Multiple acquisition-fee elections may be filed late

Plain-English summary

A taxpayer incurred success-based fees in several covered business acquisitions and intended to use the Rev. Proc. 2011-29 safe harbor for all of them. Its timely return followed the required economics by deducting 70 percent of the fees and capitalizing 30 percent, but the return preparer accidentally omitted the mandatory election statement. The preparer discovered the mistake before the IRS did and promptly advised the taxpayer to seek relief. The IRS concluded that the taxpayer acted reasonably and in good faith and that allowing the statement would not prejudice the government. It granted 60 days to file a statement identifying the transactions and the deducted and capitalized amounts.

Ruling snapshot

• Question: Could the taxpayer file the omitted Rev. Proc. 2011-29 success-based-fee election statement for several acquisitions?
• Outcome: Approved
• Key authorities: IRC §§ 263, 446; Treas. Reg. §§ 1.263(a)-5, 301.9100-3; Rev. Proc. 2011-29

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201545004 Third Party Communication: None
Release Date: 11/6/2015 Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
--------------------------------, ID No. ----------
---------------------- ------------------
------- Telephone Number:
--------------------------------------- ----------------------
------------------- Refer Reply To:
---------------------------------- CC:ITA:B02
PLR-104823-15

                                                           Date:
                                                           August 05, 2015

TY: -------

Legend

Taxpayer = ------------------------------------------------------------------------

X= ---------------------
Y= ------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
-------------------------------------------------------
Z= ------------------------------
Vice President of Finance = ----------------
CPA Firm = ---------------------
Tax Return Preparer = ------------------------
Month = ------
Date1 = ------------------------
Date2 = --------------------
Date3 = --------------------------
Date4 = ----------------------------
Date5 = ----------------------------
Date6 = ----------------------------
LLC1= ------------------------------------
LLC2 = ------------------------------------
LLC3 = -------------------------------------------
Corp. = -----------------------
Year1 = -------
Year2 = -------
City = -----------
PLR-104823-15
State = ------------------
$a = --------------
$b = --------------
$c = --------------
$d = --------------
$e = --------------
$f = --------------

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

This is in response to your letter of Date1, requesting permission to attach an election
statement to Taxpayer's originally filed federal tax return for taxable Year1. The election
statement was not included although it was required in order for Taxpayer to use a safe
harbor method of accounting under section 4.01 of Rev. Proc. 2011-29, 2011-1 C.B.

746. This request is made in accordance with §§ 301.9100-1 and 301.9100-3 of the
     Procedure and Administration Regulations.

FACTS AND REPRESENTATIONS

Taxpayer represents the following:

Taxpayer is an X company headquartered in City, State. It provides a diversified range
of Y services to Z.

In tax Year1, Taxpayer acquired the equity interest in LLC1 in a taxable transaction
dated Date2. The transaction qualifies as a covered transaction under § 1.263(a)-5 of
the Income Tax Regulations. In connection with the acquisition of the equity interest,
Taxpayer incurred success-based transaction fees in the amount of $a. Taxpayer
elected to deduct 70% or $b and capitalize the remaining 30% or $c.

Additionally in tax Year1, Taxpayer acquired the assets of LLC2 on Date3, the assets of
LLC3 on Date4, and the equity interest in Corp. on Date5. All three of these
acquisitions qualify as covered transactions under § 1.263(a)-5 of the regulations. In
connection with the transactions, Taxpayer incurred success-based transaction fees in
the amount of $d. Taxpayer elected to deduct 70% or $e and capitalize the remaining
30% or $f.

Taxpayer engaged CPA Firm to prepare and file its Year1 federal income tax return.
Taxpayer relied upon CPA Firm to accurately prepare the return.

After discussions with Tax Return Preparer, who was a partner in CPA Firm, about the
transactions, success-based fees, and the availability of the safe harbor election in

                                           2

PLR-104823-15
Revenue Procedure 2011-29, Taxpayer’s Vice President of Finance informed Tax
Preparer that Taxpayer decided to use the safe harbor election that Tax Return
Preparer suggested for tax Year1. Taxpayer provided documentation and information
relating to the transactions to Tax Return Preparer. Taxpayer and Taxpayer’s Vice
President of Finance relied on Tax Return Preparer as a qualified tax professional to
prepare a complete and accurate federal income tax return for tax Year1 using the safe
harbor election they discussed. The federal income tax return was timely filed under
extension on or about Date6, and included a deduction of 70% of the success-based
fee while the remaining 30% of the success-based fee was capitalized, consistent with
the requirements of the safe harbor election.

In Month of Year2, Tax Return Preparer discovered that he had accidentally omitted
from the tax Year1 return the statement required under section 4.01(3) of Rev. Proc.
2011-29 for taxpayers electing to use the safe harbor method of allocating success-
based fees. This oversight was discovered by Tax Return Preparer before any
discovery by the Internal Revenue Service. Tax Return Preparer had not informed
Taxpayer about the need to attach the statement to the return in order to properly make
the election. Upon discovering the omission, Tax Return Preparer immediately
contacted Taxpayer and informed Taxpayer of the oversight and the need to file a letter
ruling request for relief under §§ 301.9100-1 and 301.9100-3 of the Procedure and
Administration Regulations.

Accordingly, Taxpayer requests that an extension of time be granted to allow Taxpayer
to attach to its Year1 return the mandatory statement regarding the election to use the
safe harbor method of allocating success-based fees under Rev. Proc. 2011-29.

LAW AND ANALYSIS:

Section 263(a)(1) of the Internal Revenue Code and § 1.263(a)-2(a) of the Income Tax
Regulations generally 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. 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. See § 1.263(a)-5(b)(1).

                                         3

PLR-104823-15
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 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 § 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, i.e., an amount 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 a taxpayer to make a safe harbor election
with respect to success-based fees. Section 4.01 provides that the Service will not
challenge a 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 (costs that may be deducted) 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 deducted. Second, the taxpayer must capitalize the remaining amount of the
success-based fee as an amount which does facilitate the transaction. Third, 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 third requirement that Taxpayer requests permission to accomplish with this
ruling request. Taxpayer requests permission to attach the statement required by
section 4.01(3) 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.

Sections 301.9100-1 through 301.9100-3 provide the standards the Commissioner will

                                         4

PLR-104823-15
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 301.9100-1(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.

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 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 and representations provided, 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 for the tax Year1 transactions, as required by section 4.01(3) of

                                        5

PLR-104823-15
Rev. Proc. 2011-29, stating that Taxpayer is electing the safe harbor for success-based
fees, identifying the transactions, and stating the success-based fee amounts that are
deducted and capitalized for tax Year1.

The rulings contained in this letter are based on information and representations
submitted by 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 transactions are within the scope of Rev. Proc. 2011-29.

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 its return that provides the date and control number of the letter
ruling.

In accordance with the provisions of the power of attorney currently on file with this
office, a copy of this letter is being sent to your authorized representatives. We are also
sending a copy of this letter to the appropriate operating division director. Enclosed is a
copy of the letter ruling showing the deletions proposed to be made in the letter when it
is disclosed.

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.

                                  Sincerely,



                                  ______________________________
                                  NORMA C. ROTUNNO
                                  Senior Technician Reviewer, Branch 2
                                  Office of Associate Chief Counsel
                                  (Income Tax & Accounting)




                                         6