FEDERAL
Late election to aggregate rental real estate interests by real estate professionals
The Internal Revenue Code requires treating each rental real estate interest separately unless an election is made to aggregate the interests. This election requires a specific election to be attached to the taxpayer’s timely filed return. The aggregation of interests can often result in a beneficial result for determining material participation in commonly owned interests. New guidance provides procedures to obtain an extension of time to file the aggregation election if the taxpayer provides a sworn statement that all steps were taken except for the attachment of the election. A taxpayer following the procedural requirements will be granted relief, but this extension does not constitute a determination as to the taxpayer’s eligibility to materially participate or whether his participation qualifies pursuant to the Code. Consult your tax advisor to determine if the new guidance might apply to your tax situation.
Larry Hirsh, Managing Director, Cleveland, OH
Property used as service station eligible for 15-year recovery period
The IRS concluded in Chief Counsel Advice 201123001 that a truck service center building did not constitute nonresidential real property with a 39-year recovery period for depreciation purposes, but rather a service station building with a recovery period of 15 years. The IRS’s holding highlights the importance of taxpayers determining the primary use of assets when considering the appropriate asset classes and recovery periods.
Natalie Tucker, Director, Washington National Tax
Relief granted to a taxpayer who failed to make a proper 59(e) election
In private letter ruling 201126021 (PLR), 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 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 representations 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. The PLR is useful in pointing out that the failure to make a proper section 59(e) election is not fatal - 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.
Tom Windram, Managing Director, Washington National Tax
Schedule UTP – IRS adds some clarity with new FAQs
In response to taxpayers’ requests for more guidance on how to complete Schedule UTP, the IRS recently posted several additional FAQs on its Schedule UTP website. Schedule UTP must be attached to income tax returns of certain C corporations for years ended on or after Dec. 31, 2010, and requires the listing and description of uncertain tax positions for which companies’ audited financial statements report contingency reserves for U.S. income tax.
Bob Adams, Managing Director, Washington National Tax
Election to refund AMT credit carryover in lieu of bonus depreciation not subject to section 383 limits
In Chief Counsel Advice 201126029 (CCA), the IRS considered whether a taxpayer's section 168(k)(4) election to increase its alternative minimum tax (AMT) credit under section 53, in lieu of bonus depreciation, was subject to the application of section 383. The electing taxpayer corporation had a net operating loss and no regular tax liability following a section 382 ownership change. Section 168(k)(4) generally allows a corporation to elect to forgo bonus depreciation and instead increase its limitation on research and development (R&D) credit utilization imposed by the section 38(c) business credit limitation or its limitation on AMT credit utilization imposed by section 53(c). The resulting increased credits are refundable – note: the extension of section 168(k)(4) included in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 only allows taxpayers to forgo bonus depreciation for tax years beginning after Dec. 31, 2010, in order to increase their AMT limitation, but not their R&D credit limitation. Generally, section 383 limits the amount of any excess credit that may be used in a year following a change in corporate ownership. As implemented by regulations, however, the limitation only applies to credits that offset regular tax liability. The CCA concluded that because no regular tax liability was offset, the refundable AMT credit, in this case, was not subject to section 383. The CCA, which was issued on July 1, 2011, was dated March 17, 2011.
Tom Windram, Managing Director, Washington National Tax
