Taxpayer receives extension for success-based-fee safe harbor election

Plain-English summary

A corporation incurred a success-based financial advisory fee when it acquired another company's stock. The taxpayer relied on a return preparer to advise it about elections, but neither the taxpayer nor the preparer identified the fee before the original return was filed. A later adviser discovered that the fee could qualify for Revenue Procedure 2011-29's safe harbor, which treats 70 percent as not facilitating the transaction and capitalizes the other 30 percent. The IRS found reasonable, good-faith reliance and no prejudice to the government. It granted 45 days to file an amended return reflecting the allocation and attach the required election statement.

Ruling snapshot

• Question: Could the taxpayer make a late safe harbor election for a success-based transaction fee?
• Outcome: Approved; the taxpayer received 45 days to amend its return, apply the 70/30 allocation, and attach the mandatory statement.
• Key authorities: IRC § 263(a); Treas. Reg. §§ 1.263(a)-5, 301.9100-1, and 301.9100-3; Rev. Proc. 2011-29

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201822009 Third Party Communication: None
Release Date: 6/1/2018 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-128597-17
------------------------------ Date:
-------------------------------------------- February 28, 2018

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   ---------

Taxpayer = -----------------------------------
A = ----------------------------------------
B = ------------
C = ---------
D = ----------------------------------------------------
E = -------------------------------------------------
F = -------------
G = --------------------------------------------------------
H = --------------
J = ---------------------------------------------------------
K = -------------------
L = ----------------
M = ----------------------------------------------
N = ----------------------------
Date 1 = ----------------------------
Date 2 = ---------------------------
Date 3 = ---------------
Date 4 = -----------------------------

Dear ----------------

This letter responds to your letter dated September 12, 2017, requesting an extension
of time under §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration
Regulations to make the safe harbor election for success-based fees set forth in Section
4 of Rev. Proc. 2011-29, 2011-18 I.R.B. 746. Section 4 requires a taxpayer, on its
original federal income tax return for the year of the election, to: (1) allocate 70 percent
of its success-based fees to activities that do not facilitate the transaction at issue and
30 percent to activities that do facilitate the transaction and (2) attach a statement
setting forth, among other items, that the taxpayer is making the election.

                                      FACTS

Taxpayer is a corporation and a member of an affiliated group that files a consolidated
federal income tax return. Taxpayer files its federal income tax return on a calendar
year basis and uses an accrual method as its overall method of accounting.

Taxpayer is wholly owned by A, formed under the laws of B and C. A is owned by D,
also formed under the laws of B and C. D is owned by E, the Taxpayer’s parent, formed
under the laws of F.

G was formed under the laws of H and was wholly owned by J. On Date 1, pursuant to
a plan of merger, E arranged for Taxpayer to acquire 100 percent of the stock of G (the
Transaction). In the course of investigating and pursuing the Transaction, Taxpayer
incurred certain transaction costs. Some of these costs included Taxpayer obtaining
the services of K, a financial advisor, for a cost of L, the payment of which was
contingent upon the successful closing of the Transaction. Taxpayer paid L to K upon
that closing.

Taxpayer hired M to prepare Taxpayer’s federal income tax return for the period ended
Date 2 and to advise the Taxpayer as to all elections with respect to that return.
Taxpayer was unaware of the success-based fee; therefore, the information it provided
to prepare its return made no mention of it. Moreover, M did not inquire specifically of
the Taxpayer whether it had incurred any success based fees. As a result, the
Taxpayer timely filed its original federal income tax return for its taxable year ending
Date 2 without reflecting the 70/30 split of the success-based fees on the return and
without attaching the required statement to that return.

On Date 3, Taxpayer engaged N to prepare Taxpayer’s federal income tax return for the
period ended Date 4. Shortly after that, Taxpayer was advised that it had incurred a
success-based fee in its taxable year ending on Date 2. N advised Taxpayer that the
success-based fee qualified under Rev. Proc. 2011-29 and advised the Taxpayer to file
this request for a private letter ruling granting an extension of time under §§ 301.9100-1
and -3 to make the election.

                                       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 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.

Section 301.9100-1(c) of the Procedural Regulations 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 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
  (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)(3) provides that a taxpayer will not be deemed to have 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 an extension of time to make a regulatory
election will be granted only when the interests of the government are not prejudiced by
the granting of relief. 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). Section 301.9100-3(c)(1)(i).

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
under section 6501(a) before the taxpayer’s receipt of a ruling granting relief under this
section. Section 301.9100-3(c)(1)(ii).

Section 301.9100-3(c)(2) provides special rules for accounting method regulatory
elections. The interests of the government are deemed to be prejudiced except in
unusual and compelling circumstances if the accounting method regulatory election for
which relief is requested:

  (i)     is subject to the procedure set forth in § 1.446-1(e)(3)(i) of this chapter
          (requiring advance written consent of the Commissioner);
  (ii)    requires an adjustment under § 481(a) (or would require an adjustment
          under § 481(a) if the taxpayer changed to the method of accounting for
          which relief is requested in a taxable year subsequent to the taxable year
          in which the election should have been made);
  (iii)   would permit a change from an impermissible method of accounting that is
          an issue under consideration by examination, an appeals office, or a
          federal court and the change would provide a more favorable method or
          more favorable terms and conditions than if the change were made as part
          of an examination; or
  (iv)    provides a more favorable method of accounting or more favorable terms
          and conditions if the election is made by a certain date or taxable year.

                                   ANALYSIS

The Taxpayer’s election is a regulatory election, as defined in § 301.9100-1(b), because
the due date of the election is prescribed in the Income Tax Regulations under
§ 1.263(a)-5(f). 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.

The information provided and representations made by the Taxpayer establish that the
Taxpayer acted reasonably and in good faith. The Taxpayer reasonably relied on M, a
qualified tax professional, to prepare its federal income tax return for the period ended
Date 2. The Taxpayer is not seeking to alter a return position for which an accuracy
related penalty has been or could be imposed under § 6662 at the time relief is
requested. The Taxpayer did not affirmatively choose not to make the election after
having been informed in all material respects of the required election and related tax
consequences. Rather, the Taxpayer relied on M to advise it as to any relevant
elections, which M failed to do with respect to this election. The Taxpayer is not using
hindsight in requesting relief.

Further, based on the information provided and representations made by the Taxpayer,
granting an extension will not prejudice the interests of the government. The Taxpayer
will not have a lower tax liability in the aggregate for all taxable years to which the
election applies at this time than the Taxpayer would have had if the election had been
timely made. In addition, the taxable year in which the regulatory election should have
been made and any taxable years that would have been affected by the election had it
been timely made will not be closed by the period of limitations on assessment under
§ 6501(a) before the Taxpayer’s receipt of the ruling granting an extension of time to
make a late election.

                                  CONCLUSION

Based solely on the information provided and representations made, 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 45 days from the date of this ruling to file an
amended return for its --------taxable year reflecting 70 percent of the amount of the
success-based fee as an amount that does not facilitate the transaction and capitalizing
the remaining 30 percent of the success-based fee as an amount that does facilitate the
transaction. The Taxpayer must also attach the mandatory statement, as required by
Section 4.01 of Revenue Procedure 2011-29. The mandatory statement must state that
Taxpayer is electing the safe harbor for success-based fees, identify the transaction,
and state the success-based fee amounts that are deducted and capitalized.

The ruling contained in this letter is 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.

In accordance with the provisions of the power of attorney currently on file with this
office, a copy of this letter ruling is being sent to your two authorized representatives.

                                   Sincerely,

                                   /s/ Ronald J. Goldstein

                                   Ronald J. Goldstein
                                   Assistant to the Branch Chief, Branch 1
                                   Office of Associate Chief Counsel
                                   (Income Tax & Accounting