Late return preserved election out of bonus depreciation

Plain-English summary

An electric utility partnership consistently elected not to claim additional first-year depreciation and intended to do the same for the year at issue. Its financial statements, draft partner schedule, and completed partnership return all reflected that choice, but an inadvertent filing error caused the Form 1065 and election statements to be submitted late. The partnership filed the return on the day it discovered the mistake. The IRS found that the partnership met the good-faith regulatory relief standards and treated the section 168(k)(7) election on the late return as timely for every class of qualified property placed in service that year. The ruling did not extend the return-filing deadline or decide whether particular property qualified for bonus depreciation.

Ruling snapshot

• Question: Could the partnership make a late election out of additional first-year depreciation for all qualified-property classes placed in service that year?
• Outcome: Approved, the election included with the late-filed return was treated as timely.
• Key authorities: IRC § 168(k)(7); Treas. Reg. §§ 1.168(k)-1(e) and 301.9100-3; Rev. Proc. 2017-33

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201929008                                              Third Party Communication: None
Release Date: 7/19/2019                                        Date of Communication: Not Applicable
Index Number: 9100.04-00
                                                               Person To Contact:
----------------------------                                   --------------------
---------------------------                                    Telephone Number:
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-----------------------------------                            Refer Reply To:
------------------------------                                 CC:ITA:B07
                                                               PLR-127810-18
                                                               Date:
                                                               April 19, 2019




LEGEND:


Taxpayer                   =        -------------------------------------------------
X                          =        ---------------------------------------------------------------------------------
Y                          =        ------------------------------------------------------------------
Z                          =        ---------------------------------------------------
------------------------------------------------------------------------------
State                      =        ------------
Taxable Year               =        -------------------------------------------------------
Date 1                     =        ----------------------------
Date 2                     =        ---------------------------
Date 3                     =        ----------------------
Date 4                     =        --------------------
Date 5                     =        -------------------
Date 6                     =        --------------------
Date 7                     =        --------------------
Date 8                     =        --------------------
Firm                       =        -----------------



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

This letter ruling responds to a letter dated September 10, 2018, submitted by your
representative on behalf of Taxpayer requesting an extension of time pursuant to
§§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations to
make the election not to deduct the additional first year depreciation under § 168(k) of
the Internal Revenue Code for all classes of qualified property placed in service by
Taxpayer in the Taxable Year.

PLR-127810-18                                  2

All references in this letter to § 168(k) are treated as a reference to § 168(k) as in effect:
(i) prior to amendment by § 13201 of the Tax Cuts and Jobs Act, Pub. L. No. 115-97,
131 Stat. 2054 (December 22, 2017) (TCJA), and after amendment by § 143(b) of the
Protecting Americans from Tax Hikes Act of 2015 (PATH Act), enacted as part of the
Consolidated Appropriations Act, 2016, Division Q, Pub. L. 114-113, 129 Stat. 2242
(December 18, 2015), for property placed in service after December 31, 2015. See §
143(b)(7)(A) of the PATH Act; and (ii) after amendment by § 13201 of the TCJA for
property acquired and placed in service after September 27, 2017. See § 13201(h)(1)
of the TCJA.

                                           FACTS


Taxpayer represents that the facts are as follows:

Taxpayer is a limited liability company that is treated as a partnership for federal income
tax purposes. Members of Taxpayer are X, Y, and Z. X is Taxpayer’s managing
member and Tax Matters Partner. Taxpayer is an electric utility company that owns and
operates the electric transmission system in State. Taxpayer uses an accrual method
of accounting.

Taxpayer timely filed its Federal tax return extension applications and its Federal tax
returns for every taxable year since its formation through its taxable year ended Date 1.
For all such tax returns other than the taxable year ended Date 2, Taxpayer made the
election not to deduct the additional first year depreciation under § 168(k).

For the Taxable Year, Taxpayer engaged Firm to prepare its Form 1065, U.S. Return of
Partnership Income. On Date 3, Taxpayer and X each issued its own financial
statements, which reflected an election not to deduct additional first year depreciation
under § 168(k).

On Date 4, Firm confirmed with Taxpayer that Taxpayer wanted to make an election not
to deduct the additional first year depreciation under § 168(k) for all classes of property
placed in service during the Taxable Year.

On Date 5, Firm provided to Taxpayer a draft Schedule K-1 for Y. The draft Schedule K-
1 reflected the agreed election not to deduct additional first year depreciation under
§ 168(k).

On Date 6, Firm sent to Taxpayer a filing copy of Form 1065 that properly reflected the
election not to deduct the additional first year depreciation.

Due to an inadvertent error, Taxpayer did not timely file Taxpayer’s Form 1065 including
the election statements by the due date, Date 7. The return was instead filed late on

PLR-127810-18                                  3

Date 8, the day the inadvertent error was discovered. Because Taxpayer did not timely
file its federal tax return for the Taxable Year, Taxpayer failed to make the election not
to deduct additional first year depreciation under § 168(k)(7).

Neither Taxpayer nor any members of Taxpayer has made the election under
§ 168(k)(4) to accelerate alternative minimum tax credits in lieu of the additional first
year depreciation deduction.


                                  RULING REQUESTED


Accordingly, Taxpayer requests an extension of time pursuant to §§ 301.9100-1 and
301.9100-3 of the Procedure and Administration Regulations to make the election not to
deduct the additional first year depreciation under § 168(k) for all classes of qualified
property placed in service by Taxpayer in the Taxable Year.


                                   LAW AND ANALYSIS


Section 168(k)(1) allows, 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 (or January 1, 2021, for qualified
property described in §§ 168(k)(2)(B) or 168(k)(2)(C).

Section 168(k)(7) allows a taxpayer to elect out of additional first year depreciation for
any class of property placed in service during the taxable year.

Section 4.04 of Rev. Proc. 2017-33, 2017-19 I.R.B. 1236, 1240, provides guidance
regarding the election under § 168(k)(7) not to deduct the additional first year
depreciation (the § 168(k)(7) election). Section 4.04(1) of Rev. Proc. 2017-33 provides
that the rules for making the § 168(k)(7) election are similar to the rules for making the
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 the same class of
property and placed in service in the same taxable year. Section 4.04(2) of Rev. Proc.
2017-33 provides that rules generally similar to the rules in § 1.168(k)-1(e)(2), (3), (5)
and (7) of the Income Tax Regulations 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). As a
result of the amendments to § 168(k) by § 143(b) of the PATH Act, the term “class of
property” also includes qualified improvement property as defined in § 168(k)(3) and
depreciated under § 168.

PLR-127810-18                                 4


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)(3)(ii) provides that the election not to deduct additional first year
depreciation must be made in the manner prescribed on Form 4562, “Depreciation and
Amortization,” and its instructions. The instructions to Form 4562 for a taxable year
beginning in 2016 provide that the election not to deduct the additional first year
depreciation is made by attaching a statement to the taxpayer's timely filed tax return
indicating that the taxpayer is electing not to deduct the additional first year depreciation
and the class of property for which the taxpayer is making the election.

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.

Under § 301.9100-1(a), the Commissioner 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 rules for requesting extensions of time for regulatory
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 that granting
relief will not prejudice the interests of the Government.


                                      CONCLUSION


Based solely on the facts 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 to make the election not to deduct the
additional first year depreciation under § 168(k) for all classes of qualified property
placed in service during the Taxable Year. In this regard, we will consider the election
made by Taxpayer on Taxpayer’s federal income tax return for the Taxable Year filed
on Date 8 to be timely made.

PLR-127810-18                                 5


Except as specifically ruled upon above, no opinion is expressed or implied concerning
the 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 placed in service by Taxpayer
in the Taxable Year, is eligible for the 50-percent or 100-percent, as applicable,
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.

Further, this letter ruling does not grant an extension of time for filing Taxpayer’s federal
income tax return for the Taxable Year.

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.

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.

We are sending a copy of this letter to the appropriate operating division director.


                                       Sincerely,

                                       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