IRS grants late success-based-fee safe-harbor election

Plain-English summary

A corporation incurred success-based fees in an acquisition and reported them using Revenue Procedure 2011-29’s 70-percent deduction and 30-percent capitalization safe harbor. Its accounting firm prepared the required election statement but inadvertently omitted it from the electronically filed short-year return. Because the omission was discovered outside an IRS examination and the taxpayer acted reasonably and in good faith, the IRS granted 60 days to file an amended return with the election statement.

Ruling snapshot

• Question: Should the taxpayer receive extra time to make the Revenue Procedure 2011-29 safe-harbor election for success-based transaction fees?
• Outcome: approved
• Key authorities: IRC § 263(a); Treas. Reg. §§ 1.263(a)-5, 301.9100-1, 301.9100-3; Rev. Proc. 2011-29

Full text (IRS public release)

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Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202014012 Third Party Communication:
Release Date: 4/3/2020 Date of Communication:
Index Number: 9100.00-00, 263.00-00
Person To Contact:
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                                                         ID No. -----------------

                                                         Telephone Number:

                                                         --------------------

                                                         Refer Reply To:

------- CC:ITA:B01
------------------------------------------------ PLR-115529-19
----------------------- Date: December 23, 2019

Legend

Acquirer = -----------------------------------------------------------------------------------
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Taxpayer = -----------------------------------------------------------------------------------
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Short Taxable Year = ----------------------------------------------------------------
Tax Year = -------
Return = --------------------------------------------------------
State = ------------------------
Merger Sub = ----------------------------
Business = -----------------------------------------------------------------------------------
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-----------------------------------------------------------------------------------
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Products = -----------------------------------------------------------------------------------
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Date A = -----------------------------------------------------------------------------------
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Advisor 1 = ---------------------------
Advisor 2 = -------------------------------------------------
Accounting Firm = ----------------------------------
Tax Consulting Firm = ------------------------
Date 1 = --------------------------
Date 2 = -----------------
Date 3 = -----------------
Date 4 = ------------------
PLR-115529-19 2

Date 5 = -------------------
Date 6 = -------------------
Date 7 = --------------

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

This letter responds to correspondence, dated Date A, submitted on behalf of Taxpayer,
requesting a ruling that Taxpayer be granted an extension of time under §§ 301.9100-
1(c) and 301.9100-3 of the Procedure and Administrative Regulations to make a late
safe-harbor election for the treatment of success-based fees, in accordance with Rev.
Proc. 2011-29, 2011-18 I.R.B. 746. Section 4.01(3) of Rev. Proc. 2011-29 requires that
a statement be attached to Taxpayer’s original Return for Short Taxable Year.

                                           FACTS

Taxpayer, a domestic corporation organized under the laws of State, is engaged in the
Business of producing Products. Following the transaction described below, Taxpayer
became a member of an affiliated group of corporations, of which Acquirer is the
common parent. The affiliated group elects to file a consolidated federal income tax
return. Taxpayer has a calendar tax year and uses an accrual method as its overall
method of accounting.

On Date 1 and Date 2, Taxpayer engaged Advisor 1 and Advisor 2, respectively, to
perform services in the process of investigating or otherwise pursuing an acquisition.

On Date 3, the boards of directors of Acquirer, Merger Sub, a wholly-owned subsidiary
of Acquirer, and Taxpayer approved a merger agreement. On Date 4, pursuant to the
merger agreement, Merger Sub completed its tender offer to purchase all the
outstanding shares of common stock of Taxpayer and merged with and into Taxpayer
with Taxpayer continuing as the surviving entity. At the completion of the merger,
Taxpayer became the wholly owned subsidiary of Acquirer (the “Transaction”).

Taxpayer incurred success-based fees for services rendered by Advisor 1 and Advisor
2 that were contingent upon the successful closing of the Transaction (“Fees”).

Accounting Firm prepared Taxpayer’s Return, for the Short Taxable Year, in which
Taxpayer capitalized 30 percent of the Fees and deducted the remaining 70 percent
consistent with the safe-harbor election set forth in section 4 of Rev. Proc. 2011-29.
Accounting Firm prepared the election statement, as required by section 4.01(3) of Rev.
Proc. 2011-29, but inadvertently failed to attach it to the Return. When Accounting Firm
electronically filed Taxpayer’s Return, on Date 5, it again failed to notice that the
election statement was not attached. Taxpayer represents that the original due date of
the Return was Date 6. On Date 7, as part of a review of Acquirer’s tax computations,
PLR-115529-19 3

Tax Consulting Firm discovered that Taxpayer’s election statement had been omitted
from Taxpayer’s Return.
As part of its request for an extension of time to file the election statement, Taxpayer
submitted detailed affidavits from individuals having knowledge or information about the
events that led to the failure to attach the required election statement to Taxpayer's
Return for the Short Taxable Year as well as about the subsequent discovery of that
failure.

                                  LAW & ANALYSIS

Section 263(a)(1) of the Internal Revenue Code and § 1.263(a)-2(a) 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 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 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) is presumed to facilitate the
transaction and, thus, must be capitalized. 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 and thus may be deductible. 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 Internal Revenue Service (the “Service”) 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 Service issued Rev. Proc. 2011-29

Section 4.01 of Rev. Proc. 2011-29 states that the Service will not challenge a
taxpayer's allocation of a success-based fee between activities that facilitate the
transaction described in § 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-
PLR-115529-19 4

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 § 1.263(a)-5(e)(3),
which includes, inter alia: 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 § 267(b) or § 707(b). See § 1.263(a)-5(e)(3)(ii).

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 301.9100-1(c) provides that the Commissioner, in exercising his discretion, may
grant a reasonable extension of time under the rules set forth in § 301.9100-3 to make a
regulatory election under all subtitles of the Internal Revenue Code except subtitles E,
G, H, and I.

Section 301.9100-2 provides automatic extensions of time for making certain elections.
Section 301.9100-3 sets forth 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 relief under this section 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 that granting relief will not prejudice the interests of the
Government.

Section 301.9100-3(b)(1) provides, in general, 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 (b) 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 be deemed to have not acted
reasonably and in good faith if the taxpayer: (i) Seeks to alter a return position for which
PLR-115529-19 5

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 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). 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.

The election Taxpayer seeks to make is a regulatory election, as defined in § 301.9100-
1(b), because the due date of the election is prescribed by 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. Taxpayer represents that, for federal
income tax purposes, the Transaction was a direct taxable purchase of stock of
Taxpayer by Acquirer. Thus, upon the closing of the Transaction, Taxpayer and
Acquirer were related within the meaning of § 267(b). Accordingly, Taxpayer represents
that the Transaction is a covered transaction described in §1.263(a)-5(e)(3)(ii).

Taxpayer represents that the Return for the Short Taxable Year is not under
examination and that the failure to file the election statement was not discovered by the
Service. Thus, under § § 301.9100-3(b)(1)(i), Taxpayer will be deemed to have acted
reasonably and in good faith. Taxpayer also represents that none of the circumstances
listed in § 301.9100-3(b)(3) apply.

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. Regulatory
elections, relating to methods of accounting, are subject to special rules. § 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 election statement required by section 4.01(3) of
Rev. Proc. 2011-29.
PLR-115529-19 6

                                  CONCLUSION

Based solely on the facts provided and the representations made, we conclude that
Taxpayer acted reasonably and in good faith and that 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 following the date of this ruling to file an
amended tax return for Short Taxable Year, electing safe-harbor treatment, under
section 4.01(3) of Rev. Proc. 2011-29, for its success-based fees. The amended return
must include an election statement, stating that Taxpayer is electing the safe harbor for
its 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 Taxpayer and accompanied by a penalty of perjury statement executed by
an appropriate party. 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 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 under any other provision of the Code. In particular, no opinion
is expressed or implied as to whether Taxpayer properly included the correct costs as
its success-based fees subject to the election, or whether the Transaction is within the
scope of Rev. Proc. 2011-29.

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 the election statement to their return 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) of the
Code provides that it may not be used or cited as precedent.
PLR-115529-19 7

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 two authorized representatives.
We are also sending a copy of this letter to the appropriate operating division director.

                                  Sincerely,

                                  Alexa T. Dubert
                                  Assistant to the Chief, Branch 1
                                  Office of Associate Chief Counsel
                                  (Income Tax & Accounting)

Enclosure:
Copy of the letter for § 6110 purpose-s
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