Extra time granted to elect to capitalize interest to personal property under § 266

Plain-English summary

Section 266 lets a taxpayer choose to add certain carrying charges, such as interest on a loan used to buy personal property, to the property's cost (capitalize them) instead of deducting them right away. A corporation that is part of a consolidated group prepared this election correctly, with a technical memo, calculations, and the required election statement, and intended to attach the statement to its return. When it filed the timely return, it accidentally left the election statement off. The mistake was caught later during a financial-statement audit. The parent company asked the IRS for more time under the "9100 relief" rules (Treas. Reg. §§ 301.9100-1 and 301.9100-3), which allow a late regulatory election when the taxpayer acted reasonably and in good faith and relief would not harm the government. The IRS agreed and granted 60 days from the date of the letter to make the election by filing an amended consolidated return with the election statement. The IRS did not opine on whether the interest actually qualifies for the election.

Ruling snapshot

• Question: May the taxpayer get an extension of time to make the § 266 election to capitalize interest to personal property, after omitting the election statement from its timely return?
• Outcome: approved
• Key authorities: IRC § 266; Treas. Reg. §§ 1.266-1, 301.9100-1, 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202425006                                              Third Party Communication: None
 Release Date: 6/21/2024                                        Date of Communication: Not Applicable
 Index Number: 9100.00-00, 9100.05-00
                                                                Person To Contact:
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 ----------------------------------                             Refer Reply To:
 ------------------------------------                           CC:ITA:B07
                                                                PLR-118212-23
                                                                Date:
                                                                March 19, 2024




Re: Request for Extension of Time to Make the Election under § 266 to Capitalize
Interest to Personal Property

Legend

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

        This letter refers to a letter dated September 20, 2023, and supplemental
information, submitted by Parent on behalf of its subsidiary, Taxpayer, requesting an
extension of time pursuant to §§ 301.9100-1 and 301.9100-3 of the Procedure and
Administration Regulations to make an election under § 266 of the Internal Revenue
Code to capitalize interest to personal property during the Taxable Year. This letter
ruling is being issued electronically, as permissible under section 7.02(5) of Rev. Proc.
2023-1, 2023-1 I.R.B. 1, 35.
PLR-118212-23                               2

                                         FACTS

      Parent represents that the facts are as follows:

       Parent is the common parent of an affiliated group of corporations that files a
consolidated federal income tax return on Form 1120, U.S. Corporation Income Tax
Return, that includes Taxpayer. Taxpayer uses a 52–53-week taxable year ending on
the Saturday nearest to January 31, and an overall accrual method of accounting.

        On Date1, Taxpayer engaged Firm1 to provide advice related to making an
election to capitalize interest to personal property under § 266 and Treas. Reg. §
1.266-1(b)(1)(iii) of the Income Tax Regulations. Firm1 determined that Taxpayer was
eligible to make the election for the Taxable Year and provided its conclusions to
Taxpayer in a deliverable package, which included a technical memorandum,
computation supporting the amount of the capitalizable interest, the election statement
required by Treas. Reg. § 1.266-1(c)(3), and instructions indicating the election
statement should be attached to Taxpayer's federal income tax return for the Taxable
Year.

       Taxpayer engaged Firm2 to review and sign the Taxpayer's federal income tax
return for the Taxable Year as preparer, but Taxpayer was responsible for actually filing
the return. In reviewing the return and associated statements provided by Taxpayer,
Firm2 confirmed that Taxpayer complied with the substantive requirements of the
election by capitalizing interest to personal property under § 266, and that the election
statement was prepared correctly. Firm2 informed Taxpayer that the election statement
should be attached to the return and Taxpayer confirmed that it would attach the
election statement prior to filing Taxpayer's federal income tax return.

       However, when timely filing the return, Taxpayer inadvertently omitted the
election statement. As a result, no election statement was attached to Taxpayer's
timely filed federal income tax return for the Taxable Year.

       In Date2, as part of Taxpayer's financial statement audit, Firm2 discovered that
the election statement was not included with Taxpayer's return. Firm2 immediately
brought it to Taxpayer's attention and informed Taxpayer that it must seek relief under
§§ 301.9100-1 and 301.9100-3 for an extension of time to properly file the election
statement to capitalize interest to personal property. Shortly thereafter, Taxpayer
requested that Firm2 commence preparation of this ruling request.

                                  RULING REQUESTED

      Accordingly, Parent requests an extension of time pursuant to §§ 301.9100-1 and
301.9100-3 to make an election under § 266 to capitalize interest to personal property.
PLR-118212-23                                 3

                                   LAW AND ANALYSIS

        Section 266 provides that no deduction shall be allowed for amounts paid or
incurred for such taxes and carrying charges as, under regulations prescribed by the
Secretary, are chargeable to capital account with respect to property, if the taxpayer
elects, in accordance with such regulations, to treat such taxes or charges as so
chargeable.

       Section 1.266-1(a)(1) provides that in accordance with § 266, items enumerated
in paragraph (b)(1) of this section may be capitalized at the election of the taxpayer.
Thus, taxes and carrying charges with respect to property of the type described in this
section are chargeable to capital account at the election of the taxpayer,
notwithstanding that they are otherwise expressly deductible under provision of Subtitle
A of the Code. No deduction is allowable for any items so treated.

        Section 1.266-1(b)(1) provides in part that the taxpayer may elect, as provided in
paragraph (c) of this section, to treat the items enumerated in this subparagraph which
are otherwise expressly deductible under the provisions of Subtitle A of the Code as
chargeable to capital account either as a component of original cost or other basis, for
purposes of section 1012, or adjustment to basis, for the purposes of section
1016(a)(1). The items thus chargeable to capital account are, in the case of personal
property, interest on a loan to purchase such property or to pay for transporting or
installing the same. Section 1.266-1(b)(1)(iii)(b).

        Section 1.266-1(c)(3) provides that if the taxpayer elects to capitalize an item or
items under this section, such election shall be exercised by filing with the original return
for the year for which the election is made a statement indicating the item or items
(whether with respect to the same project or different projects) which the taxpayer elects
to treats as chargeable to capital account.

       Under § 301.9100-1(a), the Commissioner of Internal Revenue 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 a
regulatory 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 making 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 the grant of
relief will not prejudice the interests of the government.
PLR-118212-23                                  4

                                            CONCLUSION

        Based solely on the facts and the representations submitted, we conclude that
the requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied. Accordingly,
Parent is granted an extension of 60 calendar days from the date of this letter ruling to
make the election under § 266, on behalf of Taxpayer, to capitalize interest to personal
property for the Taxable Year. This election must be made by Parent filing an amended
consolidated federal income tax return for the Taxable Year, with a written statement
indicating that Taxpayer is electing to capitalize interest to personal property under §
266.

        A copy of this letter should be attached to the relevant filing. A taxpayer filing its
federal return electronically may satisfy this requirement by attaching a statement to
their return that provides the date and control number of the letter ruling.

       Except as specifically set forth above, we express no opinion concerning the
federal income tax consequences of the facts described above under any other
provisions of the Code. Specifically, no opinion is expressed or implied on whether any
interest on personal property is eligible for the election under § 266.

      The rulings contained in this letter are based upon information and
representations submitted by Parent 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 ruling, 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.

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

                                        Sincerely,

                                        Deena M. Devereux

                                        DEENA M. DEVEREUX
                                        Branch Chief, Branch 7
                                        (Income Tax & Accounting)


Enclosures (2)
copy of this letter
copy for section 6110 purposes
PLR-118212-23                                           5




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