Taxpayer receives 60 days to file omitted success-fee election statement

Plain-English summary

A corporate taxpayer paid a success-based financial advisory fee when it acquired another corporation through a merger. Its return applied Revenue Procedure 2011-29's safe harbor by capitalizing 30 percent of the fee and treating 70 percent as nonfacilitative, but the return preparer failed to attach the mandatory election statement. The taxpayer lacked in-house federal tax expertise and reasonably relied on the professional preparer. The IRS found that the taxpayer acted reasonably and in good faith and that late relief would not prejudice the government. It granted 60 days to file the missing statement identifying the transaction and the amounts deducted and capitalized, without deciding whether the transaction or fee otherwise qualified for the safe harbor.

Ruling snapshot

• Question: May the taxpayer file a late Revenue Procedure 2011-29 statement after its return preparer omitted it from the original return?
• Outcome: Approved
• Key authorities: IRC §§ 263(a), 446, 481(a), 6501(a), 6662; Treas. Reg. §§ 1.263(a)-5, 301.9100-1, 301.9100-3; Rev. Proc. 2011-29

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201528012                                             Third Party Communication: None
Release Date: 7/10/2015                                       Date of Communication: Not Applicable
Index Number: 263.08-04, 9100.00-00
                                                              Person To Contact:
----------------------------------------------------          -----------------------------, ID No. -------------
----------------------                                        ----------------
----------------------------------                            Telephone Number:
-------------------------------                               --------------------
                                                              Refer Reply To:
                                                              CC:ITA:B02
                                                              PLR-131891-14
                                                              Date:
                                                              February 19, 2015



Taxpayer                   =   -----------------------------------------------------
LLC                        =   --------------------------------
Corporation                =   -------------------------------
Merger Subsidiary          =   ----------------------
CPA                        =   --------------------------
Taxable Year               =   -------------------------------------------
Amount 1                   =   --------------
State 1                    =   ------------
Year 1                     =   ------
Date 1                     =   --------------------
Date 2                     =   -----------------------
Date 3                     =   -----------------------
Date 4                     =   ------------------------
Date 5                     =   ---------------------------

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

       This is in response to your letter submitted on Date 1 on behalf of the Taxpayer,
requesting rulings that, pursuant to Treas. Reg. § 301.9100-1, the Internal Revenue
Service grant the Taxpayer an extension of time to file an election statement required by
section 4.01(3) of Rev. Proc. 2011-29 with respect to the Taxable Year.

                                                       FACTS

       On Date 2, the Taxpayer was formed as a limited liability company pursuant to
the laws of State 1. On Date 3, the Taxpayer filed a Form 8832 with the I.R.S. and
elected to be treated as a corporation for U.S. federal income tax purposes. The
Taxpayer’s sole owner was LLC, an entity treated as a partnership for U.S. income tax
purposes.
PLR-131891-14                                2

       On Date 4, pursuant to a plan of merger, the Taxpayer acquired 100% of the
stock of Corporation through a wholly-owned subsidiary, Merger Sub. Pursuant to the
plan of merger, the Taxpayer caused Merger Sub to merge into Corporation, with
Corporation surviving the merger as a direct, wholly-owned subsidiary of the Taxpayer.
The Taxpayer has represented that the transaction qualified as a taxable acquisition of
Corporation stock by the Taxpayer, pursuant to Rev. Rul. 73-427, as well as a covered
transaction, pursuant to Treas. Reg. § 1.263(a)-5(e)(3)(ii).

       In the process of pursuing the merger with Corporation, the Taxpayer incurred
transaction costs, including fees paid to professional advisors for legal, accounting, and
consultative services. Some of the costs were attributable to fees paid by the Taxpayer
to a professional financial advisor due only upon the successful closing of the merger
with Corporation (success-based fee). Upon completion of the merger, the Taxpayer
remitted a success-based fee in the amount of Amount 1 to the financial advisor.

       The Taxpayer represents that it does not have in-house tax knowledge or
expertise with respect to U.S. federal tax filings. Due to its lack of knowledge and
expertise with respect to U.S. federal tax filings, the Taxpayer has historically engaged
professional tax advisors in the ordinary course of its business to prepare all of its
required U.S. federal tax return filings.

       In Year 1, the Taxpayer engaged CPA to prepare the Taxpayer’s U.S. federal
income tax return for the Taxable Year. The Taxpayer represents that it believed and
understood that CPA had extensive experience in preparing income tax returns and
advising clients regarding all statements and other information that should be included
on such returns.

        On Date 5, the Taxpayer filed a consolidated U.S. federal income tax return for
the Taxable Year. The Taxpayer elected to capitalize 30% of the success-based fee
pursuant to section 263(a), and treated the remaining 70% of the success-based fee as
a deductible start-up cost, pursuant to the safe harbor election set forth in section 4 of
Rev. Proc. 2011-29. The Taxpayer represents that CPA failed to attach the election
statement required by section 4.01(3) of Rev. Proc. 2011-29 to the Taxpayer’s return for
the Taxable Year. Subsequent to the filing of the return, the Taxpayer engaged CPA to
file a request for relief to file the election statement, pursuant to Treas. Reg.
§ 301.9100-1.

                                          LAW

       Section 263(a)(1) provides generally that no deduction shall be allowed for any
amount paid in exchange for property having a useful life extending beyond the end of
the taxable year. See also Treas. Reg. § 1.263(a)-2(a). Costs incurred in the process
of acquisition or reorganization of a business entity that produce significant long-term
benefits must be capitalized. Indopco v. Commissioner, 503 U.S. 79, 89-90 (1992);
PLR-131891-14                                 3

Treas. Reg. § 1.263(a)-5(a) (providing that taxpayers must capitalize amounts paid to
facilitate certain transactions set forth in that section).

      Treas. Reg. §1.263(a)-5(b)(1) provides that an amount is paid to facilitate a
transaction if the amount is paid in investigating or otherwise pursuing the transaction.
Whether an amount is paid in the process of investigating or otherwise pursuing the
transaction is determined based on all of the facts and circumstances.

         Treas. Reg. § 1.263(a)-5(f) sets forth the rule governing success-based fees, and
provides that an amount paid that is contingent on the successful closing of a
transaction described in Treas. Reg. § 1.263(a)-5(a) is treated as an amount paid to
facilitate the transaction, except to the extent the taxpayer maintains sufficient
documentation to establish that a portion of the fee is allocable to activities that do not
facilitate the transaction. This documentation must be completed on or before the due
date of the taxpayer’s timely filed original federal income tax return (including
extensions) for the taxable year during which the transaction closes.

         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 section 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. 2011-29 provides a safe harbor election for allocating success-based
fees paid in business acquisitions or reorganizations described in Treas. Reg.
§ 1.263(a)-5(e)(3). Pursuant to Section 4.01 of Rev. Proc. 2011-29, the Service will not
challenge a taxpayer’s allocation of success-based fees between activities that facilitate
a transaction described in Treas. Reg. § 1.263(a)-5(e)(3) and activities that do not
facilitate the transaction, if the taxpayer: 1) treats 70% of the amount of the success-
based fee as an amount that does not facilitate the transaction; 2) capitalizes the
remaining 30% as an amount that does facilitate the transaction; and 3) attaches a
statement to its original federal income tax return for the tax year the success-based fee
is paid or incurred, stating that the taxpayer is electing the safe harbor, identifying the
transaction, and stating the amount of the success-based fees that are deducted and
capitalized.

       Treas. Reg. §§ 301.9100-1 sets forth the standards the Commissioner will use to
determine whether to grant an extension of time to make a regulatory election. Treas.
Reg. § 301.9100-1(b) provides that a regulatory election is 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.
Pursuant to Treas. Reg. § 301.9100-1(c), the Commissioner has discretion to grant a
reasonable extension of time under the rules set forth in Treas. Reg. §§ 301.9100-2 and
301.9100-3 to make a regulatory election.
PLR-131891-14                                 4

        Treas. Reg. § 301.9100-2 sets forth the rules applicable to automatic 12-month
extensions of time to make certain regulatory elections. Treas. Reg. § 301.9100-3 sets
forth the rules applicable to requests for extensions of time for regulatory elections that
do not meet the requirements of Treas. Reg. § 301.9100-2. Requests for relief pursuant
to Treas. Reg. § 301.9100-3 will be granted when the taxpayer provides evidence
(including affidavits described in Treas. Reg. § 301.9100-3(e)) that establishes that the
taxpayer acted reasonably and in good faith, and that the grant of relief will not
prejudice the interests of the government.

      Treas. Reg. § 301.9100-3(b)(1) provides that a taxpayer is deemed to have acted
reasonably and in good faith if the taxpayer:

       (i)     requests relief before the failure to make the regulatory election is
               discovered by the Service;
       (ii)    failed to make the election because of intervening events beyond the
               taxpayer’s control;
       (iii)   failed to make the election because, after exercising reasonable diligence
               (taking into account the taxpayer’s experience and the complexity of the
               return at issue), the taxpayer was unaware of the necessity for the
               election;
       (iv)    reasonably relied on the written advice of the Service; or
       (v)     reasonably relied on a qualified tax professional, including a tax
               professional employed by the taxpayer, and the taxpayer failed to make,
               or to advise the taxpayer to make, the election.

      Treas. Reg. § 301.9100-3(b)(3) provides that a taxpayer will not be deemed to
have acted reasonably and in good faith if the taxpayer:

       (i)     seeks to alter a return position for which an accuracy-related penalty has
               been or could be imposed under section 6662 at the time the taxpayer
               requests relief, and the new position requires or permits a regulatory
               election for which relief is requested;
       (ii)    was informed in all material respects of the required election and related
               tax consequences, but chose not to file the election; or
       (iii)   uses hindsight in requesting relief.

        Treas. Reg. § 301.9100-3(c)(1) provides that an extension of time to make a
regulatory election will be granted only when the interests of the government are not
prejudiced by the granting of relief. The interests of the government are prejudiced if
granting relief would result in a 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 (taking into account the time value of money). Treas.
Reg. § 301.9100-3(c)(1)(i).
PLR-131891-14                                  5

        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 under section 6501(a) before the taxpayer’s receipt of a ruling granting relief
under this section. Treas. Reg. § 301.9100-3(c)(1)(ii).

       Treas. Reg. § 301.9100-3(c)(2) provides special rules for accounting method
regulatory elections. The interests of the government are deemed to be prejudiced
except in unusual and compelling circumstances if the accounting method regulatory
election for which relief is requested:

       (i)     is subject to the procedure set forth in Treas. Reg. § 1.446-1(e)(3)(i) of this
               chapter (requiring advance written consent of the Commissioner);
       (ii)    requires an adjustment under section 481(a) (or would require an
               adjustment under section 481(a) if the taxpayer changed to the method of
               accounting for which relief is requested in a taxable year subsequent to
               the taxable year the election should have been made);
       (iii)   would permit a change from an impermissible method of accounting that is
               an issue under consideration by examination, an appeals office, or a
               federal court and the change would provide a more favorable method or
               more favorable terms and conditions than if the change were made as part
               of an examination; or
       (iv)    provides a more favorable method of accounting or more favorable terms
               and conditions if the election is made by a certain date or taxable year.

                                       CONCLUSION

       Based upon on the information submitted and representations made, we
conclude that the Taxpayer acted reasonably and in good faith, and granting relief will
not prejudice the interests of the government. Therefore, the requirements of Treas.
Reg. §§ 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 the
Taxpayer properly included the correct costs as its success-based fees subject to the
retroactive election, or whether the Taxpayer’s transaction was within the scope of Rev.
Proc. 2011-29.
PLR-131891-14                                6

      This ruling is directed only to the taxpayer requesting it. Pursuant to Treas. Reg.
§ 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.

      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.

                                      Sincerely,


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




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