Late success-based-fee safe-harbor election granted

Plain-English summary

A consolidated corporate group paid a contingent adviser fee for an acquisition and reported the fee using Revenue Procedure 2011-29’s safe harbor, deducting 70 percent and capitalizing 30 percent. Its return preparer unintentionally omitted the required election statement from the timely filed return. An auditor later discovered the omission, and the taxpayer requested relief before the IRS raised the issue. The IRS found that the taxpayer reasonably relied on a qualified professional, acted in good faith, did not use hindsight, and would not gain a lower aggregate tax liability. It granted 60 days to file the missing safe-harbor statement.

Ruling snapshot

• Question: Could the taxpayer make the Revenue Procedure 2011-29 safe-harbor election after its return preparer omitted the required statement?
• Outcome: Yes. A 60-day extension was granted.
• Key authorities: Treas. Reg. §§ 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: 201829002 Third Party Communication: None
Release Date: 7/20/2018 Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
------------------------------------------------------- ---------------------------, ID No. ---------------
-------------------------------- -----------------
----------------------------------------- Telephone Number:
----------------------- ----------------------
Refer Reply To:
CC:ITA:B03
PLR-131875-17

                                                          Date:

--------------------------------- April 16, 2018

                         TY: -------------------------------------------------------------

Legend:

Taxpayer = -------------------------------------------------------------------------
Acquirer = ----------------------------------------
Target = --------------------------------------------------
Adviser = ------------------------------------------------
Tax Return Preparer = ----------------
Auditor = ----------------------------
Date1 = -----------------------
Date2 = ---------------------------
Date3 = ---------------------------
Date4 = ----------------------------
Date5 = --------------------
Date6 = ---------------------------
Taxable Year = ------------------------------------------------------
$a = --------------

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

This letter responds to a letter dated Date1, submitted on behalf of Taxpayer,
requesting a ruling that Taxpayer be granted an extension of time under §§ 301.9100-
1(c) and 301.9100-3 of the Procedure and Administration Regulations to make a safe
harbor election under 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 the common parent of a U.S. consolidated return group. It was formed on
PLR-131875-17 2

Date2 to manufacture and distribute premium citrus juices. Taxpayer developed its
business by having its wholly owned subsidiary, Acquirer, acquire Target, which was
already operating in the desired business, in a transaction that qualified as an asset
acquisition under § 338(e) of the Internal Revenue Code. The transaction occurred on
Date3. Taxpayer engaged Adviser to assist with the transaction, including preliminary
and investigative activities, structuring, and leading the diligence efforts on behalf of
Taxpayer. The fee for Adviser’s services for the transaction was $a, and was
contingent upon the successful closing of the transaction. These fees were payable to
Adviser on consummation of the transaction.

Taxpayer engaged Tax Return Preparer to prepare its consolidated federal income tax
returns. Tax Return Preparer prepared Taxpayer’s Form 1120 for the tax year ending
Date4, which it timely filed (with extension) on Date5. On this return, Taxpayer
deducted 70% of Adviser’s fees and capitalized the remaining 30%, consistent with the
safe harbor election in Rev. Proc. 2011-29. However, Tax Return Preparer
unintentionally failed to attach a statement making the election to the return, as required
by Rev. Proc. 2011-29. Taxpayer was not specifically aware of the requirement, but
relied upon Tax Return Preparer to ensure that its federal income tax return was
properly filed.

Taxpayer also engaged Auditor to audit its financial statements. On Date6, during its
audit, Auditor asked Tax Return Preparer to provide the safe harbor election statement
required by Rev. Proc. 2011-29. That same day, Tax Return Preparer discovered that
the election statement had been omitted, and informed Taxpayer. Taxpayer asserts
that its tax return for Taxable Year is under exam, but that the issue in question is not.

                                       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).
PLR-131875-17 3

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
PLR-131875-17 4

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
PLR-131875-17 5

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 represents that the issue is not under
examination, and that it reasonably relied upon the advice of Tax Return Preparer, a
qualified tax professional, to prepare its federal income tax return for Taxable Year. It is
not the case that Taxpayer was informed of the need to file the election but chose not to
do so. 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.
Taxpayer also represents that no specific facts have changed since the due date for
filing the election that make the election advantageous.

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. The tax year at issue is not a closed year at the time relief would be granted. In
addition, granting relief in this instance will not affect any closed years.

                                     RULING

Based solely on the facts submitted and the representations made, we conclude that
Taxpayer acted reasonably and in good faith, and that granting the request will not
prejudice the interests of the government. Accordingly, the requirements of
§§ 301.9100-1 and 301.9100-3 have been satisfied.

Taxpayer is granted an extension of 60 days from the date of this ruling to file the
statement required by § 4.01(3) of Rev. Proc. 2011-29, stating that it is electing the safe
harbor for success-based fees, properly identifying the party making the election,
PLR-131875-17 6

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 specifically provided herein, no opinion is expressed or implied concerning
the federal tax consequences of the facts described above under any other provision of
the Code. In particular, no opinion is expressed or implied as to whether the Taxpayer
properly included the correct costs as its success-based fees subject to the election,
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 provisions of a power of attorney currently on file, a copy of this
letter is being sent to your authorized representatives. We are also sending a copy of
the ruling 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 & Accounting)

Enclosure: Copy of the letter for § 6110 purposes

cc: