Late success-fee safe-harbor election is denied

Plain-English summary

A corporate taxpayer incurred acquisition costs but did not account for them on its original return because its tax director believed the costs belonged to its parent. After later claiming additional deductions on an amended return, the taxpayer requested more time to elect the Rev. Proc. 2011-29 safe harbor for success-based fees. The IRS denied relief because the limitations period for the election year had closed before a ruling could issue, which prejudiced the government's interests under Treas. Reg. § 301.9100-3(c)(1)(ii). The IRS separately held that the safe harbor had to be elected on the original return and could not be added after an amended return was filed.

Ruling snapshot

• Question: Could the taxpayer make a late Rev. Proc. 2011-29 safe-harbor election for acquisition success fees?
• Outcome: Denied because the limitations period had closed and the election was not made on the original return.
• Key authorities: IRC §§ 263(a), 6501(a); Treas. Reg. §§ 1.263(a)-5, 301.9100-1, 301.9100-3; Rev. Proc. 2011-29.

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201639009                                              Third Party Communication: None
Release Date: 9/23/2016                                        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:B01
                                                               PLR-140810-15
                                                               Date:
                                                               June 20, 2016




Taxpayer             =     ----------------------------------------------------------------------------
Parent               =     ------------------------------
A                    =     -----------
B                    =     ---
C                    =     ------------------
D                    =     -----
E                    =     -------------------
F                    =     ------------------------------------
G                    =     -------------
H                    =     --------------------------
I                    =     -------------------------
Date1                =     ---------------------
Date2                =     --------------------------
Date3                =     ------------------------
Date4                =     -------------
Date5                =     --------------------------
$Amount1             =     -----------------
$Amount2             =     -----------------
$Amount3             =     -----------------
$Amount4             =     -----------------

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

This letter responds to your letter dated December 14, 2015, and supplemental
correspondence, 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, 2011-18 I.R.B. 746,
which includes attaching statements to Taxpayer’s original federal income tax return for
the taxable year ended Date1.
PLR-140810-15                                 2



FACTS

Taxpayer is the holding company for C based A companies, which operate in B states
and engage in the research, development, manufacture, sales and service of A
products. The A companies serve a broad spectrum of industries in C. Taxpayer uses
the accrual method of accounting and has a March 31 fiscal year end.

On Date3, Taxpayer completed the purchase of D percent of the stock of E.
Immediately before the purchase, Taxpayer had established an acquisition vehicle, F, to
purchase the shares of E. The terms of the deal included that immediately following the
purchase, E and F would merge, with E remaining as the surviving corporation and a
wholly owned subsidiary of Taxpayer.

In connection with the acquisition of E, Taxpayer incurred several deal-related
expenses, e.g., costs of due diligence, legal and accounting costs, and investment
banking fees. All deal-related expenses were paid on behalf of Taxpayer directly by its
G parent company, Parent.

Taxpayer filed its original federal income tax return for the taxable year ending Date1 on
Date 2. On this tax return, which was prepared by Taxpayer’s return preparer, H,
Taxpayer did not capitalize or deduct any of the deal-related costs pertaining to the
above transaction that occurred on Date3. When the tax return was filed, Taxpayer’s
Tax Director believed that the costs at issue were the responsibility of Parent. Further,
H did not advise Taxpayer about the potential deductibility of the costs at issue.
Taxpayer’s tax return for the taxable year ending Date1 reported a net operating loss.

In Date4, Taxpayer became aware that the costs at issue paid by Parent on behalf of
Taxpayer were potentially deductible by Taxpayer. Taxpayer retained the accounting
firm, I, to confirm the deductibility of the costs at issue and to perform a transaction cost
analysis to determine whether the costs at issue were deductible or capitalizable. I
concluded that the costs at issue were allocable to Taxpayer and should have either
been deducted or capitalized by Taxpayer for its taxable year ended Date1.

Further, I provided a transaction cost analysis to determine the deductibility of the costs
at issue. Pursuant to this, Taxpayer filed an amended federal income tax return for the
taxable year ended Date1 on Date5. The amended tax return reflected additional
deductions for non-facilitative costs in connection with the transaction that occurred on
Date3 that reduced Taxpayer’s taxable income from $Amount1 to $Amount2. As a
result of the amended tax return, Taxpayer’s net operating loss carryforward increased
from $Amount3 to $Amount4.
PLR-140810-15                                 3

In the days before filing its amended tax return, Taxpayer attempted to execute a Form
872, Consent to Extend Limitations Period, in order to extend the statute of limitations
for Taxpayer’s taxable year ended Date1. The Form 872 was not duly executed by the
Taxpayer and the Internal Revenue Service.

On Date5, which is the day before the statute of limitations for Taxpayer’s taxable year
ended Date1 expired, Taxpayer filed the subject request for 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 4.01(3) of Rev. Proc. 2011-29 for success-based
fees, which includes attaching statements to Taxpayer’s original income tax return for
the taxable year ended Date1.

LAW

Section 263(a)(1) of the Internal Revenue Code and § 1.263(a)-2(a) of the Income Tax
Regulations 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, 112 S. Ct. 1039, 117 L. Ed. 2d
226 (1992); Woodward v. Commissioner, 397 U.S. 572, 575-576, 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.

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.
PLR-140810-15                                  4

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.

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 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 due 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, 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(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
PLR-140810-15                                 5

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 section
6501(a) before the taxpayer’s receipt of a ruling granting relief under this section.

ANALYSIS AND CONCLUSION

The Service is adverse and cannot grant relief to Taxpayer’s request on two separate
grounds. First, pursuant to section 301.9100-3(c)(1)(ii), the interests of the Government
will be prejudiced because a letter ruling granting relief would necessarily need to be
issued after the statute of limitations has closed for the taxable year in which Taxpayer
is requesting to make the late election at issue. Taxpayer asserts that that the closing
of the statute of limitations does not lead to a dispositive conclusion that the interests of
the Government are prejudiced under section 301.9100-3(c)(1)(ii). Taxpayer asserts
that it merely leads to a rebuttable presumption that may be overcome. Taxpayer
asserts that this presumption of prejudice to the interests of the Government can be
overridden by an actual determination that the granting of relief will not result in
Taxpayer having 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 as set
forth in section 301.9100-3(c)(1)(i). In this regard, Taxpayer states that for the taxable
year ended Date1, Taxpayer had no tax liability due to utilization of net operating loss
carryforward amounts and that the granting of relief will only increase its net operating
loss carryforward amounts.

We disagree that the presumption of prejudice to the interests of the Government can
be overridden by an actual determination that the granting of relief will not result in
Taxpayer having 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 as set
forth in section 301.9100-3(c)(1)(i). Specifically, section 301.9100-3(c)(1)(i) and section
301.9100-3(c)(1)(ii) are separate and distinct requirements. Satisfying the requirements
under section 301.9100-3(c)(1)(i) does not in itself lead to a conclusion that the
requirements under section 301.9100-3(c)(1)(ii) are satisfied.

Second, the Service is adverse on the grounds that pursuant to section 4.01(3) of Rev.
Proc. 2011-29, the safe harbor election must be made on an original tax return, but
because Taxpayer already has filed an amended tax return for the tax year at issue, the
election can no longer be made on its original tax return.

Taxpayer disagrees with the Service’s interpretation of this provision and asserts that an
amended tax return is not recognized as a separate tax return from the original tax
PLR-140810-15                                  6

return and does not displace the original tax return. Further, Taxpayer states that it has
merely filed an amended tax return that includes a protective claim for refund for
success-based fees. Finally, Taxpayer asserts that in PLR 201102031, the Service had
no objections where the taxpayers had filed an amended tax return after filing its original
tax return and the taxpayers requested relief under section 301.9100-3 for an extension
of time to make an election under section 163.

We disagree with Taxpayer’s assertion that an amended tax return is not recognized as
a separate tax return from the original tax return and does not displace the original tax
return. The Service does distinguish between an original tax return and an amended
tax return. In this regard, a “superseding tax return”, a return that is filed subsequent to
the original filed return and filed within the filing period (including extensions) is treated
the same as the original tax return. On the other hand, an amended tax return, a return
that is filed subsequent to the originally filed or superseding tax return and filed after the
expiration of the filing period (including extensions), is deemed not to incorporate
anything into the original tax return. See Haggar Co. v. Helvering, 308 U.S. 389 (1940).
Also see Badaracco v. Commissioner, 464 U.S. 386 (1984).

Next, Taxpayer’s assertion that it has merely filed an amended tax return that includes a
protective claim for refund for success-based fees is unpersuasive.

Finally, Taxpayer’s assertion about PLR 201102031 is inaccurate and not on point. In
PLR 201102031, the election in question under § 163(d)(4)(B)(iii) is required to be made
on or before the due date (including extensions) of the income tax return for the taxable
year at question. See Treas. Reg. § 1.163(d)-1(b). This is distinguishable from the
election under section 4.01(3) of Rev. Proc. 2011-29, which is required to be made on
the original tax return for the taxable year at question.

Thus, Taxpayer’s request for an extension of time to make the safe harbor election
under Section 4 of Rev. Proc. 2011-29 is not granted.

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 is the proper party to account for the costs that
are the subject of this request and 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.
PLR-140810-15                                 7


A copy of this ruling should 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.

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,

                                       Christina M. Glendening

                                       Christina M. Glendening
                                       Senior Counsel, Branch 5
                                       Office of Associate Chief Counsel
                                       (Income Tax & Accounting)