Grants 45 days for late success-fee safe-harbor election

Plain-English summary

A corporation paid a success-based financial advisory fee in connection with a stock acquisition. Its tax preparer did not advise it to elect the Revenue Procedure 2011-29 safe harbor, which generally treats 70 percent of a qualifying success fee as nonfacilitative and deductible while capitalizing the remaining 30 percent. A later adviser discovered the omission and recommended an amended return. The IRS found that the corporation reasonably relied on a qualified professional, did not use hindsight, and would not gain an aggregate tax advantage compared with a timely election. It granted 45 days to file an amended return with the required election statements.

Ruling snapshot

• Question: Could the corporation make a late Revenue Procedure 2011-29 election for success-based transaction fees?
• Outcome: Approved, with 45 days to file the amended return and mandatory statements.
• Key authorities: IRC § 263(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: 201827009 Third Party Communication: None
Release Date: 7/6/2018 Date of Communication: Not Applicable
Index Number: 9100.00-00, 263.14-00
Person To Contact:
-------------------, ID No. ----------------
------------------------- Telephone Number:
-------------------------------------- ----------------------
------------------------------------------- Refer Reply To:
CC:ITA:B01
------------------------------------ PLR-134054-17
---------------------------------------------- Date:
April 03, 2018

Taxpayer = --------------------------------------------------
A = --------------------------
B = --------------------------------------
C = -------------------------------
D = ------------------------------
E = -----------------------------
F = ----------------------
G = -------------------
Day 1 = --------------
Date 1 = ----------------------
Date 2 = ---------------------------
Date 3 = ----------------------
Amount 1 = --------------

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

This letter responds to your letter dated June 6, 2017, 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 claiming a deduction for a portion of
success-based fees and attaching statements to Taxpayer’s original consolidated
federal income tax return for the tax year ending on Date 1.

                                                 FACTS

Taxpayer is a corporation that files its federal income tax returns on a fiscal year basis
with a tax year ending on Day 1, and it uses an accrual method as its overall method of
accounting. Taxpayer is engaged in the design, simulation, layout, engineering, and
fabrication of test interface circuit boards.

A, a corporation wholly owned by Taxpayer, files its federal income tax returns on a
fiscal year basis with a tax year ending on Day 1, and uses an accrual method as its
overall method of accounting.

B, an entity taxed as a partnership, was the 100 percent owner of Taxpayer before the
Transaction. Taxpayer and B file a federal consolidated tax return with Taxpayer as the
common parent. B is engaged in the engineering, design, and manufacturing of
advanced technology printed circuit boards.

C, is an entity disregarded for federal income tax purposes. C is wholly owned by D, an
entity taxed as a partnership for federal income tax purposes.

C acquired 100 percent of the stock of Taxpayer (the Transaction) on Date 1. Taxpayer
represents that Taxpayer and C became related within the meaning of IRC § 267(b) or
707(b) on that date. Taxpayer also represents that the stock acquisition is a covered
transaction under § 1.263(a)-5(e).

Taxpayer engaged E on Date 2 to provide financial advisory services related to the
Transaction. Under the engagement letter, Taxpayer was to provide the greater of
Amount 1 or a calculated percentage of the purchase price of a completed transaction.
Taxpayer represents that this fee is a success-based fee and that it accrued on Date 1.

Taxpayer engaged F and relied upon it to prepare its federal income tax return for the
tax year ending on Date 1. Taxpayer’s return did not treat any of the fees related to the
Transaction as success-based fees deductible under Rev. Proc. 2011-29. In addition, F
failed to advise Taxpayer to make the election provided in Rev. Proc. 2011-29
concerning the treatment of success-based fees as not facilitating a business
acquisition.

Taxpayer subsequently engaged G to prepare its federal income tax return for the tax
year ending on Date 2, and to analyze the costs of the Transaction. G discovered that
none of the success-based fee was deducted on Taxpayer’s tax return for the tax year
ending on Date 1, and it recommended that Taxpayer amend its return to make the
election provided in Rev. Proc. 2011-29 and deduct a portion of the success-based fee.

                                       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) 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

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 Taxpayer establish that
Taxpayer acted reasonably and in good faith. Taxpayer reasonably relied on F, a
qualified tax professional, to prepare its tax return. 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 relied on F to advise it as to
any relevant elections, which F failed to do with respect to this election. Taxpayer is not
using hindsight in requesting relief.

Further, based on the information provided and representations made by Taxpayer,
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 to which the election
applies 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.

                                  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 its
amended return and attach the mandatory statements as required by Section 4.01 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
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 properly including the correct costs as its
success-based fees subject to the retroactive election, or whether Taxpayer’s
transaction is 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 is being sent to your 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)