Corporate group receives 60 days to attach a success-based fee safe-harbor election

Plain-English summary

A corporate group paid a success-based advisory fee in connection with a stock acquisition and merger. Its return deducted 70 percent of the fee and capitalized the remaining 30 percent under Revenue Procedure 2011-29, but the group's tax preparer failed to attach the required election statement because of an administrative error. The omission was found when new employees of the preparer reviewed prior filings, before the IRS discovered it. The IRS concluded that the taxpayer acted reasonably and in good faith and that relief would not prejudice the government. It granted 60 days from the ruling date to amend the return and attach a statement identifying the safe-harbor election, the transaction, and the amounts deducted and capitalized. The IRS did not rule on whether the entire fee was incurred and paid, whether the costs were properly included, or whether the transaction qualified for the safe harbor.

Ruling snapshot

• Question: May the corporate group attach a late Revenue Procedure 2011-29 election statement for a success-based acquisition fee?
• Outcome: approved, with 60 days from the ruling date to amend the return
• Key authorities: IRC §§ 263(a), 446, and 6501(a); Treas. Reg. §§ 1.263(a)-5, 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: 201945014                                             Third Party Communication: None
Release Date: 11/8/2019                                       Date of Communication: Not Applicable
Index Numbers: 263.00-00, 9100.00-00
                                                              Person To Contact:
--------------------------------------                        --------------------, ID No. ---------------------
--------------------------------------                        Telephone Number:
------------------------------------------                    --------------------
                                                              Refer Reply To:
Attn: ---------------------                                   CC:IT&A:01
      -------------------------------                         PLR-101929-19
                                                              Date:
In re: --------------------------------------                 August 12, 2019
       ------------------------
        ------------


Legend

Taxpayer                   =    ------------------------------------------------------------------------------------
Year 1                     =    --------
State A                    =    -------------------------
A                          =    ----------------------------------------------------------
B                          =    --------------------
C                          =    -------------------------------------------
D                          =    -------------------------------------
Date 1                     =    -----------------------
Date 2                     =    -----------------------------------------------------------------------------------
Date 3                     =    -----------------------
$a                         =    -----------------


Dear ----------------

This letter responds to your correspondence dated January 31, 2019, requesting an
extension of time to make the safe harbor election for success-based fees described in
Rev. Proc. 2011-29, 2011-18 I.R.B. 746. Taxpayer failed to attach the required election
statement to its consolidated Federal income tax return for Year 1 (Year 1 return) in
order to make the safe harbor election to allocate success-based fees between
facilitative and non-facilitative amounts. Therefore, Taxpayer requests an extension of
time under §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration
Regulations to attach the required election statement to its Year 1 return.

                                                    FACTS
PLR-101929-19                                 2

Taxpayer is a C corporation incorporated on Date 1 under the laws of State A.
Taxpayer is the parent of an affiliated group that files a consolidated Federal income tax
return. Taxpayer formed A, and though A, purchased all the stock of B from B’s
shareholders in exchange for cash. On Date 2, B merged into A with B surviving (the
Transaction). Taxpayer represents the Transaction qualifies as a reorganization
described in § 368(a)(1)(B) of the Internal Revenue Code and hence, a covered
transaction described in § 1.263(a)-5(e) of the Income Tax Regulations.

Taxpayer engaged C to perform advisory services in the process of investigating or
otherwise pursuing the Transaction as part of Taxpayer’s acquisition of B. Taxpayer
represents it incurred a liability of $a in success-based fees for C’s services. Taxpayer
paid the entire amount of $a to C upon the closing of the Transaction.

Taxpayer engaged D, a third-party tax professional, in the preparation of Taxpayer’s
state tax return and its consolidated Federal income tax return for Year 1. Taxpayer
intended to make the safe harbor election to allocate the success-based fees pursuant
to Rev. Proc. 2011-29. Taxpayer’s Year 1 return reflects a deduction of seventy percent
of $a, and capitalization of the remaining thirty percent as allocable to activities that
facilitated the Transaction. Due to an administrative error, D failed to attach the
statement required by section 4.01(3) of Rev. Proc. 2011-29 to the Year 1 return filed
with the Internal Revenue Service (Service).

On Date 3, several new employees of D commenced working on the tax matters of
Taxpayer. D instructed these employees to review Taxpayer’s prior tax filings to
familiarize themselves with Taxpayer. These employees were unable to locate the
election statement with D’s copy of Taxpayer’s Year 1 return.

Initially, D’s further investigation suggested that there was a technical problem with the
software used to prepare the Year 1 return. D’s employees believed the election
statement was attached to the Year 1 return when it was filed. To confirm whether the
election statement was attached to the return, D asked Taxpayer to review its copy of
the Year 1 return. However, Taxpayer could not locate the election statement.

Although Taxpayer’s Year 1 return reflected a deduction of success-based fees as
provided in Rev. Proc. 2011-29; the Taxpayer failed to attach the required election
statement to its return. D advised Taxpayer that relief to file a late election might be
obtained under § 301.9100-3. Taxpayer immediately authorized D to prepare all the
necessary documents to request the relief on behalf of Taxpayer.

                                    LAW & ANALYSIS

Section 263(a)(1) and § 1.263(a)-2(a) provide that no deduction shall be allowed for any
amount paid 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
PLR-101929-19                                 3

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). In general, 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 paid 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. A taxpayer may rebut this presumption by
maintaining sufficient documentation to establish that a portion of the fee is allocable to
activities that do not facilitate the transaction.

Rev. Proc. 2011-29 provides a safe harbor election for taxpayers that pay or incur
success-based fees for services performed in the process of investigating or otherwise
pursuing a covered transaction described in § 1.263(a)-5(e)(3).

Section 4.01 of Rev. Proc. 2011-29 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 satisfies three requirements. 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 must: (a) state that the
taxpayer is electing the safe harbor; (b) identify the transaction; and (c) state the
success-based fee amounts deducted and capitalized. It is the third requirement that
Taxpayer requests permission to accomplish with this ruling request. Taxpayer
requests permission to amend its Year 1 return by attaching the statement required by
section 4.01(3) of Rev. Proc. 2011-29.

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
301.9100-1(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 relief under § 301.9100-3 will be
granted when the taxpayer provides evidence to establish to the satisfaction of the
PLR-101929-19                                 4

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 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 at 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 § 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 § 6501(a) before the taxpayer’s receipt of a ruling granting relief under
this section. Section 301.9100-3(c)(1)(ii).
PLR-101929-19                                  5

Taxpayer’s election is a regulatory election as defined in § 301.9100-1(b) because the
due date of the election is prescribed in section 4.01(3) of Rev. Proc. 2011-29. 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.

Section 2.04 of Rev. Proc. 2011-29 provides that a taxpayer’s method for determining
the portion of a success-based fee that facilitates a transaction and the portion that
does not facilitate a transaction is a method of accounting under § 446. Elections
relating to methods of accounting are subject to special rules. Section 301.9100-
3(c)(2). However, Taxpayer is not seeking to change its method of accounting for the
success-based fees, only to file the statement required by section 4.01(3) of Rev. Proc.
2011-29.

                                      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. Accordingly, Taxpayer has met the requirements of
§§ 301.9100-1 and 301.9100-3.

Taxpayer is granted an extension of 60 days from the date of this letter ruling to amend
its Year 1 return to attach the statement required under section 4.01(3) of Rev. Proc.
2011-29. The statement must set forth that Taxpayer is electing the safe harbor
treatment for success-based fees, identify the transaction, and set forth the amount of
the success-based fees that are deducted and capitalized for Year 1.

                                         CAVEATS

The ruling contained in this letter is based upon information and representations
submitted by Taxpayer and accompanied by a penalty of perjury statement executed by
an appropriate party. Taxpayer similarly represented that C acquired no proprietary
interest in Taxpayer or B immediately before, during, or immediately after the
Transaction. Although this office has not verified any of the material submitted in
support of the request for the ruling, it is subject to verification on examination.

Except as expressly set forth 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, including whether: (1) Taxpayer incurred a liability for the entire $a as
success-based fees; (2) Taxpayer paid the entire amount of $a; (3) Taxpayer properly
included the correct costs as success-based fees subject to the retroactive election; or
(4) the Transaction was within the scope of Rev. Proc. 2011-29.

A copy of this ruling should be attached to Taxpayer’s Federal tax returns for the tax
years affected. Alternatively, taxpayers filing their returns electronically may satisfy this
PLR-101929-19                                 6

requirement by attaching a statement to their returns that provides the date and control
number of the letter ruling.

Enclosed is a copy of the letter ruling showing the deletions proposed to be made in the
letter when it is disclosed under § 6110 of the Code.

This ruling is directed only to Taxpayer that is requesting it. Section 6110(k)(3) provides
that it may not be used or cited as precedent.

In accordance with the provisions of the power of attorney currently on file with this
office, we are sending a copy of this letter ruling to your authorized representative. We
are also sending a copy of this letter ruling to the appropriate operating division director.

                                                  Sincerely,



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

Enclosure:
Copy for § 6110 purposes



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