Late success-based fee election statement allowed

Plain-English summary

A corporation used Revenue Procedure 2011-29's safe harbor to deduct 70 percent and capitalize 30 percent of success-based fees from a covered transaction. Its tax professional intended to attach the required election statement to the original consolidated return but inadvertently omitted it. The corporation discovered the mistake before the IRS did and sought permission to add the statement without changing the accounting treatment already reported. 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 file an amended return with the completed election statement.

Ruling snapshot

• Question: Could the taxpayer obtain extra time to file the statement required for the success-based fee safe harbor election?
• Outcome: Approved, with an amended return due within 60 days.
• Key authorities: 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: 201948004 Third Party Communication: None
Release Date: 11/29/2019 Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
---------------------- -------------------------------, ID No. -----------
--------------------------------------- ----------------
--------------------------------------------- Telephone Number:

------------------------------------------------------------ Refer Reply To:
----------------------------------------------------- CC:ITA:B01
PLR-103739-19
Date:
August 29, 2019

In re: Request for an Extension to File Election
Statement
LEGEND

Taxpayer = ------------------------------------------------

Business = -----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
--------------------------------------------------------

Transaction = ------------------------------------------

A = ----------------------------------

Year 1 = --------------------------------------------

Date a = ------------------------
Date b = ------------------------
Date c = ---------------------
Date d = -----------------------
State A = ------------

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

   This is in response to a letter sent on behalf of Taxpayer dated Date a,

requesting permission to attach an election statement to Taxpayer’s originally filed
consolidated Federal income tax return for Year 1. The election statement was not

PLR-103739-19 2

included with Taxpayer’s originally filed tax return for Year 1 although it was required in
order for Taxpayer to use the safe harbor under section 4.01 of Rev. Proc. 2011-29,
2011-1 C.B. 746. The request is made under §§ 301.9100-1 and 301.9100-3 of the
Procedure and Administration Regulations.

                                      FACTS

   Taxpayer represents the following facts:

   Taxpayer is a State A registered corporation that was organized on Date b and is

engaged in the Business. Taxpayer is the common parent of a U.S. consolidated return
group.

  Taxpayer incurred transaction costs, including success-based fees paid upon the

consummation of Transaction on Date c. Taxpayer represents that Transaction was a
covered transaction for purposes of § 1.263(a)-5(e)(3)(ii) of the Income Tax
Regulations.

    Taxpayer capitalized 30 percent of the success-based fees, and deducted the

remaining 70 percent, on its timely filed Year 1 Federal income tax return consistent
with the safe harbor election provided in Rev. Proc. 2011-29. However, Taxpayer failed
to attach the statement required by section 4.01(3) of Rev. Proc. 2011-29 to elect to use
the safe harbor method of allocating success-based fees. This oversight was
uncovered on Date d by A, a tax professional employed by Taxpayer who was
responsible for filing all tax elections for Taxpayer. A intended to complete and attach
the statement required by Rev. Proc. 2011-29 to Taxpayer’s return for Year 1, but
inadvertently failed to do so.

    To date, Taxpayer has not received any notification from the Internal Revenue

Service (IRS) that its Federal income tax return for Year 1 is under examination, nor has
it received notification that the failure to include the election statement was discovered
by the IRS. Accordingly, Taxpayer requests permission to file an amended
consolidated return for Year 1 which will include the mandatory election statement
required to use the safe harbor method of accounting for success-based fees under
section 4.01(3) of Rev. Proc. 2011-29.

                              LAW AND ANALYSIS

    Section 263(a)(1) of the Internal Revenue Code and § 1.263(a)-2(a) 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-103739-19 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). 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 70 percent of the success-based fee
as an amount that does not facilitate the transaction (i.e., amounts that can be
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 the 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, stating that the
taxpayer is electing the safe harbor, identifying the transaction, and stating the success-
based fee amounts that are deducted (treated as not facilitating the transaction) and
capitalized (treated as facilitating the transaction).

   Taxpayer requests permission with this ruling request to attach the statement

required by Section 4.01(3) of Rev. Proc. 2011-29 to its Year 1 return, by amending its
original filed return and superseding it with a return with the proper election statement
completed and attached.

   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 of Internal Revenue, in

exercising his discretion, may grant a reasonable extension of time under the rules set

PLR-103739-19 4

forth in § 301.9100-3 to make a regulatory election under all subtitles of the Internal
Revenue Code except subtitles E, G, H, and I. The term “regulatory election” is defined
in § 301.9100-1(b) as an election whose due date is prescribed by a regulation
published in the Federal Register, or a revenue ruling, revenue procedure, or
announcement published in the Internal Revenue Bulletin.

    Section 301.9100-3(a) provides that requests for relief subject to this section will

be granted when the taxpayer provides the evidence to establish to the satisfaction of
the Commissioner that the taxpayer acted reasonably and in good faith, and the grant of
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
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 under § 301.9100-1(b),

because the due date of the election is prescribed by Rev. Proc. 2011-29. In the
present situation, the requirements of §§ 301.9100-1 and 301.9100-3 of the regulations
have been satisfied.

  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

PLR-103739-19 5

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 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 attach

the statement required by section 4.01(3) of Rev. Proc. 2011-29 to its return by
amending its original filed return for Year 1, and superseding it with a return attaching a
completed election statement with respect to the Transaction.

  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.

   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.

    A copy of this letter is being sent 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.

PLR-103739-19 6

  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 Technical Reviewer, Branch 1
                                  Associate Office of Chief Counsel
                                  (Income Tax & Accounting)

Enclosure(1):
Copy for § 6110 purposes