Corporation receives 60 days to attach success-fee election

Plain-English summary

A corporation paid success-based fees in a stock reorganization and reported 70 percent as deductible and 30 percent as capitalized under the Revenue Procedure 2011-29 safe harbor. The corporation and its outside tax professional had discussed and documented the election, but both missed the required election statement when reviewing the electronically filed return. They discovered the omission while discussing a later acquisition. The IRS found that the corporation acted reasonably and in good faith and that relief would not prejudice the government. It granted 60 days to amend the return by attaching the required statement identifying the transaction and the deducted and capitalized amounts.

Ruling snapshot

• Question: Could a corporation receive extra time to attach the Revenue Procedure 2011-29 election statement after correctly applying the 70/30 success-fee allocation on its return?
• Outcome: Approved; the corporation received 60 days to amend the return and attach the statement.
• Key authorities: IRC § 263(a); Treas. Reg. §§ 1.263(a)-5 and 301.9100-3; Rev. Proc. 2011-29

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201927006                                             Third Party Communication:
Release Date: 7/5/2019                                        Date of Communication:
Index Number: 9100.00-00, 263.00-00
                                                              Person To Contact:
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------------------------                                      ID No. ------------------
---------------------------------                             Telephone Number:
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---------------------------                                   Refer Reply To:
                                                              CC:ITA:B01
-----------------------------                                 PLR-126710-18
--------------------------------------                        Date:
                                                              April 09, 2019
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Legend

Taxpayer              =     ---------------------------------------
Taxable Year          =     ---------------------------------------------------------------
A                     =     -------------------------
B                     =     ---------------------------------------------------------------
C                     =     -----
D                     =     ----------------
Director              =     --------------------------------------
Date 1                =     -------------------
Date 2                =     -----------------------
Date 3                =     ------------------
$a                    =      ----------------

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

This letter responds to your correspondence dated August 16, 2018, requesting an
extension of time to make the safe harbor election for success-based fees described in
Rev. Proc. 2011-29, 2011-18 I.R.B. 746. Taxpayer failed to attach the required election
statement to its previously filed return in order to make the safe harbor election to allocate
success-based fees between facilitative and non-facilitative amounts. Therefore,
Taxpayer requests an extension of time under §§ 301.9100-1 and 301.9100-3 of the
Procedure and Administration Regulations to attach the required election statement to its
return.

                                                     FACTS

Taxpayer is a domestic corporation incorporated under the laws of State A on Date 1, and
a member of an affiliated group that files a consolidated federal income tax return.
PLR-126710-18                                 2

Taxpayer has a fiscal tax year and uses an accrual method as its overall method of
accounting. On Date 2, Taxpayer acquired B in a reorganization under § 368(a)(1)(B) of
the Internal Revenue Code (the Transaction). Taxpayer engaged C to perform services
in the process of investigating or otherwise pursuing the Transaction as part of its
acquisition of B. Taxpayer incurred $a in success-based fees for the services performed
by C. Taxpayer paid the $a in success-based fees to C upon the successful closing of
the Transaction.

Taxpayer engaged D, a third-party tax professional, to perform an analysis of the
success-based fees incurred and paid in connection with Taxpayer’s acquisition of B and
to prepare any documentation to establish that portion of the success-based fees
allocable to activities that did not facilitate the Transaction. Taxpayer and D discussed
and documented the necessity of making an election to allocate the success-based fees
pursuant to Rev. Proc. 2011-29. Taxpayer self-prepared its original return for its Taxable
Year (Return) reflecting a deduction of seventy percent of its success-based fees as
allocable to activities that do not facilitate the Transaction and reflecting capitalization of
thirty percent as allocable to activities that facilitate the Transaction. However, Taxpayer
and Director, who oversees tax compliance for Taxpayer, inadvertently failed to attach the
statement required by section 4.01(3), or notice the absence of the statement, when
Taxpayer filed its Return electronically with the Internal Revenue Service (Service).
Taxpayer also engaged D to review and sign the Return as preparer; nonetheless, D
failed to include, or notice the absence of, the statement before Taxpayer timely filed its
Return electronically on Date 3.

In the second tax year immediately following the Taxable Year, Taxpayer made another
acquisition involving success-based fees. Taxpayer engaged D to perform a review of
the transaction costs incurred in the acquisition. Director and D discussed making the
election for success-based fees incurred in the acquisition pursuant to Rev. Proc. 2011-
29, as Taxpayer did for Taxable Year. In the course of this discussion, Director inquired
with D about the election statement for Taxable Year, and D discovered that the election
statement had not been included with the Return. D then advised Director of the
procedures under §§ 301.9100-1 and 301.9100-3 to obtain an extension of time to attach
the required statement to the Return. Shortly after, Taxpayer filed this private letter ruling
requesting an extension of time to add the required statement under section 4.01(3) of
Rev. Proc. 2011-29 to its Return.

                                     LAW & ANALYSIS

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 (1992); Woodward v.
Commissioner, 397 U.S. 572, 575-576 (1970).
PLR-126710-18                                  3


Under § 1.263(a)-5, a taxpayer must capitalize an amount paid to facilitate a business
acquisition or reorganization transaction 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) (“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.

A taxpayer’s method for determining the portion of a success-based fee that facilitates a
transaction and the portion that does not facilitate a transaction is a method of accounting
under § 446. See section 2.04 of Rev. Proc. 2011-29.

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), this safe harbor permits electing taxpayers to
treat seventy percent of the success-based fee as an amount that does not facilitate the
transaction, and may be deducted, and the remaining portion of the fee must be
capitalized as an amount that facilitates the transaction.

Section 4.01 of Rev. Proc. 2011-29 provides that the Service will not challenge a
taxpayer’s allocation of success-based fees between activities that facilitate a transaction
described in § 1.263(a)-5(e)(3) and activities that do not facilitate the transaction if the
taxpayer satisfies three requirements. First, the taxpayer must treat seventy percent of
the amount of the success-based fee as an amount that does not facilitate the
transaction. Second, the taxpayer must capitalize the remaining amount of the success-
based fee as an amount which does facilitate the transaction. Third, 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. This statement must : (a) state that the taxpayer is
electing the safe harbor; (b) identify the transaction; and (c) state the success-based fee
amounts deducted and capitalized. It is the third requirement that Taxpayer requests
permission to accomplish with this ruling request. Taxpayer requests permission to
amend its Return by attaching to it the completed statement required by § 4.01(3) of Rev.
Proc. 2011-29.

Sections 301.9100-1 through 301.9100-3 of the Procedure and Administration
Regulations provide the standards the Commissioner will use to determine whether to
grant an extension of time to make an election. Section 301.9100-1(b) defines a
"regulatory election" as an election whose due date is prescribed by a regulation
PLR-126710-18                                4

published in the Federal Register, or a revenue ruling, revenue procedure, notice or
announcement published in the Internal Revenue Bulletin.

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).
PLR-126710-18                                5

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.

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

                                         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, Taxpayer has met the requirements of
§§ 301.9100-1 and 301.9100-3.

Taxpayer is granted an extension of sixty days from the date of this ruling to amend its
Return to attach the statement required under section 4.01(3) of Rev. Proc. 2011-29. The
statement must set forth that Taxpayer is electing the safe harbor treatment for success-
based fees, identify the transaction, and set forth the amount of the success-based fees
that are deducted and capitalized for Taxable Year.

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
PLR-126710-18                                      6

an appropriate party. Although this office has not verified any of the material submitted in
support of the request for the ruling, it is subject to verification on examination.

Except as expressly set forth 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 Transaction was within the
scope of Rev. Proc. 2011-29.

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 returns that provides the date and control
number of the letter ruling.

Enclosed is a copy of the letter ruling showing the deletions proposed to be made in the
letter when it is disclosed under § 6110 of the Code.

This ruling is directed only to Taxpayer that is requesting it. Section 6110(k)(3) of the
Code provides that it may not be used or cited as precedent.

In accordance with the provisions of the power of attorney currently on file with this office,
we are sending a copy of this letter ruling to your two authorized representatives,
-------------------------------------------------------. We are also sending a copy of this letter to the
appropriate operating division director.

                                           Sincerely,



                                           Norma C. Rotunno
                                           Chief, Branch 1
                                           Office of Associate Chief Counsel
                                           Income Tax & Accounting Division
Enclosure:
Copy for § 6110 purposes

cc: