In PLR 201126021, the IRS granted a taxpayer permission under Treas. Reg. section 301.9100-3 for an extension of time to make a section 59(e) election to capitalize and ratably deduct certain research and experimentation (R&E) expenditures incurred by its subsidiary. The taxpayer had properly made the election on paper returns it prepared for review by its tax director, but failed to carry the election over to electronic returns that were submitted to the IRS. In the PLR, the IRS relied on representation by the taxpayer that the failure to make the election was inadvertent, and that granting relief would not lower the taxpayer’s aggregate tax burden, nor would it cause prejudice to the interest of the government.
Discussion
The taxpayer’s subsidiary, with which the taxpayer filed a consolidated return, incurred section 174 R&E expenditures in year one. The taxpayer prepared a section 59(e) election to capitalize its R&;E expenditures and amortize them over 10 years. Prior to filing the return electronically, the taxpayer's compliance director reviewed a paper copy that included the election. When the return was converted into electronic format, the election was inadvertently omitted. Unaware of this omission, the taxpayer calculated its year one tax return as if the election had been made. The taxpayer did not discover the error until it was preparing to file its year two return. The taxpayer then filed an amended return for year one that included an invalid election. Subsequently, the taxpayer then sought an extension of time to file the election under Treas. Reg. section 301.9100-3. The taxpayer represented that granting the relief requested would not result in a lower tax liability in the aggregate for the years affected by the election and that it acted reasonably and in good faith.
Section 174(a) provides that a taxpayer may treat research or experimental expenditures that are paid or incurred during the taxable year in connection with its trade or business as expenses that are not chargeable to a capital account. Section 59(e)(1) allows the taxpayer to deduct these expenditures ratably over the 10-year period. Section 59(e)(3) prohibits the deduction of qualified expenditures under any other section if this option is elected. Under Treas. Reg. section 1.59-1(b)(1), an election under section 59(e) can only be made by attaching a statement to the taxpayer's income tax return for the taxable year in which the amortization of the qualified expenditures begins. The taxpayer must file the statement no later than the due date for the original return (including extensions).
Under Treas. Reg. section 301.9100-1(c), the IRS Commissioner may grant a taxpayer a reasonable extension to make a regulatory or statutory election. Treas. Reg. section 301.9100-2 allows automatic extensions and Treas. Reg. section 301.9100-3 allows extensions for making elections that do not meet the requirements of Treas. Reg. section 301.9100-2. The Commissioner grants relief under Treas. Reg. section 301.9100-3 when the taxpayer provides evidence that the taxpayer acted reasonably and in good faith, and the grant of relief will not prejudice the interests of the government. Treas. Reg. section 301.9100-3(b) provides that a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer requests relief before the failure to make the election is discovered by the IRS and the taxpayer failed to make the election because, after exercising reasonable diligence, the taxpayer was unaware of the necessity for the election, failed to make the election because of intervening events beyond the taxpayer's control, or reasonably relied on a qualified tax professional, including a tax professional employed by the taxpayer, and the taxpayer failed to make, or advise the taxpayer to make the election. Treas. Reg. section 301.9100-3(c) provides that the government's interest is prejudiced if granting relief would result in a taxpayer having a lower tax liability in the aggregate of all taxable years affected by the election than the taxpayer would have had if the election had been timely made.
The PLR concluded that based on the representations made by the taxpayer, the requirements of Treas. Reg. sections 301.9100-1 through 301.9100-3 had been satisfied. Accordingly, the Commissioner granted the taxpayer a 120-day extension to make an election under section 59(e) for year one.
Actions to be taken
This PLR is useful in pointing out that the failure to make a proper section 59(e) election is not fatal if the failure was due to an inadvertent error or omission. The PLR confirms that 9100 relief is available in the case of a missed section 59(e) election as long as the Treas. Reg. section 301.9100-1(c) criteria are met. Taxpayers should not, however, count on 9100 relief to correct mistakes.
If an election is missed due to an inadvertent error, taxpayers should take steps to correct the error as soon as possible and provide the IRS with the information it needs to show that the error was inadvertent.
