IRS grants 60 days for a success-fee election omitted from an examined return

Plain-English summary

A corporation paid a contingent advisory fee in a business acquisition and intended to use the Rev. Proc. 2011-29 safe harbor. Its accounting firm prepared the required election statement and the return deducted 70 percent of the fee and capitalized 30 percent, but the statement was omitted from the electronically filed return and the taxpayer's review did not catch the omission. The taxpayer discovered the problem only after an IRS revenue agent requested the statement during an examination. The IRS accepted the taxpayer's representations that it reasonably relied on a qualified tax professional, acted in good faith, would not obtain a lower aggregate tax liability, and had open assessment periods. It granted 60 days to file the election statement, without deciding whether the fee qualified as success-based or whether the acquisition was a covered transaction.

Ruling snapshot

• Question: Could the taxpayer file a late Rev. Proc. 2011-29 election statement after the omission was discovered during an IRS examination?
• Outcome: approved (the taxpayer received 60 days to file the safe-harbor election statement)
• Key authorities: IRC §§ 263(a), 6662; 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: 202036004                                               Third Party Communication: None
 Release Date: 9/4/2020                                          Date of Communication: Not Applicable
 Index Number: 263.00-00, 9100.00-00
                                                                 Person To Contact:
 -------------------------------                                 --------------------, ID No. -----------------
 --------------------------------------                          Telephone Number:
 --------------------------------------                          --------------------
                                                                 Refer Reply To:
 EIN: -----------------                                          CC:ITA:B03-
                                                                 PLR-128453-19
 Attn: ---------------------------------                         Date:
 ---------------------------------------------                   May 29, 2020

 In re: -------------------------------




Legend

Date 1                     =         --------------------------
Taxpayer                   =         --------------------------------
Taxable Year               =         ---------------------------------------------------
State                      =         -------------
Date 2                     =         -----------------------
Advisor                    =         ------------------------------
Target                     =         ---------------------------------------
Date 3                     =         -------------------------
$a                         =         -----------------
$b                         =         -----------------
$c                         =         ---------------
$d                         =         ---------------------
$e                         =         ---------------------
$f                         =         ---------------
Accounting Firm            =         ----------------------------------------
Date 4                     =         -----------------------
Date 5                     =         -----------------------

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

This letter responds to a letter ruling request dated Date 1, submitted on behalf of
Taxpayer, requesting an extension of time to make a late safe harbor election under
Rev. Proc. 2011-29, 2011-18 I.R.B. 746. Taxpayer failed to attach the required election
statement to its Federal income tax return for Taxable Year 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
PLR-128453-19                                             2

301.9100-3 of the Procedure and Administration Regulations to attach the required
election statement to its Taxable Year return.

                                                     FACTS

Taxpayer, a State corporation, is a -------------------------- company. Taxpayer ----------------
---------------------------------------------------------------------------------------------------------------------
--------------------. Taxpayer ----------------------------------------------------------------------------------
-------------------------------------------------------------------------.

Pursuant to an engagement letter dated Date 2, Taxpayer engaged Advisor in
conjunction with the possible acquisition of Target, an -------company focused on ---------
----------. Under the terms of the engagement letter, Taxpayer agreed to pay Advisor a
fee of between $a and $b if Taxpayer acquired more than ----percent of Target’s
outstanding ordinary share capital or assets, or a fee determined at Taxpayer’s
discretion if Taxpayer acquired less than ----percent of Target’s outstanding ordinary
share capital or assets. Taxpayer also agreed to consider engaging Advisor to perform
additional services in connection with the acquisition. In the event Taxpayer were to
engage Advisor for such additional services, Advisor agreed to credit $c (or a lesser
amount agreed to by the parties) of the fees described above against any fees that
became payable to Advisor for the additional services.

Taxpayer successfully closed the acquisition transaction on Date 3, acquiring Target for
$d and paying Advisor a fee of $e. Taxpayer also incurred fees for additional services in
the amount of $f.

Taxpayer engaged Accounting Firm to prepare a transaction costs analysis (TCA) with
respect to the acquisition of Target, and to prepare and electronically file its Federal and
state tax returns for Taxable Year. Accounting Firm determined that the $e fee paid to
Advisor constituted a success-based fee subject to the safe harbor election provided in
Rev. Proc. 2011-29. Accounting Firm drafted a statement setting forth the total amount
of the success-based fee of $e, as well as the portion of the fee to be deducted and the
portion to be capitalized pursuant to the safe harbor election in Rev. Proc. 2011-29.

Accounting Firm provided the TCA and draft election statement to Taxpayer and to
Accounting Firm personnel responsible for preparing Taxpayer’s Form 1120, U.S.
Corporation Income Tax Return, for Taxable Year. Accounting Firm also provided
Taxpayer with a letter noting that, to elect the safe harbor treatment under Rev. Proc.
2011-29, an election statement was required to be filed with the Form 1120.

The Form 1120 prepared by Accounting Firm and filed by the Taxpayer reflected the
portion of the success-based fee to be deducted and the portion to be capitalized, as if
the safe harbor election under Rev. Proc. 2011-29 had been made. In other words,
Taxpayer deducted 70 percent of $e and capitalized the remaining 30 percent on its
Form 1120 for Taxable Year. However, despite the intention of the Taxpayer to make
PLR-128453-19                                 3

the election, the election statement required by Rev. Proc. 2011-29 was not included
with the Form 1120 when it was delivered to the Taxpayer for review. Although
Taxpayer’s internal tax personnel reviewed the Form 1120 for Taxable Year, they did
not detect the missing election statement.

The Form 1120 was signed by a partner with Accounting Firm and the Chief Financial
Officer of Taxpayer. The Chief Financial Officer of Taxpayer also signed Form 8453-C,
U.S. Corporation Income Tax Declaration for an IRS e-file Return. The Form 1120 was
electronically filed, pursuant to an extension, on Date 4.

By a letter dated Date 5, the Internal Revenue Service (IRS) notified Taxpayer that its
return for Taxable Year had been selected for examination. During that examination, an
IRS Revenue Agent requested a copy of the statement required by Rev. Proc. 2011-29.
At that point, Taxpayer discovered that the statement had been omitted from the Form
1120 when filed.

Taxpayer and Accounting Firm determined that relief to make the election was
potentially available under §§ 301.9100-1(c) and 301.9100-3. Taxpayer determined to
request such relief and advised the Revenue Agents handling the examination of
Taxpayer’s return for Taxable Year of its intent to do so.

                                           LAW

Section 263(a)(1) of the Internal Revenue Code and § 1.263(a)-2(a) 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. 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 § 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. Section 1.263(a)-5(b)(1). 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. Section 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, therefore, 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. Section 1.263(a)-5(f).
Section 4.01 of Rev. Proc. 2011-29 provides a safe harbor election for allocating
success-based fees paid in business acquisitions or reorganizations described in
PLR-128453-19                                4

§ 1.263(a)-5(e)(3) (“covered transactions”). 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,
and thus, can be deducted, and to treat 30 percent of the success-based fee as an
amount that facilitates the transaction and must be capitalized.

Specifically, section 4.01 provides that the Service will not challenge a taxpayer’s
allocation of success-based fees between activities that do not facilitate a covered
transaction and activities that do facilitate the covered 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 and thus may be deducted; (2) capitalizes the remaining
amount of the success-based fee as an amount which does facilitate the transaction;
and (3) attaches a statement to its original federal income tax return for the taxable year
that 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 pursuant to the safe harbor election.

Sections 301.9100-1 through 301.9100-3 provide the standards that 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 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.

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 or issue), the taxpayer was unaware of the necessity for the election;
PLR-128453-19                                 5

   (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)(2) provides that a taxpayer will not be considered to have
reasonably relied on a qualified tax professional if the taxpayer knew or should have
known that the professional was not:

   (i)     Competent to render advice on the regulatory election; or
   (ii)    Aware of all relevant facts.

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 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 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.

                                        ANALYSIS

Taxpayer’s election is a regulatory election, as defined under § 301.9100-1(b), because
the due date of the election is prescribed under Rev. Rul. 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 Taxpayer’s acquisition of Target was a covered transaction as
defined by § 1.263(a)-(5)(e)(3)(ii), and that the fee of $e paid by Taxpayer to Advisor
was a success-based fee as defined in § 1.263(a)-5(f). Further, Taxpayer specifically
represents that no portion of the $e fee reflected services for which payment was not
contingent upon the successful closing of the transaction.
PLR-128453-19                                6

Taxpayer represents that Accounting Firm, although identifying the safe harbor
provision of Rev. Proc. 2011-29 and completing Form 1120 as though that safe harbor
had been elected, failed to include with Taxpayer’s return for Taxable Year the
statement required to make the election. Taxpayer further represents that its own failure
to detect the omitted election statement was inadvertent. Based on these
representations, Taxpayer reasonably relied on a qualified tax professional and, under
§ 301.9100-3(b)(1)(v), is deemed to have acted reasonably and in good faith.

Taxpayer represents that granting relief would not result in a lower tax liability in
the aggregate for all taxable years affected by the election than Taxpayer would have
had if the election had been timely made (taking into account the time value of money).
Furthermore, Taxpayer represents that the taxable year in which the regulatory
election should have been made and any taxable years that would have been affected
had it been timely made, are not closed by the period of assessment. Based on these
representations, granting an extension of time to file the election will not prejudice the
interests of the government under § 301.9100-3(c)(1).

                                     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 Section 4.01(3) of Rev. Proc. 2011-29, stating that it is
electing the safe harbor for success-based fees for Taxable Year, identifying the
covered transaction, and stating the success-based fee amounts that are deducted and
capitalized, in accordance with Taxpayer’s representations.

The ruling contained in this letter is based on 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. In particular, no opinion is expressed as to Taxpayer’s classification of its
fees as success-based fees or whether Taxpayer’s acquisition of Target 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, a taxpayer filing its return electronically may satisfy this requirement by
attaching a statement to its return that provides the date and control number of the letter
ruling.
PLR-128453-19                                 7


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.

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


                                       Sincerely,

                                       BRINTON T. WARREN
                                       Chief, Branch 3
                                       Office of Associate Chief Counsel
                                       (Income Tax and Accounting)



                                 By:
                                       SUSIE K. BIRD
                                       Senior Counsel, Branch 3

Enclosure:      Copy for § 6110 purposes


cc:    -----------------------