Grants 45 days to attach omitted success-fee election

Plain-English summary

A foreign entity taxed as a partnership incurred success-based fees when buyers acquired its direct and indirect ownership interests. Its return treated 70 percent of the fees as nonfacilitative and capitalized 30 percent under Revenue Procedure 2011-29, but the tax preparer failed to attach the required election statement. The preparer discovered the omission during later training, and the partnership requested relief before the IRS discovered it. The IRS found reasonable reliance on a qualified professional, no hindsight, and no aggregate tax advantage from the late filing. It granted 45 days to file the required statement identifying the transaction and the amounts deducted and capitalized.

Ruling snapshot

• Question: Could the partnership attach a late Revenue Procedure 2011-29 election statement when its timely return already reflected the safe-harbor treatment?
• Outcome: Approved, with 45 days to file the required statement.
• Key authorities: IRC § 263(a); Treas. Reg. §§ 1.263(a)-4, 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: 201827005 Third Party Communication: None
Release Date: 7/6/2018 Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
----------------, ID No. -----------------
-------------------- Telephone Number:
-------------------------------- ---------------------
----------------------------------------------- Refer Reply To:
CC:ITA:B03
-------------------------------- PLR-130905-17
------------------------------------------------------------ Date:

• April 2, 2018

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

              TY: --------

LEGEND:

Taxpayer = ---------------------------------------------
Owners = --------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------------------------------
Buyers = --------------------------------------------------------
Advisers = ------------------------------
Tax Return Preparer = ----------------
Affiliate = ----------------------------------
Date 1 = --------------------------
Date 2 = -----------------
Date 3 = ----------------------
Date 4 = -----------------
Date 5 = ---------------------
Date 6 = ------------------
Date 7 = ---------------------------
Date 8 = -------------------
Date 9 = ---------------------------
Date 10 = ------------------------
Taxable Year = --------------------------------------------
$a = --------------------

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

This responds to a letter ruling request dated Date 1, submitted on behalf of Taxpayer.
Taxpayer requests an extension of time under §§ 301.9100-1 and 301.9100-3 of the

Procedure and Administration Regulations to make a late election concerning the
treatment of success-based fees in accordance with Rev. Proc. 2011-29, 2011-1 C.B.
746, which requires that a statement be attached to Taxpayer’s original federal income
tax return for Taxable Year.

                                     FACTS

Taxpayer is a foreign entity, treated as a partnership for U.S. federal income tax
purposes. Taxpayer was organized on Date 2, and technically terminated pursuant to
§ 708(b)(1)(B) on Date 3, after a transfer of 50 percent or more of the total interest in
partnership. Taxpayer retained its name and EIN number following the technical
termination.

On Date 4, Taxpayer and Owners entered into an agreement to have Buyers acquire
the direct and indirect interest of Taxpayer. As part of the acquisition, Taxpayer
incurred $a of success-based fees that were paid for services performed in the process
of investigating or otherwise pursuing the transaction. Advisers were engaged to advise
on the structure, negotiating the transaction, providing advice on technical
considerations, performing valuation analysis, advising on financial terms and
considerations, assisting with coordinating due diligence, and other financial matters
with respect to the acquisition.

Following the acquisition, Taxpayer engaged Tax Return Preparer to prepare the state
income tax returns and Taxpayer’s Taxable Year Form 1065. Taxpayer also engaged
Affiliate to perform an analysis of the success-based fees that were incurred, as well as
to prepare any documentation to establish the portion of the success-based fees
allocable to activities that did not facilitate the transaction.

On or about Date 5, and during the preparation of Taxpayer’s Taxable Year Form 1065,
Affiliate provided to Tax Return Preparer its analysis of the success-based fees and
advised Tax Return Preparer that should Taxpayer desire to make application of the
safe harbor method of accounting under section 4.01 of Rev. Proc. 2011-29, Taxpayer
was required to include an election statement with its Form 1065. Tax Return Preparer,
however, failed to advise Taxpayer that an election statement must be attached to
Taxpayer’s timely filed Form 1065. Taxpayer was unware that the election statement
was required to be attached to Taxpayer’s Form 1065, or that one had not been
included, and therefore not filed, along with Taxpayer’s Form 1065.

On Date 6, Taxpayer timely filed its Form 1065 for Taxable Year. Taxpayer’s Form
1065 was prepared consistent with having made a timely election under section 4.01 of
Rev. Proc. 2011-29. Taxpayer capitalized 30% of the success-based fees, and
reported on its ------- Form 1065 the remaining 70% as an amount that did not facilitate
the acquisition of Taxpayer’s direct and indirect interests. Furthermore, Taxpayer’s
Form 1065 for the tax period ending Date 7 was also prepared consistent with Taxpayer
having made a timely election under section 4.01 of Rev. Proc. 2011-29.

In late Date 8, during training on the topic of making a safe harbor method of accounting
election pursuant to Rev. Proc. 2011-29, Tax Return Preparer realized an election
statement had not been included in Taxpayer’s Form 1065 for Taxable Year. Tax
Return Preparer subsequently advised Taxpayer that the election statement had not
been attached to Taxpayer’s filed Form 1065 as required. On Date 9, and after having
gathered the requisite information and documents, Taxpayer requested that Tax Return
Preparer evaluate whether it was able to make a request pursuant to Treas. Reg. §§
301.9100-1(c) and 301.9100-3. On or about Date 10, Taxpayer engaged Tax Return
Preparer to prepare a request pursuant to Treas. Reg. §§ 301.9100-1 and 301.9100-3.

                                        LAW

Section 263(a) of the Internal Revenue Code 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. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992);
Woodward v. Commissioner, 397 U.S. 572 (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. 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) (i.e., a success-based fee) is an
amount paid to facilitate the transaction except to the extent the taxpayer maintains
sufficient documentation to establish that a portion of the fee is allocable to activities
that do not facilitate the transaction. 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.

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.

It is this last requirement that Taxpayer requests permission to accomplish with this
ruling request. Taxpayer requests permission with this ruling request to attach the
statement required by section 4.01(3) of Rev. Proc. 2011-29 to its return, by amending
its original filed return and superseding it with a return with the proper election
statement completed and attached.

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 extensions of time for regulatory
elections (other than automatic changes covered under section 301.9100-2) 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 that a taxpayer will be 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) inadvertently 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, 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 considered to have acted
reasonably and in good faith if the taxpayer

(i) seeks to alter a return position for which an accuracy-related penalty could be
imposed under § 6662 at the time the taxpayer requests relief and the new position
requires 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. 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. 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. 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.

                                     ANALYSIS

Taxpayer’s election is a regulatory election, as defined under § 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 and representations made by Taxpayer establish that Taxpayer acted
reasonably and in good faith. Taxpayer reasonably relied on Tax Return Preparer, a
qualified tax professional, to prepare its federal income tax return for Taxable Year.

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. 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,
Taxpayer intended to take advantage of the safe harbor provisions in Rev. Proc. 2011-
29 and filed its return for Taxable Year reflecting those provisions but failed to include
the required election statement. Taxpayer is not using hindsight in requesting relief.

Further, based on the facts of the case provided, granting an extension will not
prejudice the interests of the Government. Taxpayer will not have a lower tax liability in
the aggregate for all taxable years affected by the election if given permission to make
the election at this time than 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 Taxpayer’s receipt of the ruling granting an extension of time to make
a late election.

                                      RULING

Based upon our analysis of the facts as represented, 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 the
statement required by section 4.01(3) of Rev. Proc. 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
appropriate parties. 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 its
success-based fees subject to the election, or whether Taxpayer’s transaction was
within the scope of Rev. Proc. 2011-29.

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.

A copy of this ruling should be attached to Taxpayer’s federal income tax returns for the

tax years affected. Alternatively, taxpayers filing returns electronically may satisfy this
requirement by attaching a statement to their return that provides the date and control
number of this ruling.

In accordance with the power of attorney on file with this office, a copy of this letter is
being sent to your authorized representatives. We are also sending a copy of this letter
to the appropriate operating division director. Enclosed is a copy of the letter ruling
showing the deletions proposed to be made in the letter when it is disclosed under
§ 6110.

                                       Sincerely,



                                       Jamie Kim
                                       Assistant to the Branch Chief, Branch 3
                                       (Income Tax and Accounting)

Enclosure: Copy of the letter for 6110 purposes

cc: