Acquisition fee safe-harbor election allowed late

Plain-English summary

A consolidated corporate group paid a success-based financial advisory fee when acquiring another company. Its tax adviser prepared a transaction-cost analysis concluding that the fee qualified for Revenue Procedure 2011-29's 70-percent deduction and 30-percent capitalization safe harbor, and the return was prepared consistently with that conclusion. The adviser failed to attach the required election statement, and the IRS later proposed disallowing the deduction during an examination. The IRS found that the taxpayer reasonably relied on qualified tax professionals, acted in good faith, and would not prejudice the government. It granted 60 days to file the missing statement.

Ruling snapshot

• Question: Could the taxpayer make the success-based fee safe-harbor election late after its adviser omitted the required statement?
• Outcome: Approved, with the election statement due within 60 days.
• Key authorities: IRC § 263(a); Treas. Reg. §§ 1.263(a)-5 and 301.9100-1 through 301.9100-3; Rev. Proc. 2011-29.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201947008 Third Party Communication: None
Release Date: 11/22/2019 Date of Communication: Not Applicable
Index Number: 9100.00-00, 263.00-00
Person To Contact:
------------------------------------------------------------ ------------------, ID No. ------------------
-------------------- Telephone Number:
------------------------------ ----------------------
------------------------------------ Refer Reply To:
CC:ITA:B02
PLR-102873-19
Date:
August 23, 2019

Taxpayer = -------------------------------------------------------------------------------------------
X = --------------------------------------------------------------------
A = -----------------------------------------------
B = -------------------------
C = ------------------------------
D = -----------------------------------------
Amount 1 = ------------------
Amount 2 = ------------------
Year 1 = -------
Date 1 = ---------------------------
Date 2 = -------------------
Date 3 = ----------------------------
Date 4 = ----------------------
Date 5 = ----------------------
Date 6 = ---------------------
Month = ---------------

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

   This letter responds to your letter of Date 5, and supplemental correspondence of

Date 6, submitted on behalf of Taxpayer requesting an extension of time under
§§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations to
make the election described in Section 4 of Rev. Proc. 2011-29, 2011-1 C.B. 746, which
includes attaching a statement to Taxpayer’s original federal income tax return for the
taxable year ending Date 1.

FACTS

     Taxpayer represents that the facts are as follows:

PLR-102873-19 2

  Taxpayer is the parent of a consolidated group, whose primary business is X.

Taxpayer uses the accrual method of accounting and has a Month (52/53 week) fiscal
year end.

   On Date 2, Taxpayer completed the purchase of the stock of A. Taxpayer used

its subsidiary, B, to purchase the shares of A.

   In connection with its acquisition of A, Taxpayer entered into an agreement with

C, where C provided financial advisory services in conjunction with Taxpayer’s
acquisition of A. Under this agreement, Taxpayer agreed to pay C Amount 1 for these
services if the acquisition closed successfully. The acquisition closed successfully, and
Taxpayer paid C Amount 2 for services rendered, including the Amount 1 described
above.

     Taxpayer had an internal tax department with approximately ---- tax

professionals, and it also hired D for general tax consulting and also to prepare
Taxpayer’s Year 1 Form 1120 tax return. Taxpayer’s internal tax department prepared
the tax computations for the Form 1120, and D reviewed the computations and
prepared the return and any accompanying statements and disclosures. D filed
Taxpayer’s return electronically and signed it as the paid preparer. Taxpayer also hired
D to prepare a transaction cost analysis (“TCA”) with respect to costs Taxpayer incurred
in conjunction with its acquisition of A. This TCA concluded that the fees paid to C were
“success-based fees” under Rev. Proc. 2011-29, and that the fees were therefore
eligible to be allocated under the safe harbor election contained therein, with 70 percent
being deductible as non-facilitative and 30 percent required to be capitalized as
facilitative. This TCA noted that an election statement was required to be attached to
Taxpayer’s Year 1 tax return to make this election. D discussed this TCA with
Taxpayer’s internal tax personnel. D gave the TCA to both Taxpayer’s internal tax
personnel and to the D personnel who were preparing Taxpayer’s Year 1 return. D
prepared Taxpayer’s Year 1 return consistent with the making of a safe-harbor election
under Rev. Proc. 2011-29, but the statement required by Rev. Proc. 2011-29 was not
attached to the return. Therefore, the election was not made.

   On Date 3, the IRS notified Taxpayer that it had selected Taxpayer’s Year 1

return for examination. On Date 4, the IRS told Taxpayer representatives that it would
issue a Notice of Proposed Adjustment disallowing Taxpayer’s deduction of the fee it
paid to C in connection with its acquisition of A because Taxpayer had not elected the
safe harbor for allocating those fees under Rev. Proc. 2011-29. D advised Taxpayer to
request this private letter ruling.

LAW
PLR-102873-19 3

  Section 263(a)(1) of the Internal Revenue Code and § 1.263(a)-2 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.

   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 §§ 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.

   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, 112 S. Ct.
1039, 117 L. Ed. 2d 226 (1992); Woodward v. Commissioner, 397 U.S. 572, 575-76, 90
S. Ct. 1302, 25 L. Ed. 2d 577 (1970).

   Under § 1.263(a)-5, a taxpayer must capitalize an amount paid to facilitate the

business acquisition or reorganization transactions 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) (i.e., 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.

    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. Section 4 of 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). In lieu of
    maintaining the documentation required by § 1.263(a)-5(f), a taxpayer may elect to
    allocate a success-based fee between activities that facilitate the transaction and
    activities that do not facilitate the transaction and by treating 70 percent of the amount
    of the success-based fee as an amount that does not facilitate the transaction and by
    capitalizing the remaining 30 percent as an amount that does facilitate the transaction.
    In addition, 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 and capitalized.
    PLR-102873-19 4

    Taxpayer requests permission with this ruling for an extension of time to make
    the election under Rev. Proc. 2011-29 to treat 70 percent of its success-based fee as
    non-facilitative, and therefore deductible.

    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.

    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 301.9100-3(a) provides that requests for extensions of time for regulatory
    elections, other than those covered by §301.9100-2, 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)(v) provides that a taxpayer is deemed to have acted
    reasonably and in good faith if the taxpayer 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 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 § 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 original
    deadline that make the election advantageous to a taxpayer, the IRS will not ordinarily
    grant relief.

    Section 301.9100-3(c)(1) provides that the Commissioner will grant a reasonable
    

    extension of time to make a regulatory election only when the interests of the
    Government will not be 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. The interests of the
    PLR-102873-19 5

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, and the change would provide a
more favorable method or more favorable terms and conditions than if the change were
made as part of an examination, or provides a more favorable method of accounting or
more favorable terms and conditions if the election is made by a certain date or taxable
year.

RULING

    Based upon our analysis of the facts, as represented by Taxpayer, 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 by section 4.01(3) 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 for its taxable year
ending Date 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. This office has not verified any of the material submitted in
support of the request for ruling, and it is all 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. No opinion is expressed as to the federal tax treatment of the
transaction under any other provisions of the Internal Revenue Code and the Treasury
Regulations that may be applicable or under any other general principles of federal
income taxation. This letter ruling is only applicable to matters under our jurisdiction.
See Rev. Proc. 2019-1, 2019-1 I.R.B. 1, 11, section 3.03. No opinion is expressed as to
the tax treatment of any conditions existing at the time of, or effects resulting from, the
PLR-102873-19 6

transaction that are not specifically covered by the above ruling. 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 was within the scope of Rev. Proc. 2011-29.

  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.

   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.

  Enclosed is a copy of this letter ruling showing the deletions proposed to be

made in the letter when it is disclosed under § 6110.

    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.

                                  Sincerely,



                                  Bridget Tombul
                                  Branch Chief, Branch 2
                                  Office of Associate Chief Counsel
                                  (Income Tax & Accounting)