PLR 1250015: IRS grants extra time to make a success-based fee safe harbor election

Plain-English summary

The IRS granted a taxpayer 45 additional days to attach the required statement for an election under Revenue Procedure 2011-29. The taxpayer used the safe harbor for allocating success-based fees from a business sale, but its original return omitted the mandatory election statement. The IRS found that the taxpayer acted reasonably and in good faith and that the relief would not prejudice the government, including under the special rules for accounting method elections. The ruling did not decide whether the taxpayer correctly identified the costs covered by the election or whether the transaction was within the revenue procedure's scope.

Ruling snapshot

• Question: Could the taxpayer receive extra time to file the mandatory statement for the success-based fee safe harbor election?
• Outcome: Approved
• Key authorities: IRC §§ 263, 446, 481, and 6110; Treas. Reg. §§ 1.263(a)-2, 1.263(a)-5, and 301.9100-1 through 301.9100-3; Rev. Proc. 2011-29

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201250015 Third Party Communication: None
Release Date: 12/14/2012 Date of Communication: Not Applicable
Person To Contact:
Index Number: 9100.00-00 ------------------------, ID No. ----------
Telephone Number:
---------------------
-------------------------------- Refer Reply To:
--------------------------------------------------- CC:ITA:B02
-------------------------------- PLR-121701-12
--------------------------- Date:
September 17, 2012

Legend

Taxpayer= --------------------------------
Advisor= ------------------------------
Year1= -------
Date A= ------------------
Date B= -----------------
Taxable Year 1= ------------------------------------------------------------------------

Dear ------------:

This is in response to the letter dated May 16, 2012, submitted on your behalf by your
authorized representative, Advisor. In the letter, you request permission to attach an
election statement to Taxpayer’s originally filed federal tax return for Taxable Year 1.
The election statement was not included with Taxpayer’s originally filed federal tax
return for Taxable Year 1 although it was required in order for Taxpayer to use a safe
harbor method of accounting. The request is made in accordance with §§ 301.9100-1
and 301.9100-3 of the Procedure and Administration Regulations.

Taxpayer represents the following facts:

  Taxpayer and its shareholders began the process of trying to sell itself in Year 1.
  Taxpayer was successful, and entered into a stock purchase agreement on Date A.
  On Date B, the taxpayer executed the stock purchase agreement and sold itself to
  new, unrelated shareholders, which resulted in a short tax year for the period
  Taxable Year 1.

  In connection with its sale in Year 1, Taxpayer incurred transaction costs, including
  success-based fees. These success-based fees were paid upon the closing of the
  transaction on Date B. Taxpayer capitalized the transaction costs in accordance

PLR-121701-12 2

with § 263 of the Internal Revenue Code and § 1.263(a)-2(a) and § 1.263(a)-5 of
the Income Tax Regulations. Taxpayer capitalized 30 percent of the success-based
fees, and deducted the remaining 70 percent, on its Taxable Year 1 return
consistent with the safe harbor election provided in Revenue Procedure 2011-29,
2011-18 I.R.B. 746.

Taxpayer timely filed its Taxable Year 1 return, prepared by Advisor, but failed to
attach the mandatory statement required in Revenue Procedure 2011-29 for any
taxpayer electing to use the safe harbor method of allocating success-based fees.
This oversight was uncovered prior to Taxpayer filing any other returns and prior to
any discovery by the Service.

Taxpayer requests that an extension of time be granted solely for the purposes of
allowing taxpayer to attach to its Taxable Year 1 return the mandatory statement
regarding the election to use the safe harbor method of allocating success-based
fees.

Section 263(a)(1) and § 1.263(a)-2(a) provide that no deduction shall be allowed for any
amount paid out for property having a useful life substantially beyond the taxable year.
In the case of an acquisition or reorganization of a business entity, costs that are
incurred in the process of acquisition and that produce significant long-term benefits
must be capitalized. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 89-90 (1992);
Woodward v. Commissioner, 397 U.S. 572, 575-576(1970).

Under § 1.263(a)-5, a taxpayer must capitalize an amount paid to facilitate a business
acquisition or reorganization transaction described in § 1.263(a)-5(a). An amount is
paid to facilitate a transaction described in § 1.263(a)-5(a) if the amount is paid in the
process of investigating or otherwise pursuing the transaction.

Section 1.263(a)-5(f) provides that an amount that is contingent on the successful
closing of a transaction described in § 1.263(a)-5(a) ( “success-based fee”) is presumed
to facilitate the transaction, and thus must be capitalized. A taxpayer may rebut the
presumption by maintaining sufficient documentation to establish that a portion of the
fee is allocable to activities that do not facilitate the transaction, and thus may be
deductible.

A taxpayer's method for determining the portion of a success-based fee that facilitates a
transaction and the portion that does not facilitate the transaction is a method of
accounting under § 446.

Because the treatment of success-based fees was a continuing subject of controversy
between taxpayers and the Service, the Service published Revenue Procedure 2011-

29. Revenue Procedure 2011-29 provides a safe harbor method of accounting for
    allocating success-based fees paid in business acquisitions or reorganizations
    PLR-121701-12 3

described in regulations section 1.263(a)-5(e)(3). In lieu of maintaining the
documentation required by section 1.263(a)-5(f), this safe harbor permits electing
taxpayers to treat 70 percent of the success-based fee as an amount that does not
facilitate the transaction (i.e., amounts that can be deducted). The remaining portion of
the fee must be capitalized as an amount that facilitates the transaction.

Section 4.01 of Revenue Procedure 2011-29 allows the taxpayer to make a safe harbor
election with respect to success-based fees. Section 4.01 provides that the Service will
not challenge the taxpayer’s allocation of success-based fees between activities that
facilitate a transaction described in § 1.263(a)-5(e)(3) (costs that must be capitalized)
and activities that do not facilitate the transaction (cost that may be deductible) if the
taxpayer does three things. First, the taxpayer must treat 70 percent of the amount of
the success-based fee as an amount that does not facilitate the transaction and thus
may be deductible. Second, the taxpayer must capitalize the remaining amount of the
success-based fee as an amount which does facilitate the transaction. Finally, the
taxpayer must attach a statement to its original federal income tax return for the taxable
year the success-based feed is paid or incurred, stating that the taxpayer is electing the
safe harbor, indentifying the transaction, and stating the success-based fee amounts
that are deducted (treated as not facilitating the transaction) and capitalized (treated as
facilitating the transaction).

It is this last requirement that Taxpayer requests permission to accomplish with this
ruling request. Taxpayer requests permission with this ruling request to attach the
statement required by Section 4.01 of Revenue Procedure 2011-29 to its return, by
amending its original filed return and superseding it with a return with the proper
election statement completed and attached.

Section 301.9100-1(c) provides that the Commissioner has discretion to grant a
reasonable extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3
to make certain regulatory elections. Section 301.9100-1(b) defines a “regulatory
election” as an election whose due date is prescribed by a regulation published in the
Federal Register, or a revenue ruling, revenue procedure, notice or announcement
published in the Internal Revenue Bulletin.

Sections 301.9100-1 through 301.9100-3 provide the standards the Commissioner will
use to determine whether to grant an extension of time to make an election. Section
301.9100-2 provides automatic extensions of time for making certain elections. Section
301.9100-3 provides extensions of time for making elections that do not meet the
requirements of § 301.9100-2.

Section 301.9100-3(a) provides that requests for relief under § 301.9100-3 will be
granted when the taxpayer provides evidence to establish to the satisfaction of the
Commissioner that the taxpayer acted reasonably and in good faith, and that granting
relief will not prejudice the interests of the government.
PLR-121701-12 4

Section 301.9100-3(c)(1) provides that the interests of the government are prejudiced if
granting relief would result in the taxpayer having a lower tax liability in the aggregate
for all taxable years affected by the election than the taxpayer would have had if the
election had been timely made. The interests of the government are ordinarily
prejudiced if the taxable year in which the regulatory election should have been made,
or any taxable years that would have been affected by the election had it been timely
made are closed by the period of limitations on assessment.

Section 301.9100-3(c)(2) provides special rules for accounting method regulatory
elections. Section 301.9100-3(c)(2) provides that the interests of the government are
deemed prejudiced, except in unusual or compelling circumstances, if the accounting
method regulatory election for which relief is requested is subject to the advance
consent procedures for method changes, requires a § 481(a) adjustment, would permit
a change from an impermissible method of accounting that is an issue under
consideration by examination or in any other setting, or provides a more favorable
method of accounting if the election is made by a certain date or taxable year.

CONCLUSION

Based upon our analysis of the facts as represented, Taxpayers acted reasonably and
in good faith, and granting relief will not prejudice the interests of the government, and
therefore the requirements of §§ 301.9100-1 and 301.9100-3 have been met.

Furthermore, granting relief will not result in Taxpayer having a lower tax liability in the
aggregate for all taxable years affected by the election than Taxpayer would have had if
the election had been timely made, nor will any closed years be affected. Therefore,
the interests of the government will not be prejudiced by granting the request for relief.

Furthermore, granting relief will not prejudice the interests of the government associated
with the special rules for accounting method regulatory elections, in this case the safe
harbor election for success-based fees. The election provided by Revenue Procedure
2011-29 for allocating the success-based fees is granted on an automatic basis (if all
proper procedures including the attaching the mandatory statement are followed), does
not require a § 481(a) adjustment, is not an issue under consideration, and does not
provide a more favorable method of accounting if the election is made by a certain date
or taxable year.

Taxpayer is granted an extension of 45 days from the date of this ruling to file its
mandatory statement as required by Section 4.01 of Revenue Procedure 2011-29,
stating that it is electing the safe harbor for success-based fees, identifying the
transaction, and stating the success-based fee amounts that are deducted and
capitalized.
PLR-121701-12 5

The rulings contained in this letter are based upon information and
representations submitted by the taxpayer and accompanied by a penalty of
perjury statement executed by an appropriate party. While this office has not
verified any of the material submitted in support of the request for rulings, it is
subject to verification on examination.

Except as expressly provided herein, no opinion is expressed or implied
concerning the tax consequences of any aspect of any transaction or item
discussed or referenced in this letter. In particular, no opinion is expressed as to
whether Taxpayer properly included the correct costs as its success-based fees
subject to the retroactive election, or whether Taxpayer’s transaction was within
the scope of Revenue Procedure 2011-29.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

                                   Sincerely,



                                   Thomas D. Moffitt
                                   Branch Chief, Branch 2
                                   (Income Tax & Accounting)

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