Acquirer gets 60 days to make a late success-based fee safe-harbor election

Plain-English summary

A corporate group incurred success-based fees while acquiring another business. Its accounting firm prepared the election statement for the Revenue Procedure 2011-29 safe harbor but inadvertently omitted it from the electronically filed return. The return itself consistently applied the safe harbor by deducting 70 percent of the fees as nonfacilitative and capitalizing the remaining 30 percent. The accounting firm found the omission while preparing the next return, before the IRS discovered it, and the taxpayer requested relief. The IRS found reasonable reliance, good faith, and no prejudice to the government, and granted 60 days to file an amended or superseding return with the election statement attached. The ruling does not determine whether the listed costs were proper success-based fees or whether the acquisition was within the revenue procedure's scope.

Ruling snapshot

• Question: May the taxpayer belatedly attach the statement electing the Revenue Procedure 2011-29 safe harbor for success-based acquisition fees?
• Outcome: Approved, with an amended or superseding return due within 60 days
• 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: 201903011                                             Third Party Communication: None
Release Date: 1/18/2019                                       Date of Communication: Not Applicable
Index Number: 9100.00-00
                                                              Person To Contact:
-------------------------                                     ----------------------, ID No. ------------------
-------------------------------------                         Telephone Number:
--------------------------------------------------            ----------------------
---------------------------------------------                 Refer Reply To:
-------------------------                                     CC:ITA:B01
                                                              PLR-113358-18
In Re: --------------------------------------------------- Date:
       ------------------                                  October 03, 2018
       ------------------------
       -------------




LEGEND

Date1                      =   -------------------------
Taxpayer                   =   --------------------------------------------------
State1                     =   --------------
City1                      =   ------------
State2                     =   ----------
Y                          =   ----------------------------------------------------
Date2                      =   ---------------------------
Date3                      =   -----------------
A                          =   -----
Acquired                   =   -------------------------------
Amount1                    =   ------------
Date4                      =   ------------------------------
b                          =   ----
Amount2                    =   --------------
Accounting Firm1           =   ---------------------
Law Firm                   =   ------------------------------------------------------------
Accounting Firm2           =   ----------------
Date5                      =   ----------------------------
Tax Year1                  =   -------
Executive                  =   ------------------------------------------------
Date 6                     =   ----------------------------
Year3                      =   -------
Tax Year2                  =   -------
Partner                    =   ---------------------------------

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

         This is in response to a letter dated Date1, requesting an extension of time to file
the required election statement to make the safe harbor election under Rev. Proc. 2011-
29, 2011-1 C.B. 746, to allocate success-based fees between facilitative and non-
facilitative amounts for Taxpayer’s transaction during the taxable year ending Date2.
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 a domestic limited liability company organized under the laws of
State1. It is headquartered in City1, State2. Taxpayer is a holding company and the
parent company of a consolidated group. Its subsidiaries comprise a United States
network of companies providing Y.

       On Date3, Taxpayer entered a stock purchase agreement pursuant to which
Taxpayer would acquire a% of the issued and outstanding stock of Y firm, Acquired
(including its b subsidiaries), for approximately $Amount1 (“Transaction”). The
Transaction closed on Date4. Effective Date4, Acquired and its subsidiaries consented
to be included in the Taxpayer’s consolidated return group.

       As of the Date4 closing date, Taxpayer had incurred $Amount2 in success-based
fees for services performed in the process of investigating and otherwise pursuing the
Transaction. Taxpayer engaged Accounting Firm1, Law Firm, and others to negotiate
the Transaction, to advise on the structure, technical considerations, financial terms and
considerations, and other financial matters with respect to the acquisition of Acquired,
as well as to perform valuation analysis and to assist with coordinating due diligence.

        After Taxpayer purchased Acquired, it engaged Accounting Firm2 to prepare its
state income tax returns and its consolidated group’s Form 1120, U.S. Corporation
Income Tax Return (“Return”) for Tax Year1. The extended due date for Taxpayer’s
Return was on or about Date5. As part of this engagement, Taxpayer asked
Accounting Firm2 to perform an analysis of the success-based fees it incurred with
respect to the purchase of Acquired and to prepare any documentation to establish the
portion of the success-based fees allocable to activities that did not facilitate the
transaction. On or about Date6, Accounting Firm2’s compliance team prepared the
election statement to be included with Taxpayer’s Return, pursuant to which Taxpayer
would elect to use the safe harbor method of accounting under § 4.01 of Rev. Proc.
2011-29 relative to the allocation of the success-based fees associated with the

purchase of Acquiring (“Election Statement”). However, Accounting Firm2 inadvertently
failed to attach this Election Statement to the Return it filed electronically with the
Internal Revenue Service (“Service”) as required by § 4.01(3) of Rev. Proc. 2011-29.

        Taxpayer and Executive, who oversees compliance for Taxpayer, were unaware
that the Election Statement had not been attached to Taxpayer’s electronically filed Tax
Year1 Return. Executive states that, on or about Date5, she received a copy of the
Return prepared by Accounting Firm2 for review. Through inadvertent oversight, she did
not identify that the Election Statement was missing from the copy of the Return and
authorized Accounting Firm2 to electronically file it. Further, had Executive known, prior
to the filing of the Taxpayer’s Tax Year1 Return, that the Election Statement was not
included, she would have requested that it be included prior to filing.

        Partner states that, despite Accounting Firm2’s best efforts to prepare, compile,
and file a complete, executed copy of the Taxpayer’s Return, it inadvertently failed to
attach the Election Statement to the Tax Year1 Return it filed electronically. Although
Accounting Firm2 mistakenly failed to include the copy of the Election Statement with
the Taxpayer’s Tax Year1 Return, when it filed it, it was prepared consistent with having
made a timely election under § 4.01 of Rev. Proc. 2011-29. In other words, the
Taxpayer capitalized thirty percent of the success-based fees and, on its Tax Year1
Return, reported the remaining seventy percent as an amount that did not facilitate the
purchase of Acquired.

       While preparing Taxpayer’s Tax Year2 Return during the summer of Year3,
Accounting Firm2 discovered that it had not attached the statement to Taxpayer’s Tax
Year1 Return. Accounting Firm2 told Executive about the error and advised that,
pursuant to §§ 301.9100-1(c) and 301.9100-3 of the Procedure and Administration
Regulations, Taxpayer could request an extension of time to make the safe harbor
election. Accordingly, Taxpayer engaged Accounting Firm2 to file this request for relief
for an extension of time to file its Election Statement under § 4.01(3) of Rev. Proc.
2011-29 for Taxpayer’s taxable year ending Date2. This request is made in accordance
with §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations.
The Service has not notified Taxpayer that its Return for the taxable year ending Date2
is under examination. Taxpayer filed this request before the Service discovered that the
Election Statement had not been attached to Taxpayer’s Tax Year1 Return.

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).

        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. See section 2.04 of Rev. Proc. 2011-29.

         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 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) and activities that do not facilitate
the transaction 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. 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. This statement should: state that the
taxpayer is electing the safe harbor; identify the transaction; and state the success-
based fee amounts that are deducted and capitalized. It is this third requirement that
Taxpayer requests permission to accomplish with this ruling request. Taxpayer requests

permission to attach the statement required by § 4.01(3) of Rev. Proc. 2011-29 to its
return by amending its original filed return for the tax year ending Date2 and
superseding it with a return attaching a completed Election Statement.

       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 301.9100-1(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 extensions of time for regulatory
elections 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(b)(1) provides that, in general, 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, 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, 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 is deemed to have not 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 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 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 any other setting, or provides a more favorable method
of accounting if the election is made by a certain date or taxable year.

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

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 attach
the statement required by § 4.01(3) of Rev. Proc. 2011-29 to its return by amending its
original filed return for the tax year ending Date2 and superseding it with a return
attaching a completed Election Statement with respect to the Transaction for its taxable
year ending Date2.

      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
appropriate parties. 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 Transaction is 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 under § 6110.

      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
                          Chief, Branch 1
                          Office of Associate Chief Counsel
                          (Income Tax & Accounting)



Enclosure:
     Copy for § 6110 purposes

cc: