     = -------------------


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

     This letter ruling responds to a letter dated December 21, 2017, submitted by
Taxpayer requesting the consent of the Commissioner of Internal Revenue to revoke
Taxpayer’s election under § 168(k) of the Internal Revenue Code not to deduct the

additional first year depreciation that was made on its federal tax return for the short
taxable year beginning Date1, and ended Date2 (the “Year1 taxable year”).

       Except as specifically stated otherwise, all references in this letter ruling to §
168(k) or § 708(b)(1)(B) are treated as a reference to § 168(k) or § 708(b)(1)(B),
respectively, as in effect prior to amendment by the Tax Cuts and Jobs Act, Pub. L. No.
115-97, 131 Stat. 2054 (December 22, 2017).

                                           FACTS

       Taxpayer represents that the facts are as follows:

     Taxpayer, a limited partnership, files Form 1065, U.S. Return of Partnership
Income, on a calendar year basis. Taxpayer’s principal business activity is 531110.
Taxpayer’s overall method of accounting is an accrual method.

      Taxpayer is owned by a general partner and two limited partners. The general
partner is GP, which owns an M% interest in Taxpayer. The limited partners are LP1,
which owns an M% interest in Taxpayer, and LP2 which owns an N% interest in
Taxpayer.

         During Year1, Taxpayer experienced a technical termination under §
708(b)(1)(B) as the result of a former limited partner transferring all of its interest to LP2.
As a result of the technical termination, Taxpayer was required to file a final federal tax
return covering the Final Return Period, and an initial federal tax return covering the
Initial Return Period. The Initial Return Period and the Year1 taxable year are the
same.

        During Year1, Taxpayer also placed in service qualified property (as defined in §
168(k)(2)). On its timely filed Form 1065 for the Year1 taxable year, Taxpayer made an
election under § 168(k)(7) not to deduct the additional first year depreciation deduction
for the following eligible classes of property: property in the 5-year class, and property
in the 15-year class.

       GP was responsible for filing Taxpayer’s federal tax returns for the Final Return
Period and for the Year1 taxable year. GP made the election not to deduct the
additional first year depreciation based on its awareness that Taxpayer had reported
losses on its federal tax returns for the prior year and Year1, and based on its
anticipation of more losses in Year2. However, GP did not understand that LP2, its new
limited partner, needed and expected to pass-through the additional depreciation
deductions to its investors for Year1. GP also did not understand that the election to not
deduct the additional first year depreciation could not be revoked on an amended
return. Had GP understood this, GP would have obtained a more final and complete
understanding of the needs and tax positions of LP2’s investors prior to filing Taxpayer’s
Form 1065 for the Year1 taxable year.


                                  RULING REQUESTED

        Taxpayer requests consent to revoke its election under § 168(k)(7) not to deduct
the additional first year depreciation under § 168(k)(1) for the 5-year and 15-year
eligible classes of qualified property that were placed in service by Taxpayer during the
short taxable year beginning Date1, and ended Date2, and for the 5-year and 15-year
eligible classes of qualified property that were placed in service by the terminated
partnership during Year1 and contributed to Taxpayer in a transaction described in §
708(b)(1)(B) by the terminated partnership during Year1.

                                            LAW

        Section 168(k)(1) allowed, in the taxable year that qualified property is placed in
service, a 50-percent additional first year depreciation deduction for qualified property
placed in service by the taxpayer before January 1, 2020 (before January 1, 2021, for
qualified property described in §§ 168(k)(2)(B) or 168(k)(2)(C)).

       Section 4 of Rev. Proc. 2017-33, 2017-19 I.R.B. 1236, provides guidance under
§ 168(k) as amended by § 143(b) of the Protecting Americans from Tax Hikes Act of
2015 (PATH Act), enacted as Division Q of the Consolidated Appropriations Act, 2016,
Pub. L. No. 114-113, 129 Stat. 2242 (Dec. 18, 2015). Pursuant to section 4.01(3) of
Rev. Proc. 2017-33, rules similar to the rules in § 1.168(k)-1of the Income Tax
Regulations for “qualified property” or for “30-percent additional first year depreciation
deduction” apply to § 168(k)(2) and (3). However, in applying § 1.168(k)-1(d)(1)(i), the
computation of the allowable 50-percent additional first year depreciation deduction is
made in accordance with the rules for 50-percent bonus depreciation property and, in
applying § 1.168(k)-1(f)(5)(iii)(A), the rules for 50-percent additional first year
depreciation deduction apply.

        Section 1.168(k)-1(f)(1)(ii) provides that in the case of a technical termination of a
partnership under § 708(b)(1)(B), the additional first year depreciation deduction is
allowable for any qualified property placed in service by the terminated partnership
during the taxable year of termination and contributed by the terminated partnership to
the new partnership. The allowable additional first year depreciation deduction for the
qualified property shall not be claimed by the terminated partnership but instead shall be
claimed by the new partnership for the new partnership’s taxable year in which the
qualified property was contributed by the terminated partnership to the new partnership.
However, if qualified property is both placed in service and contributed to a new
partnership in a transaction described in § 708(b)(1)(B) by the terminated partnership
during the taxable year of termination, and if such property is disposed of by the new
partnership in the same taxable year the new partnership received such property from
the terminated partnership, then no additional first year depreciation deduction is
allowable to either partnership.

        Section 168(k)(7) provides that a taxpayer may elect not to deduct the additional
first year depreciation for any class of property placed in service during the taxable year.

       Section 4.04(1) of Rev. Proc. 2017-33 provides that the rules for making the
election under § 168(k)(7) not to deduct the additional first year depreciation (the
§ 168(k)(7) election) are similar to the rules for making such election under §
168(k)(2)(D)(iii) as in effect before the enactment of the PATH Act. As a result, the §
168(k)(7) election applies to all qualified property that is in the same class of property
and placed in service in the same taxable year. If the § 168(k)(7) election is made for a
class of property that is qualified property placed in service during the taxable year, no
additional first year depreciation deduction is allowable for that property and §
168(k)(2)(F) does not apply to that property.

       Section 4.04(2) of Rev. Proc. 2017-33 provides that, in general, rules similar to
the rules in § 1.168(k)-1(e)(2), (3), (5), and (7) apply for purposes of § 168(k)(7).

       Section 1.168(k)-1(e)(2) defines the term “class of property” as meaning, among
other things, each class of property described in § 168(e) (for example, 5-year
property).

       Section 1.168(k)-1(e)(3)(i) provides that the election not to deduct additional first
year depreciation must be made by the due date (including extensions) of the federal
tax return for the taxable year in which the property is placed in service by the taxpayer.

        Section 1.168(k)-1(e)(7)(i) provides that an election not to deduct the additional
first year depreciation for a class of property that is qualified property, once made, may
be revoked only with the written consent of the Commissioner of Internal Revenue. To
seek the Commissioner's consent, the taxpayer must submit a request for a letter ruling.

                                      CONCLUSION

        Based solely on the facts and representations submitted, we conclude that a
revocation of Taxpayer’s election not to deduct any additional first year depreciation
under § 168(k)(1) for the 5-year and 15-year eligible classes of qualified property that
were placed in service by Taxpayer during the short taxable year beginning Date1, and
ended Date2, and for the 5-year and 15-year eligible classes of qualified property that
were placed in service by the terminated partnership during Year1 and contributed to
Taxpayer in a transaction described in § 708(b)(1)(B) by the terminated partnership
during Year1, is permitted under § 1.168(k)-1(e)(7)(i). Accordingly, Taxpayer is granted
60 calendar days from the date of this letter to revoke such election. The revocation
must be made in a written statement filed with Taxpayer’s amended federal tax return
for the taxable year beginning Date1, and ended Date2.

      A copy of this letter ruling must be attached to such amended return. A copy is
enclosed for that purpose. Alternatively, a taxpayer filing its federal income tax return

electronically may satisfy this requirement by attaching a statement to the return that
provides the date and control number of the letter ruling.

        Except as specifically set forth above, no opinion is expressed or implied
concerning the federal 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 (1) whether any item of depreciable property that was placed in
service by Taxpayer during the short taxable year beginning Date1, and ended Date2,
or that was placed in service by the terminated partnership during Year1 and
contributed to Taxpayer in a transaction described in § 708(b)(1)(B) by the terminated
partnership during Year1, is eligible for the additional first year depreciation deduction
under § 168(k), or (2) whether Taxpayer’s classification of any item of depreciable
property under § 168(e) or Rev. Proc. 87-56, 1987-2 C.B. 674, is correct.

      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 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 this ruling may not be used or cited as precedent.

      In accordance with the power of attorney on file with this office, we are sending
copies of this letter ruling to Taxpayer’s authorized representatives. We are also
sending a copy of this letter ruling to the appropriate operating division director.

                                                 Sincerely,

                                                 Kathleen Reed


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


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


cc: