Late success-based-fee safe-harbor statement receives relief

Plain-English summary

A corporation paid a success-based fee in a taxable stock acquisition and intended to use Revenue Procedure 2011-29's safe harbor. Its return deducted 70 percent of the fee and capitalized 30 percent, but its tax adviser inadvertently omitted the required election statement. 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 deducted and capitalized amounts.

Ruling snapshot

• Question: May the taxpayer file the omitted statement electing the safe harbor for allocating a success-based transaction fee?
• Outcome: Approved
• Key authorities: IRC §§ 263(a), 446, 481(a); 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: 201537016 Third Party Communication: None
Release Date: 9/11/2015 Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
----------------------------- --------------------, ID No. ------------------
---------------------------------------- Telephone Number:
--------------------------------- ----------------------
Refer Reply To:
---------------------------------------------- CC:ITA:B02
PLR-144924-14
------------------------ Date:
June 05, 2015

              ----------------------------------------

Legend

Taxpayer = -----------------------------
Taxable Year = --------------------------------------------------------
Date 1 = ------------------------
Date 2 = --------------
Corporation A = ----------------------------------------------------------------------

Business = ----------------------------
Advisor = -------------------

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

This is in response to your letter dated December 1, 2014, requesting permission to
attach an election statement to Taxpayer's originally filed federal income tax return for
Taxable Year. The election statement was not included 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.

Taxpayer represents the following facts:

On Date 1, Corporation A acquired all of the outstanding stock of Taxpayer for cash
(“the transaction”). Specifically, (i) a newly created wholly owned subsidiary of
Corporation A merged into Taxpayer with Taxpayer surviving, (ii) Taxpayer became a
wholly owned subsidiary of Corporation A, and (iii) the shareholders of Taxpayer
PLR-144924-14 2

received cash. Taxpayer treated the transaction as a taxable acquisition by
Corporation A of all of the outstanding stock of Taxpayer.

Taxpayer engaged Business to assist with the transaction. Taxpayer paid a fee to
Business for the transaction.

Taxpayer engaged Advisor to prepare its federal income tax return for Taxable Year,
which included the fee. During the preparation of the income tax return, Taxpayer and
Advisor discussed the availability of the safe harbor election provided in Rev. Proc.
2011-29. Taxpayer decided to take advantage of the safe harbor election and instructed
Advisor to prepare the return in this manner. Taxpayer relied on Advisor as a qualified
tax professional to prepare complete and accurate returns. The federal income tax
return as filed included a deduction of 70% of the success-based fee while the
remaining 30% was capitalized, consistent with the requirements of the safe harbor
election. The statement required for making the election that should have been attached
to Taxpayer’s return was inadvertently omitted by Advisor.

Taxpayer represents that Taxpayer never has failed to timely file an income tax return.

On or about Date 2, Advisor reviewed Taxpayer’s federal income tax returns as filed
and determined that Taxpayer did not file an election for the fee.

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 § 1.263(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.
PLR-144924-14 3

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. 2011-29 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
facilitate a transaction described in § 1.263(a)-5(e)(3) (cost 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 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 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.
PLR-144924-14 4

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.

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, 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.
PLR-144924-14 5

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.

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

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.

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)