Taxpayer may make late success-fee safe harbor election

Plain-English summary

A corporate group paid a success-based fee in connection with a stock acquisition and intended to use the safe harbor in Rev. Proc. 2011-29. Its return preparer applied the safe harbor's substantive allocation but inadvertently omitted the required election statement from the timely filed return. 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 portions of the fee deducted and capitalized. The ruling did not decide whether the costs or transaction otherwise qualified for the safe harbor.

Ruling snapshot

• Question: Should the taxpayer receive more time to attach the election statement for the success-based fee safe harbor?
• Outcome: Approved
• Key authorities: IRC §§ 263(a), 446; 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: 201549020
Third Party Communication: None
Release Date: 12/4/2015
Date of Communication: Not Applicable
Index Number: 263.08-04
Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:ITA:B02
ATTN: ---------------------------
PLR-111668-15
Date: August 31, 2015

TY: -------

Legend

Taxpayer = ----------------------
Firm = ------------------------------
Tax Return Preparer = -----------------------
A = -----------------------------------------------------------------------
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B = -----------------------
C = -------------------------
D = -----------------------
E = ------------------
F = -----------------------------
G = --------------
H = -----------------
I = -------------------------
Year 1 = -------
Date 1 = ----------------------
Date 2 = --------------------
Date 3 = ------------------
Date 4 = ----------------------------

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

This is in response to your letter dated Date 1, requesting permission to attach an election statement to Taxpayer’s originally filed federal tax return for its taxable Year 1. 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 section 4.01 of Rev. Proc. 2011-29, 2011-1 C. B. 746. The request is made in
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accordance with §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations.

FACTS
Taxpayer represents the following:

Taxpayer is the common parent of an affiliated group of corporations that join in filing a consolidated federal income tax return. Taxpayer, through its wholly-owned subsidiaries, manufactures and distributes A.

On Date 2, a subsidiary of Taxpayer, B, signed an agreement to acquire the stock of C by way of the merger of D with and into C for approximately $E. The transaction closed on Date 3. The merger was treated as a stock acquisition. B paid F a success- based fee of $G for services performed in the process of investigating or otherwise pursuing the acquisition.

Taxpayer engaged Firm to prepare and file its federal income tax return for tax Year 1. After discussions between H, Taxpayer’s Corporate Controller, and Tax Return Preparer, an I at Firm, Taxpayer decided to take advantage of the safe harbor election provided in Rev. Proc. 2011-29. The federal tax return for the tax Year 1, prepared by Tax Return Preparer, was timely filed, pursuant to extensions, on Date 4.

Taxpayer represents that the return for tax Year 1 complied with the substantive requirements for the safe harbor election of section 4.01(1) and (2) Rev. Proc. 2011-29. In reliance upon Tax Return Preparer, Taxpayer failed to attach to the Year 1 return the mandatory statement stating it is making the safe harbor election, identifying the transaction and setting forth the success-based fees that are capitalized and those that are deducted, as required by section 4.01(3) of Rev. Proc. 2011-29. Tax Return Preparer inadvertently omitted this statement from the filed tax return. H represents that Firm had not informed him about the need to attach the statement to the return in order to properly make the election. Consequently, Taxpayer determined to request that an extension of time be granted under §§ 301.9100-1 and 301.9100-3 to allow Taxpayer to attach to its Year 1 return the mandatory statement regarding the election to use the safe harbor method of allocating success-based fees in Rev. Rul. 2011-29.

LAW
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
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capitalized. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 89-90 (1992); Woodward v. Commissioner, 397 U.S. 572, 575-76 (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 the facts and circumstances. See § 1.263(a)-5(b)(1).
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 seventy 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 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 (costs that may be deducted) if the taxpayer does three things. First, the taxpayer must treat seventy 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 with this ruling request to attach the
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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. 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 extensions of time for regulatory elections (other than automatic changes covered under section 301.9100-2) will be granted when the taxpayer provides evidence (including affidavits described in the regulations) 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(b)(1) provides that a taxpayer will be 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 Internal Revenue Service (IRS); (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, the taxpayer was unaware of the necessity for the election; (iv) reasonably relied on the written advice of the IRS; or (v) reasonably relied on a qualified tax professional, and the tax professional failed to make, or advise the taxpayer to make, the election. Section 301.9100-3(b)(3) provides that a taxpayer will not be considered 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 § 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
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(iii) uses hindsight in requesting relief. If specific facts have changed since the original deadline that make the election advantageous to a taxpayer, the IRS will not ordinarily grant relief.
Section 301.9100-3(c)(1) provides that the Commissioner will grant a reasonable extension of time to make a regulatory election only when the interests of the Government will not be 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. 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 under § 6501(a) before the taxpayer's receipt of a ruling granting relief under this section. 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, 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 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. RULING 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 the statement required by section 4.01(3) 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 for tax Year 1. CAVEATS 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. No opinion is expressed as to the federal tax treatment of the transaction under any other provisions of the Internal Revenue Code and the Treasury Regulations that may be applicable or under any other general principles of federal income taxation. This letter ruling is only applicable to matters under our jurisdiction. See Rev. Proc.
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2015-1, 2015-1 I.R.B. 1, 18, Section 1. No opinion is expressed as to the tax treatment of any conditions existing at the time of, or effects resulting from, the transaction that are not specifically covered by the above ruling. 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. Section 6110(k)(3) 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. 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. Enclosed is a copy of this letter ruling showing the deletions proposed to be made in the letter when it is disclosed under § 6110.
In accordance with the Power of Attorney 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.
Sincerely,

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

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Enc. Copy for § 6110 purposes