An S corporation received more time to elect the success-based fee safe harbor

Plain-English summary

An S corporation paid a success-based fee in connection with an acquisition and reported the fee using the safe harbor in Revenue Procedure 2011-29. It deducted 70 percent and capitalized 30 percent, but its CPA failed to attach the required election statement to the original return. The IRS found that the corporation acted reasonably and in good faith and that late relief would not prejudice the government's interests. It granted the corporation 60 days from the ruling date to file the statement. The IRS did not decide whether the costs were properly treated as success-based fees or whether the transaction otherwise fell within the revenue procedure.

Ruling snapshot

• Question: Could the corporation file a late election statement for the success-based fee safe harbor?
• Outcome: Approved, with 60 days from the ruling date to file the required statement.
• Key authorities: IRC §§ 263(a), 446, 481, 6501, 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: 201746020                                                Third Party Communication: None
Release Date: 11/17/2017                                         Date of Communication: Not Applicable
Index Number: 263.00-00, 9100.00-00
                                                                 Person To Contact:
-----------------------------------------------                  -------------------------------
---------------------------------------------                    ID No. ----------------
------------------------------------                             Telephone Number:
                                                                 --------------------
Attn: ----------------------                                     Refer Reply To:
------------------------------------------                       CC:ITA:B01
                                                                 PLR-109876-17
EIN:     ---------------                                         Date:
                                                                 August 18, 2017




LEGEND

Taxpayer          =        ----------------------------------------------------------
Date 1            =        -----------------------
Date 2            =        ---------------------------
Date 3            =        ---------------------------
Q Sub             =        ---------------------------------------------
Buyer             =        --------------------------------------------
Parent            =        ----------------------------
Merger Sub        =        --------------------------------
CPA               =        ------------------------


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

       This responds to a letter ruling request dated March 09, 2017, submitted on
behalf of Taxpayer. Taxpayer requests an extension of time pursuant to sections
301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations to make
an election for the treatment of a success-based fee in accordance with Rev. Proc.
2011-29, 2011-18 I.R.B. 746, which requires that a statement be attached to Taxpayer’s
original federal income tax return for the taxable year the success-based fee is paid or
incurred. Taxpayer’s request is with respect to the short taxable year beginning Date 1,
and ending Date 2.
PLR-109876-17                                 2

                                          FACTS

       Taxpayer is an S corporation with a qualified subchapter S subsidiary, Q Sub.
On Date 2, in accordance with the terms of the Merger Agreement and Exchange
Agreement, Buyer acquired all issued and outstanding shares of Taxpayer. As part of
the transaction, certain shareholders of Taxpayer sold a portion of their common stock
for cash, as well as contributed a portion of their common stock, to Parent. Parent is
the sole shareholder of Buyer. In return, the shareholders became partial owners of
Parent. In accordance with the Merger Agreement, Merger Sub, a subsidiary of Buyer,
merged with and into Taxpayer, with Merger Sub ceasing to exist and Taxpayer
becoming a wholly-owned subsidiary of Buyer. Taxpayer represents that the
transaction qualified as a covered transaction pursuant to section 1.263(a)-5(e)(3) of the
Income Tax Regulations.

        On or around Date 3, Taxpayer hired CPA to prepare and timely file its U.S.
Form 1120S for the short tax year beginning Date 1, and ending Date 2. Consistent
with the safe harbor election provided in Rev. Proc. 2011-29, 2011-18 I.R.B. at 746-47,
Taxpayer capitalized 30% of the success-based fees and deducted the remaining 70%
on its tax return for the taxable year. CPA prepared and timely filed the Short Year
Form 1120S on behalf of Taxpayer. CPA, on behalf of Taxpayer, failed to include the
statement required by section 4.01(3) of Rev. Proc. 2011-29, 2011-18 I.R.B. at 747, to
elect to use the safe harbor method of allocating success-based fees to Taxpayer’s
original federal tax return for the taxable year.

       Promptly upon the discovery of the inadvertent and unintentional omission of the
Safe Harbor Election Statement, Taxpayer sought relief based on its reasonable
reliance on CPA. Taxpayer and CPA have each prepared and submitted an affidavit
regarding CPA’s failure to attach the required election statement to Taxpayer’s return.

                                           LAW

         Section 263(a)(1) of the Internal Revenue Code 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 section 1.263(a)-2(a). No
deduction is allowed for an amount paid to acquire or create an intangible, which
includes an ownership interest in a corporation or other entity. Section 1.263(a)-1(d)(3);
see also sections 1.263(a)-4(c)(1)(i); 1.263(a)-4(d)(2)(i)(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); section 1.263(a)-5(a) (providing that taxpayers must capitalize amounts paid to
facilitate certain transactions set forth in that section).

        Section 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
PLR-109876-17                                  3

amount is paid in the process of investigating or otherwise pursuing the transaction is
determined based on all of the facts and circumstances.

       Section 1.263(a)-5(f) sets forth the rule governing success-based fees. It
provides that an amount paid that is contingent on the successful closing of a
transaction described in section 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.

       Section 4.01 of Rev. Proc. 2011-29, 2011-18 I.R.B. 746, provides a safe harbor
election for allocating success-based fees paid in business acquisitions or
reorganizations described in section 1.263(a)-5(e)(3). Pursuant to section 4.01 of Rev.
Proc. 2011-29, 2011-18 I.R.B. at 747, the Service will not challenge a taxpayer’s
allocation of a success-based fee between activities that facilitate a transaction
described in section 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 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 and capitalized.

       Section 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. Section
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 section 301.9100-1(c), the Commissioner has discretion to grant a
reasonable extension of time under the rules set forth in sections 301.9100-2 and
301.9100-3 to make a regulatory election.

       Section 301.9100-2 provides automatic extensions of time for making certain
elections. Section 301.9100-3 sets forth the rules applicable to requests for extensions
of time for regulatory elections that do not meet the requirements of section 301.9100-2.
Requests for relief pursuant to section 301.9100-3 will be granted when the taxpayer
provides evidence (including affidavits described in section 301.9100-3(e)) that
PLR-109876-17                                 4

establishes that the taxpayer acted reasonably and in good faith, and that the granting
of relief will not prejudice the interests of the government.

      Section 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 or 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 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 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.

       Section 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). Section 301.9100-3(c)(1)(i).

        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. Section 301.9100-3(c)(1)(ii).
PLR-109876-17                                 5

       Section 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 section 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 in which 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.

                                        ANALYSIS

       Taxpayer’s election is a regulatory election, as defined in section 301.9100-1(b),
because the due date of the election is prescribed in the Income Tax Regulations under
section 1.263(a)-5(f). The Commissioner has the authority under sections 301.9100-1
and 301.9100-3 to grant an extension of time to file a late regulatory election.

        The information provided and representations made by Taxpayer establish that
Taxpayer acted reasonably and in good faith. Taxpayer requested relief before the
failure to make the regulatory election was discovered by the Service. Taxpayer is not
seeking to alter a return position for which an accuracy-related penalty has been or
could be imposed under section 6662 at the time relief is requested. Taxpayer did not
affirmatively choose not to make the election after having been informed in all material
respects of the required election and related tax consequences. Rather, Taxpayer
inadvertently failed to attach the mandatory election statement. Immediately upon
realizing the omission, Taxpayer filed for relief. Taxpayer is not using hindsight in
requesting relief.

       Further, based on the information provided and representations made by
Taxpayer, granting an extension will not prejudice the interests of the government.
Taxpayer will not have a lower tax liability in the aggregate for all taxable years to which
the election applies at this time than Taxpayer would have had if the election had been
timely made. In addition, the taxable year in which the regulatory elections should have
been made and any taxable years that would have been affected by the election had it
been timely made will not be closed by the period of limitations on assessment under
PLR-109876-17                                 6

section 6501(a) before Taxpayer’s receipt of the ruling granting an extension of time to
make a late election.

                                      CONCLUSION

       Based solely on the information provided and representations made, we
conclude that Taxpayer acted reasonably and in good faith, and granting relief will not
prejudice the interests of the government. Therefore, the requirements of sections
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, 2011-18 I.R.B.
at 747, stating that it is electing the safe harbor for allocating 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 transactions were within the scope of Rev. Proc. 2011-
29, 2011-18 I.R.B. 746.

      This ruling is directed only to the taxpayer requesting it. Pursuant to section
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 its return that provides the date and control
number of the letter ruling.


      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.
PLR-109876-17                                  7

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


                                                   Sincerely,



                                                   TaJuana E. Nelson Hyde
                                                   Senior Technician Reviewer, Branch 1
                                                   (Income Tax & Accounting)




cc: Internal Revenue Service
    ATTN: PSP