Tax Court rejects modification of sec. 179 election.

• Author: Bakale, Anthony
• Position: Expensing additional assets

In Patton, 116 TC No. 17 (2001), the Tax Court ruled that the Service did not abuse its discretion in refusing to allow a taxpayer to modify a Sec. 179 election to expense additional assets. Because the maximum amount that qualifies for expensing under Sec. 179 is now $24,000, the ruling is an important issue for many businesses.

Sec. 179 allows a taxpayer to expense, in the year placed in service, a limited amount of depreciable personal property used in a trade or business. All entities except estates, trusts and certain noncorporate lessors are eligible. Congress increased the maximum deduction from $5,000 in 1982 to $25,000 in 2003. Dollar for dollar, a taxpayer must reduce the maximum deduction by the amount of Sec. 179 property placed in service during the year in excess of $200,000. While the deduction cannot exceed the taxpayer's taxable income from the trade or business, there is a carryover allowance. Sec. 179(c)(1) requires the taxpayer to specify the items of Sec. 179 property and the portion of the cost of each item to be expensed. Sec. 179(c)(2) states that the taxpayer cannot revoke the election (and any specification contained therein) without IRS consent. "Revoke" includes any modification of the election.

Regs. Sec. 1.179-5(a) requires a taxpayer to make the election on the first return to which it applies, whether or not the taxpayer files the return timely. The taxpayer can also make the election on a timely filed amended return (including extensions). The election is binding for property elected for the election year and all subsequent tax years. Once made, the election is revocable only with the Service's consent. Regs. Sec. 1.179-5 (b) indicates that the IRS will consent to a taxpayer's request to revoke the election, including any specification contained in the election, only in "extraordinary circumstances."

Sam Patton, a self-employed welder, reported a Schedule C loss of $36,271 on his 1995 return. On the return, he elected to expense, under Sec. 179, a $4,100 torch. He was unable to deduct this amount in 1995 due to his Schedule C loss. On audit, the IRS determined that he failed to report $135,638 in gross receipts from his welding business. Also, Patton had deducted as "materials and supplies" three items the Service determined were depreciable assets...