Taxpayer receives more time for success-based fee election

Plain-English summary

A taxpayer incurred success-based fees when acquiring a corporation and reported them using the Rev. Proc. 2011-29 safe harbor. Its timely return deducted 70 percent and capitalized 30 percent, but the preparer failed to attach the mandatory election statement. After the adviser discovered the omission, the taxpayer promptly sought relief. The IRS found that the taxpayer acted reasonably and in good faith and that relief would not prejudice the government. It granted 60 days to file the statement identifying the transaction and the amounts deducted and capitalized, without deciding whether the transaction or fees otherwise fell within the safe harbor.

Ruling snapshot

• Question: Could the taxpayer file a late election statement for the success-based fee safe harbor?
• Outcome: Approved, with 60 days to file the required statement
• Key authorities: IRC §§ 263 and 446; Treas. Reg. §§ 1.263(a)-5, 301.9100-1, and 301.9100-3; Rev. Proc. 2011-29

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201505009 Third Party Communication: None
Release Date: 1/30/2015 Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
---------------------- -------------------, ID No. ------------------
------- Telephone Number:
------------------------------------------------------------ ----------------------
-------------------------------------------- Refer Reply To:
----------------------------- CC:ITA:B02
PLR-116769-14
Date:
In Re: October 17, 2014

Legend:
Taxpayer = ------------------------------------------------------------
Corporation = --------------------------------------------------
Date1 = --------------------------
Date2 = ----------------------
CPA = ----------------------
Taxable Year = ----------------------------------------------

Dear -----------------

This ruling is in response to a letter dated April 14, 2014, requesting permission to
attach an election statement to Taxpayer’s originally filed federal tax return for Taxable
Year. The election statement was not included with the return although it was required
in order for Taxpayer to use a safe harbor method of accounting for success-based fees
under Rev. Proc. 2011-29, 2011-18 I.R.B. 746. The request is made in accordance with
§§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations.

FACTS

Taxpayer incurred transaction costs including success-based fees upon closing on
Date1, in Taxable Year related to the purchase of Corporation. Taxpayer capitalized
the transaction costs in accordance with §263 of the Internal Revenue Code and §§
1.263(a)-2 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 timely
filed return for Taxable Year, which is consistent with the safe harbor election provided
in Rev. Proc. 2011-29.

Although the tax return was timely filed, it did not include the mandatory statement
required under Rev. Proc. 2011-29 for taxpayers electing to use the safe harbor method

PLR-116769-14 2

of allocating success based fees. The return was prepared and reviewed by Taxpayer’s
trusted CPA, but Taxpayer failed to attach the statement. CPA discovered this oversight
on Date2, and immediately informed Taxpayer, who instructed CPA to contact the
Service and expeditiously rectify the oversight.

Accordingly, Taxpayer requests an extension of time be granted for the purpose of
allowing Taxpayer to attach to its Taxable Year 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 of the regulations, a taxpayer must capitalize an amount paid to
facilitate a business acquisition or reorganization transaction described in § 1.62(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.

Under § 1.263(a)-5(f), 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 Rev. Proc. 2011-29. Rev.
Proc. 11-29 provides a safe harbor method of accounting for allocating success-based
fees paid in business acquisitions or reorganizations described in regulations §
1.263(a)-5(e)(3). In lieu of maintaining the documentation required by § 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 that is, 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 Rev. Proc. 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

PLR-116769-14 3

facilitate a transaction described in § 1.263(a)-5(e)(3)(costs that must be capitalized)
and activities that do not facilitate the transaction (costs 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 fee is paid or incurred, stating that the taxpayer is electing the
safe harbor, identifying 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 Rev. Proc. 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 §§ 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
the relief will not prejudice the interests of the government.

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.

PLR-116769-14 4

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 on the information submitted and representations made, we concluded that
Taxpayer acted reasonably and in good faith, and granting relief will not prejudice the
interests of the government. Therefore, the requirements of §§ 301.9100-1 and
301.9100-3 have been met.

Taxpayer is granted an extension of 60 days from the date of this ruling to file its
mandatory statement as required by section 4.01 of Rev. Proc. 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.

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 Rev. Proc. 2011-29.

This ruling is directed only to the taxpayer requesting it. Under § 6110(k)(3) this ruling
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, a taxpayer filing its return electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

                                     Sincerely,

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