IRS grants 60 days to add an omitted success-fee election to an amended return

Plain-English summary

A corporate group completed a taxable stock acquisition and paid contingent fees to two financial advisers. Its return deducted 70 percent of the fees and capitalized 30 percent, consistently with the Rev. Proc. 2011-29 safe harbor, but the company inadvertently failed to attach the required election statement. The omission was discovered during the annual financial-statement audit, and the company sought relief before the IRS discovered it. The IRS accepted representations that the taxpayer acted reasonably and in good faith, reasonably relied on a qualified tax professional, and would not prejudice the government's interests. It granted 60 days to file an amended return containing the election statement, without deciding whether the costs qualified as success-based fees or the transaction fell within the revenue procedure.

Ruling snapshot

• Question: Could the taxpayer file an amended return with a late Rev. Proc. 2011-29 safe-harbor election for acquisition-related success fees?
• Outcome: approved (a 60-day extension was granted)
• Key authorities: IRC §§ 263(a), 267(b), 6501(a), 6662, 1001, 1012; Treas. Reg. § 1.263(a)-5; Rev. Proc. 2011-29; Treas. Reg. §§ 301.9100-1, 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202036003                                             Third Party Communication: None
 Release Date: 9/4/2020                                        Date of Communication: Not Applicable
 Index Number: 9100.00-00, 263.00-00
                                                               Person To Contact:
 --------------------------------------------                  --------------------, ID No. -----------------
 ------------------------------------------------              Telephone Number:
 -------------------------------                               --------------------
                                                               Refer Reply To:
 In Re: --------------------------------------------------- CC:ITA:B01
 --------------------------------------------------------   PLR-123363-19
 ----------------------------------------                   Date:
 ------------------------                                   May 29, 2020




 Taxpayer         =    ----------------------------------------------------
 Date 1           =    ---------------------------
 Date 2           =    --------------------------
 Date 3           =    ----------------------
 Date 4           =    ---------------------
 Date 5           =    --------------------------
 State A          =    -------------
 X Corp           =    -------------------------------------------------
 Y Corp           =    ------------------------------------------
 Agreement        =    -----------------------------------------
 Target           =    -----------------------
 %a               =    -----
 $a               =    ------------------
 Advisor A        =    ------------------------------------
 Advisor B        =    ----------------------------------
 $b               =    -----------------
 Firm             =    ------------------------------
 Individual       =    ----------------------



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

     This letter responds to your letter, dated Date 1, submitted on behalf of
Taxpayer, requesting an extension of time under §§ 301.9100-1 and 301.9100-3 of the
PLR-123363-19                               2

Procedure and Administration Regulations to make a late election to treat success-
based fees in accordance with Rev. Proc. 2011-29, 2011-18 I.R.B. 746, which requires
attaching a statement to Taxpayer’s original federal income tax return for taxable year
ended Date 2. This letter ruling is being issued electronically in accordance with Rev.
Proc. 2020-29, 2020-21 I.R.B. 859. A paper copy will not be mailed to Taxpayer.

                                        FACTS

Taxpayer represents the facts as follows:

Taxpayer is a State A corporation that uses an accrual method of accounting and files a
consolidated Federal income tax return on a calendar year basis. It is a holding
company that conducts its operations through its wholly owned subsidiary, X Corp and
its subsidiaries. It is in the business of renting and selling new and used equipment
including related supplies, parts and services to customers.

X Corp is a sole owner of Y Corp, a State A corporation, which was formed solely for
the purpose of entering into the Agreement and consummating the transaction
contemplated by the Agreement. Y Corp did not engage in any business other than in
connection with the Agreement. Target is an unrelated State A corporation that is in the
business of renting construction and industrial equipment.

On Date 3, X Corp, Target, and Y Corp entered into the Agreement, pursuant to which
X Corp acquired %a percent of Target’s equity via a merger of Y Corp with and into
Target, with Target being the survivor as a direct wholly-owned subsidiary of X Corp.
The transaction involving the acquisitions described above (“Transaction”), valued at
approximately $a, closed on Date 4.

For Federal income tax purposes, the Taxpayer treated the Transaction as a taxable
stock purchase under § 1001 of the Internal Revenue Code in which X Corp obtained a
cost basis in the stock of Target under § 1012. Immediately after the Transaction, X
Corp directly owned %a of the stock of Target.

In conjunction with the transaction, Taxpayer engaged Advisor A and Advisor B as
financial advisors for services performed in the process of investigating or otherwise
pursuing the transaction. Taxpayer paid success based fees in the total amount of $b to
Advisor A and Advisor B. The fees were contingent upon the successful closing of the
transaction.

The Taxpayer prepared its Federal income tax return for the taxable year ended Date 2
and determined that it was eligible to apply the safe harbor under Rev. Proc. 2011-29 to
the success-based fees, and intended to make an election to do so. The Taxpayer
complied with the substantive requirements of Rev. Proc. 2011-29 by deducting 70% of
the success-based fees and capitalizing the remaining 30% of such fees.
PLR-123363-19                                 3

Despite the intention of Taxpayer to make the election, the Taxpayer failed to attach a
statement to its return, as required by Rev. Proc. 2011-29, stating that Taxpayer was
making the safe harbor election (the “Election Statement”). Although aware of the
Election Statement requirement, the Taxpayer overlooked the requirement and
inadvertently did not include it with the return (Election Return).

On Date 5, the Taxpayer reviewed the Election Return for its annual financial statement
audit and discovered that the Election Statement for the success-based fees was not
attached to Taxpayer’s return. Upon discovery, Taxpayer reached out to its tax
advisors, Firm, for assistance in remediating the missed Election Statement. Upon
consultation, Taxpayer requested Firm to file this request for an extension of time to
properly make the safe harbor election 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.

                                           LAW

Section 263(a) 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) of the Income Tax Regulations 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. See also § 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 § 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.
PLR-123363-19                                 4

Section 4.01 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.

The revenue procedure applies to covered transactions described in § 1.263(a)-5(e)(3).
The covered transactions include any of the following transactions; (1) a taxable
acquisition by the taxpayer of assets that constitute a trade or business; (2) 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) and (3) a reorganization described in § 368(a)(1)(A), (B), or (C) or a
reorganization described in § 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
§ 354 or § 356 (whether the taxpayer is the acquirer or the target in the reorganization).

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(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 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 301.9100-3(a) provides extensions of time to make a regulatory election under
Code sections other than those for which § 301.9100-2 expressly permits automatic
extensions. Requests for relief 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.
PLR-123363-19                                  5

Section § 301.9100-3(b)(1) states that a taxpayer will be deemed to have acted
reasonably and in good faith if the taxpayer meets any one of the following; (1) requests
relief before the failure to make the regulatory election is discovered by the Service, (2)
if failed to make the election because of intervening events beyond the taxpayer's
control, (3) failed to make the election because, after exercising due diligence, the
taxpayer was unaware of the necessity for the election, (4) reasonably relied on the
written advice of the Service, and (5) 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 § 301.9100-3(b)(3), a taxpayer will not be considered to have acted reasonably
and in good faith if the taxpayer meets any one of the following; (1) 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 (taking into account § 1.6664-
2(c)(3)) and the new position requires or permits a regulatory election for which relief is
requested, (2) was informed in all material respects of the required election and related
tax consequences, but chose not to file the election, and (3) 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.

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 § 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 Rev. Proc. 2011-29. As such, 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 it qualifies to make the election under Rev. Proc. 2011-29 and
that the transaction is a covered transaction described in § 1.263(a)-5(e)(3)(ii).
PLR-123363-19                                  6

Taxpayer has represented that under §§ 301.9100-3(b)(1)(i) and (v), it requested relief
before the failure to properly make the regulatory election was discovered by the
Service and that it reasonably relied on a qualified tax professional, and the tax
professional failed to make the election. Taxpayer has also represented that none of
the circumstances listed in § 301.9100-3(b)(3) apply.

                                      CONCLUSION

Based solely on the facts and representations submitted, we conclude that Taxpayer
acted reasonably and in good faith, and granting relief will not prejudice the interests of
the government. Accordingly, 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 an
amended return including the mandatory statement required by Section 4.01 of
Revenue Procedure 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.

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. 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, including whether Taxpayer properly included the correct costs as success-
based fees subject to the retroactive election, or whether Taxpayer’s transactions were
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 should be attached to Taxpayer’s federal tax returns for the tax
years affected. 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.
PLR-123363-19                                             7

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.


                                                 Sincerely,



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




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