Late success-fee safe-harbor election granted

Plain-English summary

A corporation acquired another company and treated its success-based investment banking fees under the safe harbor in Revenue Procedure 2011-29. It deducted 70 percent of the fees and capitalized 30 percent, but its tax adviser inadvertently omitted the required election statement from the original return. The IRS found that the corporation acted reasonably and in good faith and that allowing the late election would not prejudice the government. It granted 60 days from the ruling date to file the required statement identifying the transaction and the amounts deducted and capitalized. The IRS did not decide whether the transaction qualified for the safe harbor or whether the corporation included the correct fees.

Ruling snapshot

• Question: May the corporation file a late Revenue Procedure 2011-29 election statement for its allocation of success-based transaction fees?
• Outcome: approved
• Key authorities: IRC §§ 263(a), 446, 481(a), 6501(a), 6662; 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: 201832001 Third Party Communication: None
Release Date: 8/10/2018 Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
------------------------------------------- --------------------, ID No. ------------------
----------------------------------------------- Telephone Number:
------------------------------------ ----------------------
Refer Reply To:
Attn: ---------------------------- CC:ITA:B01
--------------------------------------- PLR-102932-18
Date:
May 09, 2018
EIN: -----------------

LEGEND

Parent = -------------------------------------------
Taxpayer = ---------------------------------------------- ---------------------------
Date 1 = ---------------------------
Date 2 = -------------------
Date 3 = --------------------
Corporation = --------------------------------------
Amount 1 = ----------------
CPA = -----------------------------

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

    This is in response to a letter dated November 28, 2017, filed by Parent

requesting a ruling on behalf of Taxpayer pursuant to sections 301.9100-1 and
301.9100-3 of the Procedure and Administration Regulations granting an extension of
time to file an election statement required by section 4.01(3) of Rev. Proc. 2011-29,
2011-18 I.R.B. 746, 747, with respect to the taxable year ending Date 1.
PLR-102932-18 2

                                      FACTS

    On Date 2, Taxpayer acquired the stock of Corporation per its agreement dated

Date 3. Taxpayer incurred investment banking fees, which included success-based
fees of Amount 1, paid upon closing the transaction during the taxable year. Taxpayer
has represented that the transaction qualified as a covered transaction pursuant to
section 1.263(a)-5(e)(3)(ii) of the Income Tax Regulations.

    Consistent with the safe harbor election provided in Rev. Proc. 2011-29, 2011-18

I.R.B. at 746-47, Taxpayer capitalized 30% of the success-based fees and deducted the
remaining 70% on its tax return for the taxable year. Taxpayer inadvertently failed to
attach the statement required by section 4.01(3) of Rev. Proc. 2011-29, 2011-18 I.R.B.
at 747, to elect to use the safe harbor method of allocating success-based fees to its
original federal tax return for the taxable year.

    Taxpayer retained CPA to prepare and file Taxpayer’s Date 1 federal tax return.

Taxpayer represents that it believed CPA was competent to render advice on the
election statement and information that should be included on its federal tax return.
Taxpayer relied on CPA as a qualified tax professional to prepare and file Taxpayer’s
federal tax return. CPA inadvertently failed to attach the election statement to
Taxpayer’s federal tax return. CPA discovered that it failed to attach the election
statement to Taxpayer’s tax return when CPA reviewed materials provided by an
international CPA firm that provided detailed guidance on the safe harbor election. CPA
informed Taxpayer of the inadvertent failure.

     Taxpayer has prepared and submitted an affidavit regarding its failure to attach

the required election statement to its return. CPA has prepared and submitted an
affidavit regarding its failure to attach the required election statement to Taxpayer’s
return.

                                       LAW

      Section 263(a)(1) of the Internal Revenue Code provides generally that no

deduction shall be allowed for any amount paid in exchange for property having a useful
life extending beyond the end of the taxable year. See also section 1.263(a)-2(a). No
deduction is allowed for an amount paid to acquire or create an intangible, which
includes an ownership interest in a corporation or other entity. Section 1.263(a)-1(d)(3);
see also sections 1.263(a)-4(c)(1)(i); 1.263(a)-4(d)(2)(i)(A). Costs incurred in the
process of acquisition or reorganization of a business entity that produce significant
long-term benefits must be capitalized. Indopco v. Commissioner, 503 U.S. 79, 89-90
(1992); section 1.263(a)-5(a) (providing that taxpayers must capitalize amounts paid to
facilitate certain transactions set forth in that section).
PLR-102932-18 3

     Section 1.263(a)-5(b)(1) provides that an amount is paid to facilitate a transaction

if the amount is paid in 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(f) sets forth the rule governing success-based fees. It

provides that an amount paid that is contingent on the successful closing of a
transaction described in section 1.263(a)-5(a) is treated as 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.

      A taxpayer’s method for determining the portion of a success-based fee that

facilitates a transaction and the portion that does not facilitate the transaction is a
method of accounting under section 446.

    Rev. Proc. 2011-29, 2011-18 I.R.B. 746, provides a safe harbor election for

allocating success-based fees paid in business acquisitions or reorganizations
described in section 1.263(a)-5(e)(3). Pursuant to section 4.01 of Rev. Proc. 2011-29,
2011-18 I.R.B. at 747, the Service will not challenge a taxpayer’s allocation of a
success-based fee between activities that facilitate a transaction described in section
1.263(a)-5(e)(3) and activities that do not facilitate the transaction if the taxpayer: 1)
treats 70% of the amount of the success-based fee as an amount that does not facilitate
the transaction; 2) capitalizes the remaining 30% as an amount that does facilitate the
transaction; and 3) attaches 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 sets forth the standards the Commissioner will use to

determine whether to grant an extension of time to make a regulatory election. Section
301.9100-1(b) provides that a regulatory election is 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.
Pursuant to section 301.9100-1(c), the Commissioner has discretion to grant a
reasonable extension of time under the rules set forth in sections 301.9100-2 and
301.9100-3 to make a regulatory election.

    Section 301.9100-2 sets forth the rules applicable to automatic 12-month

extensions of time to make certain regulatory elections. Section 301.9100-3 sets forth
the rules applicable to requests for extensions of time for regulatory elections that do
not meet the requirements of section 301.9100-2. Requests for relief pursuant to
PLR-102932-18 4

section 301.9100-3 will be granted when the taxpayer provides evidence (including
affidavits described in section 301.9100-3(e)) that establishes that the taxpayer acted
reasonably and in good faith, and that the grant of 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 or 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 section 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).
PLR-102932-18 5

    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 section 1.446-1(e)(3)(i) of this
            chapter (requiring advance written consent of the Commissioner);
    (ii)    requires an adjustment under section 481(a) (or would require an
            adjustment under section 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 section 301.9100-1(b),

because the due date of the election is prescribed in the Income Tax Regulations under
section 1.263(a)-5(f). The Commissioner has the authority under sections 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 requested relief before the
failure to make the regulatory election was discovered by the Service. Taxpayer is not
seeking to alter a return position for which an accuracy-related penalty has been or
could be imposed under section 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 CPA to advise it as to any relevant elections, which CPA 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 elections 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
PLR-102932-18 6

section 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. Therefore, the requirements of sections
301.9100-1 and 301.9100-3 have been met.

     Taxpayer is granted an extension of 60 days from the date of this ruling to file its

mandatory statement as required by section 4.01 of Rev. Proc. 2011-29, 2011-18 I.R.B.
at 747, stating that it is electing the safe harbor for allocating success-based fees,
identifying the transaction, and stating the success-based fee amounts that are
deducted and capitalized.

    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. In particular, no opinion is expressed as to whether Taxpayer
properly included the correct costs as its success-based fees subject to the retroactive
election, or whether Taxpayer’s transactions were within the scope of Rev. Proc. 2011-
29, 2011-18 I.R.B. 746.

   This ruling is directed only to the taxpayer requesting it. Pursuant to section

6110(k)(3), this ruling may not be used or cited as precedent.

    A copy of this letter must be attached to any income tax return to which it is

relevant. Alternatively, a taxpayer filing its return electronically may satisfy this
requirement by attaching a statement to its return that provides the date and control
number of the letter ruling.

   The rulings contained in this letter are based on 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.

                                               Sincerely,


                                               Ronald J. Goldstein
                                               Assistant to the Branch Chief, Branch 1
                                               (Income Tax & Accounting)