Acquirer received 60 days for a late success-fee safe harbor

Plain-English summary

A taxpayer paid investment bankers contingent fees for helping it acquire an ownership interest in another business. Its timely return deducted 70 percent of the fees and capitalized 30 percent under the Revenue Procedure 2011-29 safe harbor, but the return preparer inadvertently omitted the required election statement. The preparer found the omission after filing and the taxpayer promptly requested relief. The IRS found that the taxpayer acted reasonably and in good faith and that relief would not prejudice the government. It gave the taxpayer 60 days to file the statement identifying the transaction and the deducted and capitalized fee amounts.

Ruling snapshot

• Question: May the acquirer file late the election statement for the success-based fee safe harbor?
• Outcome: approved, with 60 days to file the required statement
• Key authorities: IRC §§ 263(a) and 446; Treas. Reg. § 1.263(a)-5; Treas. Reg. §§ 301.9100-1 and 301.9100-3; Rev. Proc. 2011-29

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201935001                                              [Third Party Communication:
Release Date: 8/30/2019                                        Date of Communication: Month DD, YYYY]
Index Number: 9100.00-00
                                                               Person To Contact:
----------------------------                                   -----------------------, ID No. -------------------
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-----------------                                              Telephone Number:
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In Re:                                                         Refer Reply To:
                                                               CC:ITA:B02
------------------------------------------------------------   PLR-101889-19
-------------------------                                      Date:
------------------------------------------------------------   May 22, 2019
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Legend

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

TY                         =        --------------------------------------------------------------------

Date1                      =        ------------------------

Date2                      =        ------------------------

Date3                      =        ------------------------

Services                   =        ------------------------------------------------

a%                         =        --------

A                          =        -------------------------------------------

B                          =        -----------------------------------------

Month1                     =        -------------------

$x                         =        ----------------
PLR-101889-19                                 2


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

         This is in response to a letter dated Date1, requesting an extension of time to file
the required election statement to make a 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 TY. 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 engaged in the business of providing Services. Pursuant to its
business expansion efforts, Taxpayer engaged investment bankers to identify and
facilitate an appropriate acquisition to expand Taxpayer’s development and production
activities. The investment bankers agreed to be paid only upon successful completion
of an acquisition (“success-based fees”). In Month1, Taxpayer acquired a% of the
equity interests of A for cash. This transaction was a covered transaction described
section 1.263(a)-5(e)(3) of the Income Tax Regulations. Taxpayer paid investment
bankers $x in success-based fees upon closing the acquisition of A.

       Taxpayer engaged B to prepare and timely file its federal income tax return for
TY. On its timely filed federal income tax return for TY, Taxpayer deducted 70% of the
success-based fees as an amount that did not facilitate the transaction and capitalized
the remaining 30% as an amount that facilitated the transaction, pursuant to the safe
harbor election under section 4 of Rev. Proc. 2011-29. However, although the safe
harbor amount was properly deducted on Taxpayer’s tax return, B inadvertently failed to
attach the election statement required by section 4.01(3) of the revenue procedure to
Taxpayer’s federal income tax return.

       Subsequent to filing the federal income tax return on Date2, B discovered the
missing statement on Date3 and notified Taxpayer. Taxpayer immediately engaged B
to prepare and submit the instant request on its behalf for an extension to file the
election statement.

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
PLR-101889-19                                  3

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 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) and activities that do not facilitate
the transaction 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. Second, the taxpayer must capitalize the remaining 30 percent 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
PLR-101889-19                                  4

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 for the TY 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
PLR-101889-19                                 5

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 file
the statement required under section 4.01(3) of Rev. Proc. 2011-29 stating that it is
electing the safe harbor treatment for success-based fees, identifying the transaction,
and stating the success-based fee amounts that are deducted and capitalized for the
TY.

CAVEATS

      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
PLR-101889-19                                6

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 yours,


                                                 _______________________________
                                                 David B. Silber
                                                 Acting Senior Technician Reviewer,
                                                 Branch 2
                                                 Office of Associate Chief Counsel
                                                 (Income Tax & Accounting)


Enclosure:

Copy for § 6110 purposes

cc: