Taxpayer received 60 days to file repair-cost capitalization election

Plain-English summary

A taxpayer historically deducted repair and maintenance costs for tax purposes while capitalizing them for book purposes. For the year at issue, it intended to elect under Treasury Regulation section 1.263(a)-3(n) to capitalize the same costs for tax, and it prepared its return consistently with that treatment, but its tax professionals failed to attach the required election statement. The taxpayer independently discovered the omission while preparing examination responses and promptly sought relief. The IRS found reasonable reliance, good faith, no hindsight, and no prejudice to the government, and granted 60 days to file an amended return with the statement. It expressed no opinion on whether the underlying costs were properly classified as repairs and maintenance.

Ruling snapshot

• Question: Could the taxpayer obtain extra time to file the statement electing to capitalize book-capitalized repair and maintenance costs?
• Outcome: approved; a 60-day extension was granted
• Key authorities: Treas. Reg. §§ 1.263(a)-3(n), 301.9100-1, 301.9100-3; IRC §§ 6501, 6662

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201919006                                              Third Party Communication: None
Release Date: 5/10/2019                                        Date of Communication: Not Applicable
 9100.00-00
                                                               Person To Contact:
----------------------------------                             ---------------------------, ID No. ---------------
------------------------------------------------------------   -----------------
--------------------------------------------------             Telephone Number:
-------------------------                                      ----------------------
---------------------------------------------------            Refer Reply To:
                                                               CC:ITA:B01
                                                               PLR-120514-18
In Re: ---------------------------------------------------- Date:
Section 301.9100-1 Late Election Relief                     December 20, 2018




                                                    LEGEND

Taxpayer                            =        ----------------------------------
Maintenance Activities              =        -----------------
Facilities                          =        --------------
Year 1                              =        -------
Date a                              =        -----------------------
Date b                              =        --------------------

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

       This is in response to a letter sent on behalf of Taxpayer dated Date b,
requesting an extension of time to make an election under § 1.263(a)-3(n) of the Income
Tax Regulations to capitalize for tax purposes any amounts paid to repair and maintain
tangible property that is capitalized for book purposes. The request is made under §§
301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations.

                                                     FACTS

        The Taxpayer engages in Maintenance Activities at its Facilities. Maintenance
Activities are scheduled and required for Facilities. The costs related to Maintenance
Activities include materials and direct labor costs.

       For all years prior to the Year 1 fiscal year, the Taxpayer consistently expensed
Maintenance Activities in the year incurred for tax purposes, but capitalized these
expenses for its books and records. The Taxpayer intended to make an election under
§1.263(a)-3(n) on its consolidated Federal income tax return filed for its Year 1 fiscal
year ended Date a. Section 1.263(a)-3(n) provides an election to capitalize for tax
purposes any amounts paid to repair and maintain tangible property which is capitalized
for book purposes.
PLR-120514-18                                 2


       Taxpayer completed and filed its return consistent with the election, but failed to
attach the statement required by § 1.263(a)-3(n). The Year 1 fiscal year return was
selected for examination. In preparing responses to the examination, the Taxpayer
independently became aware that the statement required by § 1.263(a)-3(n) was
missing.

                                  LAW AND ANALYSIS

        Section 1.263(a)-3(n) provides that a taxpayer may elect to treat amounts paid
during the taxable year for repair and maintenance (as defined under § 1.162–4) to
tangible property as amounts paid to improve that property and as an asset subject to
the allowance for depreciation if the taxpayer incurs these amounts in carrying on the
taxpayer's trade or business and if the taxpayer treats these amounts as capital
expenditures on its books and records regularly used in computing income.

       Section 1.263(a)-3(n)(2) provides, in part, that a taxpayer makes this election by
attaching a statement to the taxpayer's timely filed original Federal tax return (including
extensions) for the taxable year in which the taxpayer pays amounts described under
paragraph (n)(1) of this paragraph. Sections 301.9100-1 through 301.9100-3 provide
the rules governing extensions of the time to make regulatory elections. The statement
must be titled “Section 1.263(a)-3(n) Election” and include the taxpayer's name,
address, taxpayer identification number, and a statement that the taxpayer is making
the election to capitalize repair and maintenance costs under § 1.263(a)-3(n). In the
case of a consolidated group filing a consolidated income tax return, the election is
made for each member of the consolidated group by the common parent, and the
statement must also include the names and taxpayer identification numbers of each
member for which the election is made.

        Section 301.9100-1(c) provides that the Commissioner of Internal Revenue, in
exercising his discretion, may grant a reasonable extension of time under the rules set
forth in § 301.9100-3 to make a regulatory election under all subtitles of the Internal
Revenue Code except subtitles E, G, H, and I. The term “regulatory election” is defined
in § 301.9100-1(b) as an election whose due date is prescribed by a regulation
published in the Federal Register, or a revenue ruling, revenue procedure, or
announcement published in the Internal Revenue Bulletin.

        Section 301.9100-3(a) provides that requests for relief subject to this section will
be granted when the taxpayer provides the 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.

          Under § 301.9100-3(b)(1), except as provided in § 301.9100-3(b)(3) (i) through
(iii), a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer:
PLR-120514-18                                  3


       (i) requested relief under this section before the failure to make the regulatory
       election was discovered by the Internal Revenue Service;

       (ii) failed to make the election because of intervening events beyond the
       taxpayer’s control;

       (iii) failed to make the election because, after exercising reasonable diligence
       (taking into account the taxpayer’s experience and the complexity of the return or
       issue), the taxpayer was unaware of the necessity for the election;

       (iv) reasonably relied on the written advice of the Internal Revenue Service; or

       (v) 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.

     Paragraphs (b)(3)(i) through (iii) of § 301.9100-3 provide that a taxpayer is
deemed not to have acted reasonably and in good faith if the taxpayer:

       (i) seeks to alter a return position for which an accuracy-related penalty could be
       imposed under § 6662 at the time the taxpayer requests relief and the new
       position requires or permits a regulatory election for which relief is requested;

       (ii) was informed in all material respects of the required election and related tax
       consequences, but chose not to file the election; or

       (iii) uses hindsight in requesting relief. If specific facts have changed since the
       due date for making the election that make the election advantageous to a
       taxpayer, the Service will not ordinarily grant relief. In such a case, the Service
       will grant relief only when the taxpayer provides strong proof that the taxpayer’s
       decision to seek relief did not involve hindsight.

        Section 301.9100-3(c)(1) provides that the interests of the government are
prejudiced if granting relief would result in the 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. The interests of the government are ordinarily
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 this section.

      Taxpayer’s election is a regulatory election, as defined under § 301.9100-1(b),
because the due date of the election is prescribed in the regulations under § 1.263(a)-
PLR-120514-18                                 4

3(n)(2). In the present situation, the requirements of §§ 301.9100-1 and 301.9100-3 of
the regulations have been satisfied. The information and representations made by
Taxpayer establish that the Taxpayer acted reasonably and in good faith. The affidavits
presented show that Taxpayer reasonably relied on qualified tax professionals for the
filing of Taxpayer’s return, however, the tax professionals prepared the return consistent
with an election under § 1.263(a)-3(n), but failed to attach the statement required by §
1.263(a)-3(n)(2). The affidavits presented show that Taxpayer was unaware of the
necessity for the statement and upon discovery of the error, promptly requested relief.

       The information and representations presented establish that Taxpayer is not
seeking to alter a return position for which an accuracy-related penalty had been or
could be imposed under § 6662 at the time relief was requested. Taxpayer was not
informed in all material respects of the required election, and its related tax
consequences. Furthermore, Taxpayer is not using hindsight in requesting relief, and
no facts have changed since the time of the original filing deadline.

        Finally, granting an extension will not prejudice the interests of the Government.
It is represented that Taxpayer will not have a lower tax liability in the aggregate for all
taxable years affected by the election if given permission to make the election in the
appropriate amount at this time than Taxpayer would have had if the election were
made in the appropriate amount by the original deadline for making the election.
Taxpayer has represented that the granting of an extension will only affect the timing of
when he will incur the tax liability. Moreover, the taxable year in which the regulatory
election should have been made, and any taxable years that would have been affected
by the election had it been timely made, are not closed by the period of limitations on
assessment.

                                      CONCLUSION

       Based solely on the facts submitted and the representations made, we conclude
that Taxpayer acted reasonably and in good faith, and that granting the request will not
prejudice the interests of the government. Accordingly, the requirements of §§
301.9100-1 and 301.9100-3 have been satisfied.

        Accordingly, Taxpayer is granted an extension of 60 days from the date of this
letter to file an amended return including the statement required by § 1.263(a)-3(n)(2)
for its Year 1 fiscal year. Alternatively, a taxpayer filing returns 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 expressly provided herein, no opinion is expressed or implied
concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter. In particular, no opinion is expressed regarding Taxpayer’s
classification of Maintenance Activity expenses as repair and maintenance costs.
PLR-120514-18                                5


        In accordance with the provisions of the power of attorney currently on file with
this office, a copy of this letter is being sent to your authorized representatives. We are
also sending a copy of this letter to the appropriate operating division director.
Enclosed is a copy of the letter ruling showing the deletions proposed to be made in the
letter when it is disclosed under § 6110.

      This 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 and
representations submitted by the 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.

                                      Sincerely,



                                      Sean M. Dwyer
                                      Senior Technical Reviewer, Branch 1
                                      Office of Associate Chief Counsel
                                      (Income Tax and Accounting)



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