Company received 45 days to file safe-harbor election statements

Plain-English summary

A corporate parent incurred success-based fees in three business transactions and reported them under the Revenue Procedure 2011-29 safe harbor. Its timely filed returns deducted 70 percent of the fees and capitalized 30 percent, but its tax professionals failed to attach the required election statements. The IRS discovered the omission while examining costs associated with one transaction. The IRS found that the company reasonably relied on qualified professionals, was not changing its return position or using hindsight, and would not obtain a lower aggregate tax liability. It granted the company 45 days to file the required statements for the affected years.

Ruling snapshot

• Question: Could the company file late statements electing the Revenue Procedure 2011-29 safe harbor for success-based transaction fees?
• Outcome: approved, with 45 days to file the mandatory statements
• Key authorities: IRC §§ 263(a), 446, 481(a), 6501(a), 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: 201930024                                              Third Party Communication: None
Release Date: 7/26/2019                                        Date of Communication: Not Applicable
Index Number: 263.14-00
                                                               Person To Contact:
------------------------------------------------------------   ---------------------------, ID No. ---------------
------------------                                             -----------------
------------------------------                                 Telephone Number:
---------------------------------                              ----------------------
                                                               Refer Reply To:
------------------------------------------------------------   CC:ITA:B01
------------------------------------------------------------   PLR-127617-18
------------------------------------------------------         Date:
                                                               April 16, 2019




                                                    LEGEND


Taxpayer                    = -------------------------------------------------------------------
State A                     = -----------------
Business Holding            = ------------------------------------------------
Company
---------------------------------------------------------------------------------------------------------------------------------------
Principal Business =
Activity                       --------------------------------------------------------------------------

Transaction 1               = -------------------------------------------------------------------------------------
                              ------------
Transaction 2               = -------------------------------------------------------------------------------------
                              --------
Transaction 3               = -------------------------------------------------------------------------------------
                              -----------
Year 1                      = --------------------------------------------
Year 2                      = --------------------------------------------
Date a                      = -----------------------
Date b                      = ---------------------------
Date c                      = -------------------
Date d                      = -----------------
Date e                      = ---------------------------


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

      This is in response to a letter sent on behalf of Taxpayer dated Date a,
requesting permission to attach an election statement to Taxpayer’s originally filed
federal tax return for Year 1 and Year 2. The election statement was not included with
Taxpayer’s originally filed tax return for Year 1 nor Year 2 although it was required in
order for Taxpayer to elect the safe harbor under section 4.01 of Rev. Proc. 2011-29.
The request is made under §§ 301.9100-1 and 301.9100-3 of the Procedure and
Administration Regulations.

                                          FACTS


       The Taxpayer represents the following facts:

       The Taxpayer is a State A registered corporation that was formed on Date b and
is a Business Holding Company. The Taxpayer is the common parent of a U.S.
consolidated return group and it is engaged in the Principal Business Activity.

       Taxpayer incurred transaction costs, including success-based fees paid upon the
consummation of Transaction 1 on Date c. Taxpayer incurred transaction costs,
including success-based fees paid upon the consummation of Transaction 2 on Date d.
Taxpayer incurred transaction costs, including success-based fees paid upon the
consummation of Transaction 3 on Date e. The Taxpayer capitalized the transaction
costs in accordance with § 263 of the Internal Revenue Code and § 1.263(a)-2(a) and §
1.263(a)-5 of the Income Tax Regulations. Taxpayer capitalized 30 percent of the
success-based fees, and deducted the remaining 70 percent, on its timely filed Year 1
and Year 2 federal income tax returns consistent with the safe harbor election provided
in Rev. Proc. 2011-29. However, Taxpayer failed to attach the statement required by
Rev. Proc. 2011-29 to elect to use the safe harbor method of allocating success-based
fees. This oversight was uncovered by the Internal Revenue Service (Service) and the
disallowance of certain transaction costs related to Transaction 1 was raised as an
issue for Year 1.

                                   LAW AND ANALYSIS

       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, 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.

         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 Revenue
Procedure 2011- 29. Revenue Procedure 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 (i.e., 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 Revenue Procedure 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
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 Revenue Procedure 2011-29 to its Year 1 and
Years returns, by amending its original filed returns and superseding it with returns with
the proper election statement completed and attached.

       Section 301.9100-1(c) provides that the Commissioner of Internal Revenue, in
exercising his discretion, may grant a reasonable extension of time under the rules set
forth in § 301.9100-3 to make a regulatory election under all subtitles of the Internal
Revenue Code except subtitles E, G, H, and I. The term “regulatory election” is defined
in § 301.9100-1(b) as an election whose due date is prescribed by a regulation
published in the Federal Register, or a revenue ruling, revenue procedure, or
announcement published in the Internal Revenue Bulletin.

        Section 301.9100-3(a) provides that requests for relief subject to this section will
be granted when the taxpayer provides the evidence to establish to the satisfaction of
the Commissioner that the taxpayer acted reasonably and in good faith, and the grant of
relief will not prejudice the interests of the Government.

          Under § 301.9100-3(b)(1), except as provided in § 301.9100-3(b)(3) (i) through
(iii), a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer:

       (i) requested relief under this section before the failure to make the regulatory
       election was discovered by the Internal Revenue 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 Internal Revenue 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.

     Paragraphs (b)(3)(i) through (iii) of § 301.9100-3 provide that a taxpayer is
deemed not to have acted reasonably and in good faith if the taxpayer:

       (i) seeks to alter a return position for which an accuracy-related penalty 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

       (iii) uses hindsight in requesting relief. If specific facts have changed since the
       due date for making the election that make the election advantageous to a
       taxpayer, the Service will not ordinarily grant relief. In such a case, the Service
       will grant relief only when the taxpayer provides strong proof that the taxpayer’s
       decision to seek relief did not involve hindsight.

        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 in 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 under § 301.9100-1(b),
because the due date of the election is prescribed by Rev. Proc. 2011-29. In the
present situation, the requirements of §§ 301.9100-1 and 301.9100-3 of the regulations
have been satisfied. The information and representations made by Taxpayer and the
attached affidavits establish that the Taxpayer acted reasonably and in good faith. The
Taxpayer reasonably relied on qualified tax professionals for the filing of Taxpayer’s
return. The tax professionals prepared the return consistent with an election under Rev.
Proc. 2011-29, but failed to attach the statement required by the safe harbor election.

       The information and representations presented establish that Taxpayer is not
seeking to alter a return position for which an accuracy-related penalty had been or
could be imposed under § 6662 at the time relief was requested. Taxpayer was not
informed in all material respects of the required election, and its related tax
consequences. Furthermore, Taxpayer is not using hindsight in requesting relief, and
no facts have changed since the time of the original filing deadline.

        Finally, granting an extension will not prejudice the interests of the Government.
It is represented that Taxpayer will not have a lower tax liability in the aggregate for all
taxable years affected by the election if given permission to make the election in the
appropriate amount at this time than Taxpayer would have had if the election were
made in the appropriate amount by the original deadline for making the election.
Moreover, the taxable year in which the regulatory election should have been made,
and any taxable years that would have been affected by the election had it been timely
made, are not closed by the period of limitations on assessment.

                                      CONCLUSION

       Based solely on the facts submitted and the representations made, we conclude
that Taxpayer acted reasonably and in good faith, and that granting the request will not
prejudice the interests of the government. Accordingly, the requirements of §§
301.9100-1 and 301.9100-3 have been satisfied.

        Taxpayer is granted an extension of 45 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. In particular, no opinion is expressed regarding Taxpayer’s
classification of success-based fees.

        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)
provides that it may not be used or cited as precedent.

      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,



                                       Sean M. Dwyer
                                       Senior Technical Reviewer, Branch 1
                                       Associate Office of Chief Counsel
                                       (Income Tax & Accounting)