Taxpayer receives 45 days to file a success-fee safe-harbor election

Plain-English summary

A partnership paid success-based financial advisory fees in connection with acquisitions of broadband businesses. Its return preparer analyzed the fees under Revenue Procedure 2011-29 and prepared the required election statement, and the filed return deducted 70 percent and capitalized 30 percent as the safe harbor provides. The statement itself was inadvertently omitted from the electronically filed return, and the omission was discovered after filing but before an IRS examination. The IRS found that the taxpayer acted reasonably and in good faith and that relief would not prejudice the government. It granted 45 days from the ruling date to file the statement identifying the transaction and the fee amounts deducted and capitalized.

Ruling snapshot

• Question: May the taxpayer receive additional time to file the Revenue Procedure 2011-29 safe-harbor election statement for success-based transaction fees?
• Outcome: approved (45-day extension granted)
• Key authorities: IRC §§ 263(a), 446; Treas. Reg. §§ 1.263(a)-2, 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: 202017025                                             Third Party Communication: None
 Release Date: 4/24/2020                                       Date of Communication: Not Applicable
 Index Number: 9100.00-00, 263.00-00                           Person To Contact:
                                                               -----------------, ID No. -----------------
 -----------------------------------------------               Telephone Number:
 ---------------------------                                   --------------------
 ------------------------------                                Refer Reply To:
 -------------------------------------                         CC:ITA:B01
                                                               PLR-117198-19
                                                               Date:
                                                               January 17, 2020




 Taxpayer          =   ----------------------------------------------------
 Date1             =   --------------------------
 Date2             =   --------------------
 Date3             =   ----------------------
 Date4             =   -----------------------
 Date5             =   -------------------
 Date6             =   ------------------
 State             =   -------------
 A                 =   --------------------------
 B                 =   ----------------------------
 %a                =   -----
 C                 =   -----------------------------------
 D                 =   ------------------------
 E                 =   --------------------------------------
 F                 =   -----------------------------------------------------
 Agreement         =   --------------------------------------------------------
 G                 =   -------------------------------------
 $a                =   ----------------
 $b                =   -----------------
 Firm              =   ----------------------------------------
 Individual A      =   --------------------------------------------------------------
 $c                =   -----------------
 $d                =   ---------------
 Individual B      =   --------------------

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

This letter responds to your letter, dated June 22, 2019, submitted on behalf of
Taxpayer, requesting an extension of time under §§ 301.9100-1 and 301.9100-3 of the
Procedure and Administration Regulations to make the election described in Section 4
of Rev. Proc. 2011-29, 2011-18 I.R.B. 746, which includes attaching statements to
Taxpayer’s original federal income tax return for taxable year ended Date1.

PLR-117198-19                                2


FACTS

Taxpayer is a State limited partnership that was formed on Date2. Taxpayer is the sole
owner of A, a State limited liability company disregarded for U.S. federal income tax
purposes. A is the sole owner of B, another State limited liability company disregarded
for U.S. federal income tax purposes. Taxpayer and its two subsidiaries were formed in
conjunction with a transaction through which B acquired %a percent of the membership
interests of C and D. C and D are the respective owners of E and F, which are leading
broadband providers in their respective regions, with technologically advanced networks
that offer a full suite of internet, video, and phone services.

On Date3, B entered into a Agreement with G and C, pursuant to which it acquired %a
percent of the membership interests of C. Also on Date3, B entered into a Agreement
to acquire %a percent of the membership interests of D. The combined consideration
for the transactions was $a, and they closed on Date4.

In conjunction with the transactions involving the acquisitions described above, B
engaged several organizations to provide financial advisory services. Each of these
organizations provided financial advisory services for which fees were payable only
upon the successful closing of the transaction. Hence, Taxpayer paid success-based
fees in the total amount of $b to the organizations.

Taxpayer engaged Firm as its tax return preparer and also to prepare a transaction
costs analysis with respect to costs Taxpayer incurred in conjunction with the
acquisition of C and the assets of D. Firm concluded that the transaction costs paid by
Taxpayer in the total amount of $b to the organizations that provided financial advisory
services constituted success-based fees for purposes of the safe-harbor election
provided by Rev. Proc. 2011-29.

Firm also provided a draft election statement with the transaction costs analysis noting
that the amount of $b of the fees paid by Taxpayer would be subject to allocation under
Rev. Proc. 2011-29. The draft election statement also showed the deductible portion
(70 percent of the fees) and the capitalizable portion (30 percent of the fees). Firm
discussed the transaction costs analysis with Individual A, on Date5, at which time
Individual A indicated that the transaction costs analysis should be finalized.

Subsequently, Firm prepared Taxpayer’s original federal income tax return for the
taxable year ended Date1 relying on the transaction costs analysis by deducting 70
percent of the fees and capitalizing 30 percent of the fees, consistent with making the
election under Rev. Proc. 2011-29. However, despite the intention of Taxpayer to make
the election and the explicit indication in the transaction costs analysis that an election
statement was required, the statement required by Rev. Proc. 2011-29 was
inadvertently not included with the return that was provided to Taxpayer for review prior
to filing. Individual B reviewed the return but, although aware of the intention to make

PLR-117198-19                                 3

the election, Individual B did not notice that the election statement was not included with
the Taxpayer’s original federal income tax return for the taxable year ended Date1.
Individual B signed the return, which was filed electronically, pursuant to extension, on
Date6.

Subsequently, after the Taxpayer’s original federal income tax return for the taxable
year ended Date1 was filed, Firm realized that the safe harbor election statement was
omitted inadvertently from the return as filed. Upon consultation by Firm, Taxpayer has
filed this request for an extension of time under §§ 301.9100-1 and 301.9100-3 of the
Procedure and Administration Regulations to make the election described in Section 4
of Rev. Proc. 2011-29. Taxpayer’s federal income tax return for the taxable year ended
Date1 is not under examination by the Service.

LAW

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, 112 S. Ct. 1039, 117 L. Ed. 2d
226 (1992); Woodward v. Commissioner, 397 U.S. 572, 575-576, 90 S. Ct. 1302, 25 L.
Ed. 2d 577 (1970).

Under § 1.263(a)-5, a taxpayer must capitalize an amount paid to facilitate the business
acquisition or reorganization transactions 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) (i.e., 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.

Section 4.01 of 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), a taxpayer may elect to
allocate a success-based fee between activities that facilitate the transaction and
activities that do not facilitate the transaction and by treating 70 percent of the amount
of the success-based fee as an amount that does not facilitate the transaction and by
capitalizing the remaining 30 percent as an amount that does facilitate the transaction.

PLR-117198-19                                 4

In addition, 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 and capitalized.

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.

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 301.9100-3(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. See also § 301.9100-3(b) and
(c).

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

PLR-117198-19                                5

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 solely on the facts and representations submitted, we conclude that Taxpayer
acted reasonably and in good faith, and granting relief will not prejudice the interests of
the government. Accordingly, the requirements of §§ 301.9100-1 and 301.9100-3 have
been met.

Taxpayer is granted an extension of 45 days from the date of this ruling to file its
mandatory statements as required by Section 4.01 of Revenue Procedure 2011-29,
stating that it is electing the safe harbor for success-based fees, identifying the
transaction, and stating the success-based fee amounts that are deducted and
capitalized.

The rulings contained in this letter are based upon 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, including whether Taxpayer properly included the correct costs as success-
based fees subject to the retroactive election, or whether Taxpayer’s transactions were
within the scope of Rev. Proc. 2011-29.

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

PLR-117198-19                                    6

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 return that provides the date and control
number of the 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.

                                    Sincerely,

                                    Sean M. Dwyer

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



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