Omitted success-based fee election statement accepted late

Plain-English summary

A corporate taxpayer incurred success-based fees in an acquisition and reported them using Revenue Procedure 2011-29's 70-percent deduction and 30-percent capitalization safe harbor. Its accounting firm prepared the required election statement and told the taxpayer it would be attached, but an administrative error omitted the statement from the electronically filed return. The IRS discovered the omission during an audit, even though the return itself consistently reflected the intended election. The IRS found that the taxpayer acted reasonably and in good faith and that relief would not prejudice the government. It granted 60 days to file an amended return with the completed election statement.

Ruling snapshot

• Question: Could the taxpayer file the success-based fee safe-harbor election statement late after its accounting firm omitted it from the electronic return?
• Outcome: Approved, with an amended return and statement due within 60 days.
• Key authorities: IRC § 263(a); Treas. Reg. §§ 1.263(a)-5 and 301.9100-1 through 301.9100-3; Rev. Proc. 2011-29.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201947009 Third Party Communication: None
Release Date: 11/22/2019 Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
--------------------------------------------------- --------------------------------, ID No. ----------
---------------------- ------------------

                                                           Telephone Number:

----------------------------------- ----------------------
------------------------------------------ Refer Reply To:
CC:ITA:B01
PLR-103648-19
Date:
August 28, 2019

In re: Request for an Extension to File Election Statement

                                                  LEGEND

Taxpayer = ----------------------------------------------------------------------------
X = ---------------------------------------------
A = --------------------------------------
B = -----------------------------------------------------
Date a = ----------------------
Date b = -------------------
Date c = --------------------
Date d = --------------------------
Date e = ------------------------
Date f = ------------------------
$a = -----------------
%a = --------
Products = ------------------------
City = ----------------------------
Year 1 = -------

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

This is in response to a letter dated January 10, 2019, requesting an extension of time
to file the required election statement to make the safe harbor election under Rev. Proc.
2011-29, 2011-1 C.B. 746, to allocate success-based fees between facilitative and non-
facilitative amounts for Taxpayer's transaction during the taxable period Date a, through
Date b. This request is made in accordance with §§ 301.9100-1 and 301.9100-3 of the
Procedure and Administration Regulations.
PLR-103648-19 2

                                      FACTS

Taxpayer is the common parent of an affiliated group of corporations that files a
consolidated Federal income tax return. Taxpayer uses an overall accrual method of
accounting. Taxpayer is engaged in the wholesale distribution of Products.

On Date b, %a of the stock of Taxpayer was acquired by X (“Transaction”). As of that
date, Taxpayer had incurred $a in success-based fees for services performed in the
process of investigating and otherwise pursuing the Transaction.

After X purchased Taxpayer, it engaged an accounting firm, A, to prepare and file
Taxpayer’s Form 1120, U.S. Corporation Income Tax Return, for Taxpayer’s short
taxable year beginning Date a, and ending Date b (“Return”). The extended due date
for Taxpayer's Return was Date c.

Taxpayer had previously engaged A for accounting and tax assistance since Date d. A
is a regional accounting firm located in City, with a significant CPA tax practice providing
services which include corporate tax compliance and tax return preparation.

As part of the preparation of the Return, Taxpayer asked A to properly advise it
regarding the treatment of various fees it had incurred with regard to certain
transactions in the taxable year. A performed an analysis of the success-based fees
Taxpayer had incurred with respect to the Transaction and determined that Taxpayer
could deduct seventy percent of those fees and capitalize the remaining thirty percent
by making the election provided by Rev. Proc. 2011-29. On Date e, A provided to X an
email containing the statement required by section 4.01(3) of Rev. Proc. 2011-29
(“Election Statement”), which A represented would be attached to Taxpayer’s Return.
On Date f, after reviewing the Return, B signed the Return as well as the Form 8879-C,
IRS e-file Signature Authorization for Form 1120, authorizing A to e-file the Return along
with the attached Election Statement.

However, A inadvertently failed to attach the Election Statement to the Return which it
had filed electronically, as required by section 4.01(3) of Rev. Proc. 2011-29. Taxpayer
and B, who oversaw the approval and signing of Taxpayer’s Federal income tax return,
were unaware that the Election Statement had not been attached to Taxpayer's
electronically filed Return.

In Year 1 the Internal Revenue Service (“IRS”) began an audit of the Return. An agent
of the IRS informed Taxpayer that he or she was unable to locate the Election
Statement attached to the Return as filed.

B inquired with A and was informed that the Election Statement was omitted from the
filing of the Return. A stated that the Election Statement was inadvertently and
PLR-103648-19 3

erroneously excluded from the Return due to an administrative error of not attaching the
Election Statement to the electronic copy of the Return that was filed with the IRS.

Taxpayer’s Return was prepared consistent with having made an election under section
4.01 of Rev. Proc. 2011-29. In other words, Taxpayer capitalized thirty percent of the
success-based fees and, on its Return, deducted the remaining seventy percent as an
amount that did not facilitate the purchase of Taxpayer.

Taxpayer filed this request for relief for an extension of time to file its Election Statement
under section 4.01(3) of Rev. Proc. 2011-29 for Taxpayer’s taxable year ending Date b.
This request is made in accordance with §§ 301.9100-1 and 301.9100-3. Taxpayer filed
this request after the IRS discovered that the Election Statement had not been attached
to Taxpayer’s Return.

                               LAW AND ANALYSIS

Section 263(a)(1) of the Internal Revenue Code and § 1.263(a)-2(a) of the Income Tax
Regulations generally 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).

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). 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 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 and thus must be capitalized. A taxpayer may rebut the
presumption by maintaining sufficient documentation to establish that a portion of the
fee is allocable to activities that do not facilitate the transaction and thus may be
deductible.

Rev. Proc. 2011-29 provides a safe harbor method of accounting for allocating success-
based fees paid in business acquisitions or reorganizations 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 (i.e., an amount that can be
PLR-103648-19 4

deducted). The remaining portion of the fee must be capitalized as an amount that
facilitates the transaction.

Section 4.01 of Rev. Proc. 2011-29 allows a taxpayer to make the 70/30 safe harbor
election with respect to success-based fees. Section 4.01(3) of Rev. Proc. 2011-29
provides that 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
should: state that the taxpayer is electing the safe harbor; identify the transaction; and
state the success-based fee amounts that are deducted and capitalized. Taxpayer
requests permission to attach the statement required by section 4.01(3) of Rev. Proc.
2011-29, to its return by amending its original filed return for the tax year ending Date b,
and superseding it with a return attaching a completed Election Statement.

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 301.9100-1(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.

Section 301.9100-3(a) provides that requests for extensions of time for regulatory
elections 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, in general, 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 IRS; (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, the taxpayer was unaware of the
necessity for the election; (iv) reasonably relied on the written advice of the IRS; 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 is deemed to have not 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
PLR-103648-19 5

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 the interests of the Government are prejudiced if
granting relief would result in the 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.

Taxpayer’s election is a regulatory election as defined in § 301.9100-1(b) because the
due date of the election is prescribed in section 4.01(3) of Rev. Proc. 2011-29. 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.

Section 2.04 of Rev. Proc. 2011-29 provides that 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. Elections
relating to methods of accounting are subject to special rules. Section 301.9100-
3(c)(2). However, Taxpayer is not seeking to change its method of accounting for the
success-based fees, only to file the statement required by section 4.01(3) of Rev. Proc.
2011-29.

                                  CONCLUSION

Based upon our analysis of the facts and representations provided, Taxpayer acted
reasonably and in good faith, and granting relief will not prejudice the interests of the
Government. Therefore, the requirements of §§ 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 attach the
statement required by section 4.01(3) of Rev. Proc. 2011-29 to its return by amending
its original filed return for the tax year ending Date b, and superseding it with a return
attaching a completed Election Statement with respect to the Transaction for its taxable
year ending Date b.

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
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.
PLR-103648-19 6

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 Transaction is within the scope of Rev. Proc. 2011-29.
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. 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.

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.

                                  Sincerely,



                                  Sean M. Dwyer
                                  Senior Technician Reviewer, Branch 1
                                  Office of Associate Chief Counsel
                                  (Income Tax & Accounting)

Enclosure (1):
Copy for § 6110 purposes

cc: