Taxpayer gets 60 days to file omitted success-fee safe-harbor election

Plain-English summary

A taxpayer acquired a company and used the Rev. Proc. 2011-29 safe harbor to deduct 70 percent of its success-based transaction fees and capitalize the other 30 percent. Its timely filed return reported that treatment but accidentally omitted the required election statement. The IRS found that the taxpayer acted reasonably and in good faith and that late relief would not prejudice the government. It granted 60 days from the ruling date to file a statement identifying the transaction and the amounts deducted and capitalized. The ruling did not decide whether the acquisition qualified for the safe harbor or whether the taxpayer included the correct fees.

Ruling snapshot

• Question: Could the taxpayer file a late Rev. Proc. 2011-29 election statement after its return used the safe harbor but omitted the required attachment?
• Outcome: approved, a 60-day extension was granted
• Key authorities: IRC §§ 263(a), 446, 481(a), 6501(a), and 6662; 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: 202002008                                              Third Party Communication: None
Release Date: 1/10/2020                                        Date of Communication: Not Applicable
Index Number: 9100.00-00, 263.14-00
                                                               Person To Contact:
------------------------------------------                     -------------------------------, ID No. -----------
--------------------------------------------------             -----------------
-----------------                                              Telephone Number:
 ------------------------------------------                    ----------------------
                                                               Refer Reply To:
         In Re: Ruling Request                                 CC:ITA:B02
                                                               PLR-115600-19
                                                               Date:
                                                               October 11, 2019


Taxpayer                     =   -------------------------------------------------------
Merger Subsidiary            =   -----------------------------
Company                      =   -------------------------------------------
Consultant                   =   ------------------------------------
Tax Professional             =   -------------------------
Date 1                       =   ------------------
Date 2                       =   -------------------
Date 3                       =   -----------------------
Year 1                       =   -------
$W                           =   --------------
$X                           =   --------------
$Y                           =   ------------
$Z                           =   ------------

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

This is in response to a letter dated Date 1, requesting an extension of time under
§§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations to
make a safe harbor election under Rev. Proc. 2011-29, 2011-18 I.R.B. 746.

FACTS AND REPRESENTATIONS

On Date 2, Taxpayer through its wholly owned subsidiary, Merger Subsidiary, acquired
Company. Taxpayer treated the acquisition as an asset purchase for federal income
tax purchases. Taxpayer incurred $W of transaction costs in the acquisition. Taxpayer
retained Consultant to analyze these costs and make representations as to the nature
of these costs. Consultant determined that $X of these costs were success-based fees
eligible for the safe harbor treatment afforded by Rev. Proc. 2011-29.

Tax Professional prepared Taxpayer’s federal income tax return for Year 1. In reporting
the acquisition of Company on this return, $Y (equal to 70 percent of $X) was reported
PLR-115600-19                                2

as deducted in accordance with § 4.01(1) of Rev. Proc. 2011-29, and $Z (equal to 30
percent of $X) was reported as capitalized in accordance with § 4.01(2) of
Rev. Proc. 2011-29. In the course of timely filing Taxpayer’s federal income tax return
for Year 1, however, the election statement required by § 4.01(3) of Rev. Proc. 2011-29
inadvertently was not attached to the return. This failure was discovered on Date 3.

LAW AND ANALYSIS

Section 263(a)(1) of the Internal Revenue Code generally provides 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. See INDOPCO, Inc. v. Commissioner, 503 U.S.
79, 89-90 (1992); Woodward v. Commissioner, 397 U.S. 572, 575-76 (1970).

Under § 1.263(a)-5 of the Income Tax Regulations, 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 Internal Revenue Service (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.
PLR-115600-19                                 3

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 amount of the
success-based fee as an amount that 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: (i) state that the
taxpayer is electing the safe harbor; (ii) identify the transaction; and (iii) state the
success-based fee amounts that are deducted and capitalized.

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 § 6662 at the time the
PLR-115600-19                                4

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 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 § 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 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
election statement required by § 4.01(3) of Rev. Proc. 2011-29. The election statement
should state that Taxpayer is electing the safe harbor, identify the transaction, and state
that $Y in success-based fee amounts were deducted and $Z in success-based fee
amounts were capitalized.
PLR-115600-19                                 5

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 fee subject to the election, or whether
Taxpayer’s acquisition of Company 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, if Taxpayer files its return electronically, Taxpayer may satisfy this
requirement by attaching a statement to its return that provides the date and control
number of the letter ruling. A copy of this letter ruling is being sent to the appropriate
operating division director.

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

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

                                       Sincerely,

                                       Jason D. Kristall

                                       Jason D. Kristall
                                       Senior Technician Reviewer, Branch 2
                                       (Income Tax & Accounting)


Enclosure: Copy for § 6110 purposes