[Federal Register Volume 69, Number 138 (Tuesday, July 20, 2004)]
[Proposed Rules]
[Pages 43367-43369]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-16474]



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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-124405-03]
RIN 1545-BC13


Optional 10-Year Writeoff of Certain Tax Preferences

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations relating to the 
optional 10-year writeoff of certain tax preference items under section 
59(e) of the Internal Revenue Code (Code). These proposed 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: Written or electronic comments and requests for a public hearing 
must be received by October 18, 2004.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-124405-03), room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
124405-03), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC or sent electronically via the IRS Internet 
site at http://www.irs.gov/regs or via the Federal eRulemaking Portal 
at http://www.regulations.gov (IRS and REG-124405-03).

FOR FURTHER INFORMATION CONTACT: Concerning these proposed regulations, 
Eric B. Lee, (202) 622-3120; concerning submissions of comments and 
requests for a public hearing, LaNita VanDyke, (202) 622-7180 (not 
toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on the collection of information should be 
sent 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, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, 
Washington, DC 20224. Comments on the collection of information should 
be received by September 20, 2004. Comments are specifically requested 
concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the IRS, including whether the 
information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information (see below);
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    The collection of information in this proposed regulation is in 
Sec.  1.59-1(b). This collection of information is required by the IRS 
to verify compliance with section 59(e). This information will be used 
to determine whether the amount of tax has been calculated correctly. 
The collection of information is required to obtain a benefit. The 
respondents are certain taxpayers who pay or incur expenditures 
described in section 59(e)(2).
    Taxpayers provide the information on a statement that is attached 
to their federal income tax return for the taxable year the section 
59(e) election is effective.
    The estimated burden for the collection of information in Sec.  
1.59-1(b) is as follows:
    Estimated total annual reporting burden: 10,000 hours.
    Estimated annual burden per respondent: 1 hour.
    Estimated number of respondents: 10,000.
    Estimated annual frequency of responses: On occasion.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    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 proposed 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 which, 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

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(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.

Explanation of Provisions

    The proposed regulations provide that a section 59(e) election 
shall only be made on a statement attached 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. A taxpayer must make a separate election for each 
specific activity or project with respect to which qualified 
expenditures are paid or incurred. 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. The statement must contain: (i) The 
taxpayer's name, address, and taxpayer identification number; (ii) 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 (iii) a description of each specific activity or project 
to which the qualified expenditures relate. For example, if a taxpayer 
makes a section 59(e) election with respect to research and 
experimental expenditures incurred during the taxable year for three 
separate projects, the election statement must provide for each 
research project the amount of qualified expenditures subject to the 
election and a description of the research project. Additionally, the 
election must be made in terms of a specific dollar amount of qualified 
expenditure and cannot be made with reference to a formula.
    The proposed regulations also provide that a section 59(e) election 
may be revoked for any project or activity only with the consent of the 
Commissioner and that such consent will only be granted in rare and 
unusual circumstances. A taxpayer must request the Commissioner's 
consent to revoke a section 59(e) election prior to the end of the 
taxable year in which the applicable amortization period described in 
section 59(e)(1) ends. The revocation, if granted, will be effective 
retroactively to the first taxable year 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. For example, if a 
calendar year taxpayer makes a section 59(e) election for the 
taxpayer's 2003 taxable year with respect to three different projects 
and on June 30, 2005, requests consent to revoke the election with 
respect to one project, the revocation, if granted by the Commissioner 
prior to the expiration of the period of limitations for the taxpayer's 
2003 taxable year, is effective for the taxpayer's 2003 taxable year. 
The amount of the qualified expenditures subject to the section 59(e) 
election with respect to the one project will be deductible in the 
taxpayer's 2003 taxable year (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 income tax returns 
affected by the revocation.
    The proposed 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 the date the final regulations are published in 
the Federal Register. Additionally, an otherwise valid section 59(e) 
election filed for a tax year ending prior to the date final 
regulations are published in the Federal Register will 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) begins.

Special Analyses

    It has been determined that this notice of proposed rulemaking 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, this notice of proposed 
rulemaking will be submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and 8 
copies) or electronic comments that are submitted timely to the IRS. 
The IRS and Treasury Department request comments on the clarity of the 
proposed rules and how the proposed rules can be made easier to 
understand and comply with. All comments will be available for public 
inspection and copying. A public hearing will be scheduled if requested 
in writing by any person that timely submits written comments. If a 
public hearing is scheduled, notice of the date, time, and place for 
the public hearing will be published in the Federal Register.

Drafting Information

    The principal author of these proposed 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 in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:
    Paragraph 1. The authority citation for part 1 reads, in part, as 
follows:

    Authority: 26 U.S.C. 7805.


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    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) begins. A taxpayer must make a separate election for each 
specific activity or project with respect to which qualified 
expenditures are paid or incurred. 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) begins. Additionally, the statement must include the 
following information--
    (i) The taxpayer's name, address, and taxpayer identification 
number;
    (ii) 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
    (iii) A description of each specific activity or project to which 
the qualified expenditures identified in paragraph (b)(1)(ii) of this 
section relate.
    (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.
    (c) Revocation--(1) In general. An election under section 59(e) may 
be revoked for any project or activity 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 support why 
the Commissioner's consent should be granted and must specify the 
project activity to which the revocation shall apply.
    (4) Treatment of unamortized costs. The unamortized balance of the 
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 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 the date the final 
regulations are published in the Federal Register.

Mark Matthews,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 04-16474 Filed 7-19-04; 8:45 am]
BILLING CODE 4830-01-P