Timberland partnership gets more time to make the late § 194 reforestation-amortization election

Plain-English summary

A partnership (later an LLC) that acquires and manages timberlands can elect
under IRC § 194 to write off reforestation costs over 84 months. Making the
election requires attaching a specific statement to a timely filed return for
the year the costs were incurred. Here the taxpayer and its return preparers
always intended to make the election and prepared the returns as if it had been
made, but the required election statements were never attached for several
years. After discovering the miss, the taxpayer asked the IRS for more time
under Treas. Reg. §§ 301.9100-1 and 301.9100-3, the rules that let the IRS
extend a missed regulatory-election deadline when the taxpayer acted reasonably
and in good faith and the government is not prejudiced. Because the taxpayer
reasonably relied on its preparers and the fix would not change its income or
its partners' tax, the IRS granted the extension and will treat the elections as
timely made for the years at issue. The IRS did not opine on whether the
taxpayer actually satisfies § 194 or which costs count as reforestation
expenditures.

Ruling snapshot

• Question: Should the timberland partnership get an extension of time to
  make the § 194 election to expense and/or amortize reforestation expenditures?
• Outcome: approved (extension granted)
• Key authorities: IRC § 194; Treas. Reg. §§ 1.194-3, 1.194-4,
  301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202228014 Third Party Communication: None
Release Date: 7/15/2022 Date of Communication: Not Applicable
Index Number: 194.10-00
Person To Contact:
----------------- --------------- ID No. ------------
------------------------------ Telephone Number:
-------------------- --------------------
------------------ Refer Reply To:
------------------------- CC:PSI:B06
------------------------- PLR-122234-21
Date:
April 12, 2022

Re: ---------------------

LEGEND:

Taxpayer = -----------------------------------------------
State A = -----------------
Region = -----------------------
Couple A = ---------------------------------------------------------
Couple B = ----------------------------------------------------------------
Trust A = ----------------------------------------------------------------
Trust B = ---------------------------------------------------------
Trust C = ----------------------------------------------------------
Trust D = ---------------------------------------------------------------
Person A = --------------------------------------------------
Person B = ---------------------------------------------
Person C = ----------------------------------------------
Person D = ---------------------------------------------
Person E = --------------------------------------------------
Person F = -----------------------------------------------------------
Person G = ----------------------------------------------------------
Person H = ------------------------------------------------------------
Person I = ---------------------------------------------------
Person J = ------------------------------------------------
Person K = ----------------------------------------------------
a = --
b = --
c = --
d = ---
e = --------------
f = --------------
g = --------------
h = --
PLR-122234-21 2

i = ----
Date 1 = --------------------------
Firm A = ------------------------
Firm B = --------------------------
Year A = -------
Year B = -------
Year C = -------
Year D = -------
Year E = -------
Director = -----------------------------------------------------

Dear ----- ----------

This letter ruling responds to a letter dated October 22, 2021, requesting an extension
of time pursuant to §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration
Regulations to made an election to expense and/or amortize reforestation expenditures
under Section 194 of the Internal Revenue Code.

FACTS

Taxpayer was organized as a State A general partnership in Year A. In Year B, the
partnership was reorganized as a limited liability company. The Taxpayer’s principal
business activity is the acquisition and management of timberlands in the Region.
Taxpayer uses the accrual method of accounting and files Form 1065, U.S. Return of
Partnership Income, on a calendar year basis. Each partner of the Taxpayer files the
appropriate annual income tax return to report its share of income, loss, and deduction.

Taxpayer’s members are Couple A at a% intertest, Person A at b% interest, Couple B at
c% interest, Trust A at d% interest, Person B at e% interest, Person C at f% interest,
Person D at g% interest, Person E at h% interest, Person F at h % interest, Person G at
h% interest, Person H at h% interest, Person I at h% interest, Trust B at b% interest,
Trust C at b% interest, Person J at b% interest, Person K at h % interest, and Trust D at
i% interest.

Taxpayer engaged Firm A for preparation of its annual income tax returns beginning
with the tax year ending on Date 1. Taxpayers returns for Year A through Year C were
prepared by Firm B and its predecessors.

Taxpayer’s returns were prepared as if the Section 194 election had been made in its
prior year tax returns; however, it was subsequently determined upon review that the
required election statement was not attached to the timely filed returns for tax years
Year D through Year E as required by Section 194.

Taxpayer and its return preparers were aware of the election, and they represent that
they intended at all times to properly make the §194 election. All applicable tax returns
PLR-122234-21 3

from Year D through Year E were prepared as if the election to expense and/or
amortize reforestation costs had been properly made. However, they failed to attach
the required statement to the returns for these years. Taxpayer represents that granting
an extension of time to properly make the election by filing the required statement will
not change the taxable income of the Taxpayer or the resulting tax liability of its
partners. Taxpayer represents that they reasonably relied on its return preparers, Firm
A and Firm B, to properly make the election to amortize reforestation expenses.

Taxpayer requests an extension of time to make the elections on their tax returns for
Year D through Year E to expense and/or amortize reforestation expenditures under
Section 194.

LAW AND ANALYSIS

Section 194(a) states that in the case of any qualified timber property with respect to
which taxpayer has made (in accordance with regulations prescribed by the Secretary)
an election, the taxpayer shall be entitled to a deduction with respect to the amortization
of the amortizable basis of qualified timber property based on a period of 84 months.
Such amortization deduction shall be an amount, with respect to each month of such
period within the taxable year, equal to the amortizable basis at the end of such month,
divided by the number of months (including the month for which the deduction is
computed) remaining in the period. Such amortizable basis at the end of the month
shall be computed without regard to the amortization deduction for such month. The
84-month period shall begin on the first day of the first month of the second half of the
taxable year in which the amortizable basis is acquired.

Treas. Reg. 1-194-3(a) defines the term “qualified timber property” as a woodlot or other
site located in the United States which will contain trees in significant commercial
quantities, and which is held by the taxpayer for the planting, cultivating, caring for, and
cutting of trees for sale or use in the commercial production of timber products.

Treas. Reg. 1-194-3(b) defines the term “amortizable basis” as that portion of the basis
of the qualified timber property attributable to reforestation expenditures which have not
been taken into account under Section 194(b).

Treas. Reg. 1-194-3(c) defines the term “reforestation expenditures” as the direct costs
incurred in connection with forestation of reforestation by planting or artificial or natural
seeding, including costs—

(i) For the preparation of the site;
(ii) Of seeds or seedlings; and
(iii) For labor and tools, including depreciation of equipment such as tractors,
trucks, tree planters, and similar machines used in planting or seeding.
PLR-122234-21 4

Under Treas. Reg. 1.194-4(a), an election to amortize reforestation expenditures under
section 194 shall be made by entering the amortization deduction claimed at the
appropriate place on the taxpayer's income tax return for the year in which the
expenditures were incurred, and by attaching a statement to such return. The statement
should state the amounts of the expenditures, describe the nature of the expenditures,
and give the date on which each was incurred. The statement should also state the type
of timber being grown and the purpose for which it is being grown. A separate statement
must be included for each property for which reforestation expenditures are being
amortized under section 194. The election may only be made on a timely return (taking
into account extensions of the time for filing) for the taxable year in which the
amortizable expenditures were made.

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.

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.

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.

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 to make the elections under § 194 to expense
and/or amortize reforestation expenditures. In this regard, we will consider this election
made by Taxpayer on its federal income tax returns for taxable years Year D through
Year E to be timely made.

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 § 194. In addition, we
express no opinion regarding whether any particular item is property included by
taxpayer within “reforestation expenditures” as defined in section 194.

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
PLR-122234-21 5

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 ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representatives.

                                   Sincerely,



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

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