[Federal Register Volume 69, Number 245 (Wednesday, December 22, 2004)]
[Rules and Regulations]
[Pages 76614-76617]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-27917]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9168]
RIN 1545-BC13


Optional 10-Year Writeoff of Certain Tax Preferences

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulation.

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SUMMARY: This document contains final regulations relating to the 
optional 10-year writeoff of certain tax preference items under section 
59(e) of the Internal Revenue Code (Code). The final regulations affect 
taxpayers who utilize section 59(e) for the optional 10-year writeoff 
of certain tax preferences. These final regulations provide guidance on 
the time and manner of making an election under section 59(e). The 
regulations also provide guidance on revoking an election under section 
59(e). The regulations reflect changes to the law made by the Tax 
Reform Act of 1986, the Technical and Miscellaneous Revenue Act of 
1988, and the Omnibus Budget Reconciliation Act of 1989.

DATES: Effective Date: This rule is effective December 22, 2004.
    Applicability Date: These regulations apply to a section 59(e) 
election made for a taxable year ending, or a request to revoke a 
section 59(e) election submitted, on or after December 22, 2004.

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)) under control number 1545-1903. Responses to this collection 
of

[[Page 76615]]

information are required to obtain the benefit of the section 59(e) 
election.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number assigned by the Office of 
Management and Budget.
    The estimated annual burden per respondent is one hour.
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing this burden should be sent to the Internal 
Revenue Service, Attn: IRS Reports Clearance Officer, 
SE:W:CAR:MP:T:T:SP, Washington, DC 20224, and to the Office of 
Management and Budget, Attn: Desk Officer for the Department of the 
Treasury, Office of Information and Regulatory Affairs, Washington, DC 
20503.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document contains amendments to 26 CFR part 1 under section 
59(e) of the Code. Section 59(e)(1) allows taxpayers to elect to deduct 
any qualified expenditure ratably over a 10-year period (3-year period 
in the case of circulation expenditures described in section 173) 
beginning with the taxable year in which the expenditure was made (or, 
in the case of a qualified expenditure under section 263(c), over the 
60-month period beginning with the month in which such expenditure was 
paid or incurred). Section 59(e)(2) defines qualified expenditure as 
any amount that, but for an election under section 59(e), would have 
been allowed as a deduction (determined without regard to section 291) 
for the taxable year in which paid or incurred under section 173 
(relating to circulation expenditures), section 174 (relating to 
research and experimental expenditures), section 263(c) (relating to 
intangible drilling and development expenditures), section 616(a) 
(relating to development expenditures), or section 617(a) (relating to 
mining exploration expenditures).
    Section 59(e)(4)(A) states that an election under section 59(e) 
(section 59(e) election) may be made with respect to any portion of any 
qualified expenditure. The legislative history of section 59(e) 
suggests that this allows a section 59(e) election to be made ``dollar 
for dollar.'' See H. R. Rep. 99-426, 99th Cong., 1st Sess. 327 (1985), 
1986-3 (Vol. 2) C.B. 1, 327; S. Rep. No. 99-313, 99th Cong., 2d Sess. 
539 (1986), 1986-3 (Vol. 3) C.B. 1, 539.
    Section 59(e)(4)(B) states that a section 59(e) election may only 
be revoked with the consent of the Secretary.
    Provisions similar to those currently contained in section 59(e) 
were originally enacted as section 58(i) under the Tax Equity and 
Fiscal Responsibility Act of 1982 (Public Law 97-248; 96 Stat. 324). 
Under section 58(i)(1), the optional 10-year writeoff was available 
only to individuals. Section 58(i)(5)(C) directed the Secretary to 
promulgate regulations governing the time and manner for making an 
election under section 58(i) (section 58(i) election).
    Section 5f.0(a)(2)(i)(A) and (B) of the temporary Income Tax 
Regulations that were promulgated under section 58(i) required that a 
section 58(i) election be made by the later of the due date (including 
extensions) of the income tax return for the taxable year for which the 
election was to be effective, or April 15, 1983. TD 7870, 48 FR 1486. 
Section 5f.0(a)(3) provided that a section 58(i) election was made by 
attaching a statement to the income tax return (or amended return) for 
the taxable year in which the election was made. Section 5f.0 was 
redesignated as Sec.  301.9100-5T by TD 8435, 57 FR 43893, on October 
15, 1992.
    Section 59(e) was enacted as part of the Tax Reform Act of 1986 
(Public Law 99-514; 100 Stat. 2085) and, unlike section 58(i), is not 
limited to individuals. While both the Senate Finance Committee Report 
and the House Ways and Means Committee Report state that the time and 
manner of the election would be governed by regulations, Congress did 
not include a provision similar to former section 58(i)(5)(C) directing 
the Secretary to promulgate regulations governing the time and manner 
for making a section 59(e) election. See H. R. Rep. No. 99-426, 99th 
Cong., 1st Sess. 327 (1985), 1986-3 (Vol. 2) C.B. 1, 327; S. Rep. No. 
99-313, 99th Cong., 2d Sess. 539 (1986), 1986-3 (Vol. 3) C.B. 1, 539.
    A notice of proposed rulemaking (REG-124405-03 [69 FR 43367]) was 
published in the Federal Register on July 20, 2004. Two requests for a 
public hearing were received. A public hearing was held on December 7, 
2004. The IRS received written and electronic comments responding to 
the notice of proposed rulemaking. After consideration of all the 
comments, the proposed regulations are adopted as amended by this 
Treasury decision. The revisions are discussed below.

Summary of Comments and Explanation of Revisions

    Several commentators recommended changes regarding the information 
taxpayers would be required to submit as part of their section 59(e) 
election. Specifically, commentators requested that the IRS reconsider 
Sec.  1.59-1(b)(1)(ii) and (iii) of the proposed regulations, which 
would require taxpayers to identify (i) the type and amount, for each 
activity or project, of qualified expenditures identified in section 
59(e)(2) the taxpayer elects to deduct ratably over the applicable 
period described in section 59(e)(1), and (ii) a description of each 
specific activity or project to which the qualified expenditures 
relate. The commentators suggest that the majority of taxpayers who 
incur research and experimentation expenditures under section 174(a) 
and make a section 59(e) election with respect to such expenditures do 
not currently maintain records on a project-by-project basis. As a 
result, the commentators stated that requiring taxpayers to account for 
their section 59(e) qualified expenditures on a project-by-project 
basis would be a financial and administrative burden. Some of the 
commentators also discussed section 1016(a)(20), which provides that 
proper adjustment in respect of the property shall in all cases be made 
for amounts allowed as deductions under section 59(e) (relating to 
optional 10-year writeoff of certain tax preferences). Compliance with 
section 1016(a)(20) requires that taxpayers be able to account for 
their section 59(e) expenditures through appropriate basis adjustments 
for each property, project, or activity.
    Sections 1.59-1(b)(1)(ii) and (iii) of the proposed regulations 
were intended to improve compliance with section 1016(a)(20) by 
requiring that section 59(e) qualified expenditures be allocated among 
the properties, projects or activities to which they relate. Comments 
received regarding this provision indicate that, for taxpayers 
incurring section 174(a) expenditures, the basis rules of section 
1016(a)(20) are only of importance when a project to which a section 
59(e) election relates is disposed of, and that it is rare for a 
research project to be disposed of prior to the full amortization of 
the allocable section 59(e) qualified expenditures. As such, the 
commentators argue that the burden of requiring taxpayers to identify 
on a section 59(e) election the type and amount of qualified 
expenditures for each activity or project greatly exceeds the potential 
harm caused by non-compliance with section 1016(a)(20).

[[Page 76616]]

    Having fully considered all comments received, the final 
regulations are modified to reflect the comments discussed above. 
Taxpayers making a section 59(e) election will not be required to 
identify on the election the type and amount of qualified expenditures 
for each activity or project nor will they be required to provide a 
description of each specific activity or project to which the qualified 
expenditures relate. Instead, taxpayers will be required only to 
identify the type and amount of qualified expenditures identified in 
section 59(e)(2) that the taxpayer elects to deduct ratably over the 
applicable period described in section 59(e)(1). However, taxpayers 
remain responsible for full compliance with the requirements of section 
1016(a)(20). Specifically, taxpayers who allocate their section 59(e) 
expenditures to reduce the gain otherwise recognized on the disposition 
of a property, project, or activity must maintain books and records 
sufficient to support that allocation.
    The preamble to the proposed regulations stated that, with respect 
to an otherwise valid section 59(e) election filed for a taxable year 
ending prior to the effective date of the final regulations, such 
election would not be challenged by the IRS merely because the election 
was made later than the date prescribed by law for filing the 
taxpayer's original income tax return (including any extensions of 
time) for the taxable year in which the amortization of the qualified 
expenditures subject to the section 59(e) election begins. One 
commentator requested guidance on what the IRS considers an otherwise 
valid section 59(e) election filed for a tax year ending prior to the 
effective date of the final regulations. Although the IRS will treat a 
section 59(e) election prepared in a manner described in the final 
regulations as sufficient for a tax year ending prior to the effective 
date of the final regulations, because the final regulations only apply 
prospectively the final regulations do not provide guidance on what 
constitutes an otherwise valid section 59(e) election filed for a tax 
year prior to the effective date of the final regulations.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations. It is hereby 
certified that the collection of information in these regulations will 
not have a significant economic impact on a substantial number of small 
entities. This certification is based upon the fact that the reporting 
burden, as discussed earlier in this preamble, is expected to be 
insignificant. Therefore, a Regulatory Flexibility Analysis under the 
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. 
Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking preceding this regulation was submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on its 
impact on small business.

Drafting Information

    The principal author of these final regulations is Eric B. Lee of 
the Office of Associate Chief Counsel (Passthroughs and Special 
Industries). However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

 26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 1 and 602 are amended as follows:

0
Paragraph 1. The authority citation for part 1 reads, in part, as 
follows:

    Authority: 26 U.S.C. 7805, * * *

0
Par. 2. Section 1.59-1 is added to read as follows:


Sec.  1.59-1  Optional 10-year writeoff of certain tax preferences.

    (a) In general. Section 59(e) allows any qualified expenditure to 
which an election under section 59(e) applies to be deducted ratably 
over the 10-year period (3-year period in the case of circulation 
expenditures described in section 173) beginning with the taxable year 
in which the expenditure was made (or, in the case of intangible 
drilling and development costs deductible under section 263(c), over 
the 60-month period beginning with the month in which the expenditure 
was paid or incurred).
    (b) Election--(1) Time and manner of election. An election under 
section 59(e) shall only be made by attaching a statement to the 
taxpayer's income tax return (or amended return) for the taxable year 
in which the amortization of the qualified expenditures subject to the 
section 59(e) election begins. The statement must be filed no later 
than the date prescribed by law for filing the taxpayer's original 
income tax return (including any extensions of time) for the taxable 
year in which the amortization of the qualified expenditures subject to 
the section 59(e) election begins. Additionally, the statement must 
include the following information--
    (i) The taxpayer's name, address, and taxpayer identification 
number; and
    (ii) The type and amount of qualified expenditures identified in 
section 59(e)(2) that the taxpayer elects to deduct ratably over the 
applicable period described in section 59(e)(1).
    (2) Elected amount. A taxpayer may make an election under section 
59(e) with respect to any portion of any qualified expenditure paid or 
incurred by the taxpayer in the taxable year to which the election 
applies. An election under section 59(e) must be for a specific dollar 
amount and the amount subject to an election under section 59(e) may 
not be made by reference to a formula. The amount elected under section 
59(e) is properly chargeable to a capital account under section 
1016(a)(20), relating to adjustments to basis of property.
    (c) Revocation--(1) In general. An election under section 59(e) may 
be revoked only with the consent of the Commissioner. Such consent will 
only be granted in rare and unusual circumstances. The revocation, if 
granted, will be effective in the first taxable year in which the 
section 59(e) election was applicable. However, if the period of 
limitations for the first taxable year the section 59(e) election was 
applicable has expired, the revocation, if granted, will be effective 
in the earliest taxable year for which the period of limitations has 
not expired.
    (2) Time and manner for requesting consent. A taxpayer requesting 
the Commissioner's consent to revoke a section 59(e) election must 
submit the request prior to the end of the taxable year the applicable 
amortization period described in section 59(e)(1) ends. The application 
for consent to revoke the election must be submitted to the Internal 
Revenue Service in the form of a letter ruling request.
    (3) Information to be provided. A request to revoke a section 59(e) 
election must contain all of the information necessary to demonstrate 
the rare and unusual circumstances that would justify granting 
revocation.
    (4) Treatment of unamortized costs. The unamortized balance of the

[[Page 76617]]

qualified expenditures subject to the revoked section 59(e) election as 
of the first day of the taxable year the revocation is effective is 
deductible in the year the revocation is effective (subject to the 
requirements of any other provision under the Code, regulations, or any 
other published guidance) and the taxpayer will be required to amend 
any federal income tax returns affected by the revocation.
    (d) Effective date. These regulations apply to a section 59(e) 
election made for a taxable year ending, or a request to revoke a 
section 59(e) election submitted, on or after December 22, 2004.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

0
Par. 3. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.


0
Par. 4. In Sec.  602.101, paragraph (b) is amended by adding an entry 
in numerical order to the table to read as follows:


Sec.  602.101  OMB Control numbers.

* * * * *
    (b) * * *

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                                                             Current OMB
     CFR part or section where identified and described      control No.
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                                * * * * *
1.59-1.....................................................    1545-1903
 
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    Approved: December 15, 2004.
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
Gregory F. Jenner,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 04-27917 Filed 12-21-04; 8:45 am]
BILLING CODE 4830-01-P