Taxpayer received 60 days for a late success-based fee safe-harbor election

Plain-English summary

A partnership paid a contingent financial-adviser fee in connection with an acquisition that ended its partnership status. Its final return followed the Revenue Procedure 2011-29 safe harbor by deducting 70 percent of the success-based fee and capitalizing 30 percent, but the required election statement was accidentally omitted from the electronic filing package. The error was found when the acquirer later asked the return preparer to confirm that the statement had been included. The IRS found that the taxpayer requested relief before IRS discovery, had no closed affected years, and would not reduce its aggregate tax liability through the late election. It granted 60 days to file an amended return with a statement identifying the transaction and the deducted and capitalized fee amounts.

Ruling snapshot

• Question: May the taxpayer belatedly elect the Revenue Procedure 2011-29 safe harbor for success-based transaction fees?
• Outcome: approved, with 60 days to file an amended return containing the election statement
• Key authorities: IRC § 263(a); Treas. Reg. §§ 1.263(a)-5(f), 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: 201942003                                            Third Party Communication: None
Release Date: 10/18/2019                                     Date of Communication: Not Applicable
Index Number: 9100.00-00
                                                             Person To Contact:
--------------------                                         -----------------, ID No. ------------------
-------------------------------                              Telephone Number:
------------------------                                     ----------------------
------------------------------------------                   Refer Reply To:
                                                             CC:ITA:B03
                                                             PLR-101872-19
                                                             Date:
                                                             July 17, 2019

TY: -----------------------------------------------------------------


LEGEND:

Taxpayer = ----------------------------------------------------
Acquirer = ----------------------------------------
Financial Advisor =--------------------------------------
Tax Return Preparer = -----------------------
Corporation X = ---------------------------------------------
Corporation Y = ----------------------------------------------------
Hold Co. = -----------------------------
Taxable Year = -----------------------------------------------------------------
Date 1 = ------------------------
Date 2 = ------------------------
Date 3 = ----------------------------
Date 4 = ------------------------
Date 5 = ------------------------
Date 6 = --------------------------
Date 7 = ---------------------------
Date 8 = ---------------------------
$a = ----------------


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

This responds to a letter ruling request dated Date 1, submitted on behalf of Taxpayer.
Taxpayer requests an extension of time under sections 301.9100-1 and 301.9100- 3 of
the Procedure and Administration Regulations to make a late election concerning the
treatment of success-based fees in accordance with Rev. Proc. 2011-29, 2011-1 C.B.
746, which requires that a statement be attached to Taxpayer's original federal income
tax return for the taxable year ending on Date 2.
PLR-101872-19                                2


                                         FACTS

On Date 3, Taxpayer engaged Financial Advisor to provide assistance with a potential
transaction. Financial Advisor identified potential purchasers, performed financial
analysis, assisted in soliciting interest in the potential acquisition, and assisted in
negotiating the financial aspects of the transaction.

On Date 4, Acquirer purchased all outstanding common and Series A units of Taxpayer,
other than those held by Corporation X and Corporation Y, in exchange for cash
consideration. On the same day, Acquirer purchased all shares of Corporation X and all
shares of Corporation Y in exchange for cash consideration. Acquirer did not make a
section 338 election for Corporation X and Corporation Y.

On Date 5, Acquirer formed Hold Co. as a wholly-owned U.S. subsidiary. Pursuant to
two merger agreements dated Date 2, Corporation X and Corporation Y merged with
and into Hold Co. on Date 2 with Hold Co. surviving the merger. On Date 2,
simultaneous with the merger, Acquirer contributed all of its Taxpayer units to Hold Co..
As a result of the merger and the capital contribution, Hold Co. became the owner of all
outstanding common and preferred units of Taxpayer and Taxpayer’s partnership status
terminated on Date 2.

Upon closing of the transaction, Taxpayer incurred and paid Financial Advisor a
contingent fee of $a.

In an agreement dated Date 6, Acquirer and Taxpayer agreed that Acquirer would be
responsible for the preparation and filling of all federal, state and local income tax
returns of Taxpayer for taxable periods ending on or before the closing that are required
to be filed after the closing. The agreement also stated that each final partnership
income tax return shall contain a safe harbor election pursuant to Rev. Proc. 2011-29.

Acquirer engaged Tax Return Preparer to prepare and provide tax advice with respect
to Taxpayer’s Form 1065, U.S. Return of Partnership Income, for Taxable Year. Tax
Return Preparer advised Taxpayer to make the safe harbor election for allocating
success-based fees set forth in Rev. Proc. 2011-29 and prepared a high-level
calculation summarizing the income tax treatment of various transaction costs. Acquirer
reviewed and concurred with Tax Return Preparer’s calculation.

Taxpayer timely filed its final partnership tax return on Date 7. Taxpayer complied with
the substantive requirements for the safe harbor election for allocating success-based
fees by deducting 70 percent of the success-based fee and capitalizing 30 percent of
the success-based fee on Taxpayer’s final partnership tax return. However, Taxpayer
failed to attach the election statement required by section 4.01(3) of Rev. Proc. 2011-29
to the Taxpayer’s final partnership tax return when it inadvertently omitted the statement
from Tax Return’s e-file package.
PLR-101872-19                                 3

The omission of the election statement to use the safe harbor method for allocating
success-based fees was discovered on Date 8, when Acquirer requested Tax Return
Preparer confirm that the election statement was included in the Taxpayer’s Final
Partnership Tax Return e-file package. Upon review of the e-file package, Tax Return
Preparer discovered the election statement was omitted from the e-file submitted to the
IRS.

                                           LAW

Section 263(a) of the Internal Revenue Code provides generally that no deduction is
allowed for any amount paid out for new buildings or for permanent improvements or
betterments made to increase the value of any property or estate or any amount
expended in restoring property or in making good the exhaustion thereof for which an
allowance is or has been made. Section 1.263(a)-1(d)(3) provides that no deduction is
allowed for an amount paid to acquire or create an intangible, which under sections
1.263(a)-4(c)(1)(i) and 1.263(a)-4(d)(2)(i)(A) includes an ownership interest in a
corporation or other entity. See also section 1.263(a)-4(a).

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 section 1.263(a)-5, a taxpayer must capitalize an amount paid to facilitate a
business acquisition or reorganization transaction described in section 1.263(a)-5(a). In
general, an amount is paid to facilitate a transaction described in section 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. Section
1.263(a)-5(b)(1).

Section 1.263(a)-5(f) of the Regulations provides that an amount that is contingent on
the successful closing of a transaction described in section 1.263(a)-5(a), or success-
based fee, is presumed to facilitate the transaction. 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. 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.

To reduce controversy between the IRS and taxpayers over the documentation required
to allocate success-based fees between the activities that facilitate the transaction and
activities that do not facilitate the transaction, the IRS issued Rev. Proc. 2011-29, 2011-
1 C.B. 746. The revenue procedure states that the IRS would not challenge a
PLR-101872-19                                  4

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 percent of the amount of the success-based fee as an amount that does
not facilitate the transaction;

(2) capitalizes the remaining 30 percent 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.

The revenue procedure applies to covered transactions described in section 1.263(a)-
5(e)(3), which include --

(i) A taxable acquisition by the taxpayer of assets that constitute a trade or business;

(ii) A taxable acquisition of an ownership interest in a business entity (whether the
taxpayer is the acquirer in the acquisition or the target of the acquisition) if, immediately
after the acquisition, the acquirer and the target are related within the meaning of
section 267(b) or section 707(b); or

(iii) A reorganization described in section 368(a)(1)(A), (B), or (C) or a reorganization
described in section 368(a)(1)(D) in which stock or securities of the corporation to which
the assets are transferred are distributed in a transaction which qualifies under section
354 or 356 (whether the taxpayer is the acquirer or the target in the reorganization).

Sections 301.9100-1 through 301.9100-3 of the Procedure and Administration
Regulations provide the standards the Commissioner uses to determine whether to
grant an extension of time to make a regulatory 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 section
301.9100-2.

Section 301.9100-1(b) defines the term "regulatory election" as an election whose due
date is prescribed by a regulation published in the Federal Register, or a revenue ruling,
procedure, notice or announcement published in the Internal Revenue Bulletin.

Section 301.9100-1(c) provides that the Commissioner may grant a reasonable
extension of time to make a regulatory election, or a statutory election (but no more than
six months except in the case of a taxpayer who is abroad) under all subtitles of the
PLR-101872-19                                 5

Internal Revenue Code except subtitles E, G, H and I.

Section 301.9100-3(a) provides extensions of time to make a regulatory election under
Code sections other than those for which section 301.9100-2 expressly permits
automatic extensions. Requests for extensions of time for regulatory elections 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 granting relief will not prejudice the interests of the
government.

Section 301.9100-3(b)(1) states 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
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 due 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, including a tax professional
employed by the taxpayer, and the tax professional failed to make, or advise the
taxpayer to make the election.

Under section 301.9100-3(b)(3), 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 section 6662 at the time the taxpayer requests relief (taking
into account section 1.6664-2(c)(3)) 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 original deadline that make the election
advantageous to a taxpayer, the Service will not ordinarily grant relief.
PLR-101872-19                                 6

Section 301.9100-3(c)(1) provides that the Commissioner will grant a reasonable
extension of time only when the interests of the Government will not be prejudiced by
the granting of relief. Section 301.9100-3(c)(1)(i) provides, in part, 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 (taking into account the
time value of money). Section 301.9100-3(c)(1)(ii) provides, in part, that 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 section 6501(a) before the taxpayer’s receipt of a ruling granting
relief.

                                        ANALYSIS

Taxpayer's election is a regulatory election, as defined under 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.

Taxpayer in this case has represented that it requested relief before the failure to make
the regulatory election was discovered by the Service. Thus, under section 301.9100-
3(b)(1)(i), Taxpayer will be deemed to have acted reasonably and in good faith.
Taxpayer has also represented that none of the circumstances listed in section
301.9100-3(b)(3) apply.

Based on the facts of the case Taxpayer provided, granting an extension of time to file
the election will not prejudice the interests of the government under section 301.9100-
3(c)(1). Taxpayer has represented that granting relief would not result in a lower tax
liability in the aggregate for all taxable years affected by the election than Taxpayer
would have had if the election had been timely made (taking into account the time value
of money). Furthermore, Taxpayer has represented that the taxable year in which the
regulatory election should have been made and any taxable years that would have been
affected had it been timely made, are not closed by the period of assessment.

                                      CONCLUSION

In the present situation, the requirements of sections 301.9100-1 and 301.9100-3(b)(1)
of the regulations have been satisfied. The information and representations made by
Taxpayer establish that Taxpayer acted reasonably and in good faith. Furthermore,
granting an extension will not prejudice the interests of the Government under section
301.9100-3(c)(1). Taxpayer represented that it 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 than Taxpayer would have if the election were made by the original deadline for
PLR-101872-19                                 7

making the election. Taxpayer also represented that the period of assessment for
Taxable Year will not be closed before receipt of a ruling. Accordingly, Taxpayer is
granted an extension of time until 60 days following the date of this ruling to file an
amended return for the tax year ending Date 2 electing safe harbor treatment of its
success-based fees under section 4.01(3) of Rev. Proc. 2011-29. The amended return
must include an election statement stating that Taxpayer is electing the safe harbor for
success-based fees, identifying the transaction, and stating the success-based fee
amounts that are deducted and capitalized.

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.

Except as expressly provided herein, no opinion is expressed or implied concerning the
federal income tax consequences of any aspect of any transaction or item discussed or
referenced in this ruling including whether Taxpayer properly included the correct costs
as its success-based fees subject to the 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) of the Code
provides that it may not be used or cited as precedent.

A copy of this ruling 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.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative. 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
section 6110 of the Code.


                                       Sincerely,



                                       Brinton Warren
                                       Chief, Branch 3
                                       (Income Tax & Accounting)