Taxpayer receives 60 days to correct a success-fee election

Plain-English summary

A taxpayer incurred success-based fees when its ownership interests were sold and intended to use the Revenue Procedure 2011-29 safe harbor. Severe weather prevented its return-extension form from being filed, although the taxpayer and its tax professional believed the extension was effective. The taxpayer later filed by the date it believed was the extended deadline, but the return was late and the attached safe-harbor statement reported incorrect fees. The error came to light when the IRS assessed a late-filing penalty. The IRS found reasonable conduct, good faith, and no prejudice to the government, and granted 60 days to file an amended return making the safe-harbor election.

Ruling snapshot

• Question: May the taxpayer file an amended return making the Revenue Procedure 2011-29 election after a failed extension and an incorrect original statement?
• Outcome: approved (60-day extension granted)
• Key authorities: IRC §§ 263(a), 446, 481(a); 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: 202017022                                             Third Party Communication: None
 Release Date: 4/24/2020                                       Date of Communication: Not Applicable
 Index Number: 9100.00-00, 263.14-00                           Person To Contact:
                                                               ------------------------------, ID No. --------------
 ------------------------------                                -----------------
 ---------------------------                                   Telephone Number:
 -------------------------------                               --------------------
 ------------------------------                                Refer Reply To:
                                                               CC:ITA:2
                                                               PLR-122303-19
                                                               Date:
                                                               January 08, 2020




 Taxpayer                      =   -------------------------------------------------
 Buyer                         =   ----------------------------------
 Tax Professional              =   ---------------
 Year 1                        =   -------
 Date 1                        =   ---------------------
 Date 2                        =   ------------------

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

This is in response to a letter dated September 13, 2019, requesting that Taxpayer be
granted an extension of time under §§ 301.9100-1 and 301.9100-3 of the Procedure
and Administration Regulations to make an election to use the safe harbor method of
accounting under § 4.01 of Rev. Proc. 2011-29, 2011-18 I.R.B. 746, to allocate
success-based fees in connection with the acquisition of ownership interests in
Taxpayer by Buyer.

FACTS AND REPRESENTATIONS

On Date 1, ownership interests in Taxpayer were sold to Buyer. In the course of this
acquisition, Taxpayer incurred fees Taxpayer represents qualify as success-based fees.
Taxpayer retained Tax Professional to prepare Taxpayer’s federal income tax return for
Year 1, on which Taxpayer would make the safe harbor election under Rev. Proc. 2011-
29 for these success-based fees.

In connection with the preparation of Taxpayer’s income tax return, Tax Professional
prepared an Internal Revenue Service (Service) form requesting an extension of the
due date of Taxpayer’s income tax return for Year 1, and provided it to Taxpayer for
signature and filing with the Service.

PLR-122303-19                                2

Due to severe weather, this form was not filed with the IRS. At the time, however, Tax
Professional and Taxpayer believed the form had been filed with the Service, and that
Taxpayer had successfully extended the due date of its income tax return for Year 1.

Taxpayer filed its income tax return for Year 1 with the Service by the date it believed
was the extended due date for the return. On this return, Taxpayer made the safe
harbor election required by Rev. Proc. 2011-29 for the success-based fees, but the
return was not filed timely and the election statement required by § 4.01(3) of Rev.
Proc. 2011-29 attached to the return inadvertently reported incorrect fees.

The failure to timely file Taxpayer’s income tax return and the reporting of incorrect fees
on the election statement attached to the return was discovered by Taxpayer when the
Service sent Taxpayer a notice dated Date 2 informing Taxpayer that it had been
assessed a penalty for the failure to timely file its Year 1 income tax return.

LAW AND ANALYSIS

Section 263(a)(1) of the Internal Revenue Code generally provides 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. See INDOPCO, Inc. v. Commissioner, 503 U.S.
79, 89-90 (1992); Woodward v. Commissioner, 397 U.S. 572, 575-76 (1970).

Under § 1.263(a)-5 of the Income Tax Regulations, 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.

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 § 446. See § 2.04 of Rev. Proc. 2011-29.

Because the treatment of success-based fees was a continuing subject of controversy
between taxpayers and the Service, the Service published Rev. Proc. 2011-29. Rev.

PLR-122303-19                                 3

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 fees as an
amount that does not facilitate the transaction, i.e., an amount that can be deducted
currently. The remaining portion of the fees must be capitalized.

Section 4.01 of Rev. Proc. 2011-29 allows a taxpayer to make a safe harbor election
with respect to success-based fees. Section 4.01 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 does three things. First, the taxpayer must treat 70 percent
of the success-based fees as amounts that do not facilitate the transaction. Second,
the taxpayer must capitalize the remaining success-based fees as amounts that do
facilitate the transaction. Third, the taxpayer must attach a statement to its original
federal income tax return for the taxable year the success-based fees are paid or
incurred. This statement should: (i) state that the taxpayer is electing the safe harbor;
(ii) identify the transaction; and (iii) state the amount of the success-based fees that are
deducted and capitalized.

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 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, the taxpayer was unaware of
the necessity for the election; (iv) reasonably relied on the written advice of the Service;

PLR-122303-19                                 4

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 § 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.

Section 301.9100-3(c)(2) provides special rules for accounting method regulatory
elections. Section 301.9100-3(c)(2) provides that the interests of the Government are
deemed prejudiced, except in unusual or compelling circumstances, if the accounting
method regulatory election for which relief is requested is subject to the advance
consent procedures for method changes, requires a § 481(a) adjustment, would permit
a change from an impermissible method of accounting that is an issue under
consideration by examination or any other setting, or provides a more favorable method
of accounting if the election is made by a certain date or taxable year.

Taxpayer’s election is a regulatory election as defined in § 301.9100-1(b) because the
due date of the election is prescribed in § 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 regulatory election.

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 file an
amended income tax return making the safe harbor election under Rev. Proc. 2011-29.

CAVEATS

PLR-122303-19                                 5


The ruling contained in this letter is 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.

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 the transaction described
herein is within the scope of Rev. Proc. 2011-29 or whether the fees Taxpayer incurred
are success-based fees 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, if Taxpayer files its return electronically, Taxpayer may satisfy this
requirement by attaching a statement to its return that provides the date and control
number of this letter ruling.

In accordance with the provisions of the power of attorney currently on file with this
office, a copy of this letter is being sent to your authorized representatives. 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 ruling
when it is disclosed under § 6110.

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

                                      Sincerely,

                                      David B. Silber

                                      David B. Silber
                                      Acting Senior Technician Reviewer, Branch 2
                                      (Income Tax & Accounting)


Enclosure: Copy for § 6110 purposes


cc: