Extension Granted to Elect Success-Based Fee Safe Harbor

Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact: * * *, ID No. * * *
Telephone Number: * * *

Index Number: 9100.00-00, 263.14-00
Release Date: 7/6/2018

Date: April 3, 2018

Refer Reply To: CC:ITA:B01 - PLR-134054-17

LEGEND:

Taxpayer = * * *
A = * * *
B = * * *
C = * * *
D = * * *
E = * * *
F = * * *
G = * * *
Day 1 = * * *
Date 1 = * * *
Date 2 = * * *
Date 3 = * * *
Amount 1 = * * *

Dear * * *:

This letter responds to your letter dated June 6, 2017, 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 claiming a deduction for a portion of success-based fees and attaching statements to Taxpayer's original consolidated federal income tax return for the tax year ending on Date 1.

FACTS

Taxpayer is a corporation that files its federal income tax returns on a fiscal year basis with a tax year ending on Day 1, and it uses an accrual method as its overall method of accounting. Taxpayer is engaged in the design, simulation, layout, engineering, and fabrication of test interface circuit boards.

A, a corporation wholly owned by Taxpayer, files its federal income tax returns on a fiscal year basis with a tax year ending on Day 1, and uses an accrual method as its overall method of accounting.

B, an entity taxed as a partnership, was the 100 percent owner of Taxpayer before the Transaction. Taxpayer and B file a federal consolidated tax return with Taxpayer as the common parent. B is engaged in the engineering, design, and manufacturing of advanced technology printed circuit boards.

C, is an entity disregarded for federal income tax purposes. C is wholly owned by D, an entity taxed as a partnership for federal income tax purposes.

C acquired 100 percent of the stock of Taxpayer (the Transaction) on Date 1. Taxpayer represents that Taxpayer and C became related within the meaning of IRC § 267(b) or 707(b) on that date. Taxpayer also represents that the stock acquisition is a covered transaction under § 1.263(a)-5(e).

Taxpayer engaged E on Date 2 to provide financial advisory services related to the Transaction. Under the engagement letter, Taxpayer was to provide the greater of Amount 1 or a calculated percentage of the purchase price of a completed transaction. Taxpayer represents that this fee is a success-based fee and that it accrued on Date 1.

Taxpayer engaged F and relied upon it to prepare its federal income tax return for the tax year ending on Date 1. Taxpayer's return did not treat any of the fees related to the Transaction as success-based fees deductible under Rev. Proc. 2011-29. In addition, F failed to advise Taxpayer to make the election provided in Rev. Proc. 2011-29 concerning the treatment of success-based fees as not facilitating a business acquisition.

Taxpayer subsequently engaged G to prepare its federal income tax return for the tax year ending on Date 2, and to analyze the costs of the Transaction. G discovered that none of the success-based fee was deducted on Taxpayer's tax return for the tax year ending on Date 1, and it recommended that Taxpayer amend its return to make the election provided in Rev. Proc. 2011-29 and deduct a portion of the success-based fee.

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 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. 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.

Section 301.9100-3(b)(1) provides that a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer:

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:

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).

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:

ANALYSIS

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

The information provided and representations made by Taxpayer establish that Taxpayer acted reasonably and in good faith. Taxpayer reasonably relied on F, a qualified tax professional, to prepare its tax return. Taxpayer is not seeking to alter a return position for which an accuracy related penalty has been or could be imposed under § 6662 at the time relief is requested. Taxpayer did not affirmatively choose not to make the election after having been informed in all material respects of the required election and related tax consequences. Rather, Taxpayer relied on F to advise it as to any relevant elections, which F failed to do with respect to this election. Taxpayer is not using hindsight in requesting relief.

Further, based on the information provided and representations made by Taxpayer, granting an extension will not prejudice the interests of the government. Taxpayer will not have a lower tax liability in the aggregate for all taxable years to which the election applies at this time than Taxpayer would have had if the election had been timely made. In addition, the taxable year in which the regulatory election should have been made and any taxable years that would have been affected by the election had it been timely made will not be closed by the period of limitations on assessment under § 6501(a) before Taxpayer's receipt of the ruling granting an extension of time to make a late 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, 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 amended return and attach the mandatory statements as required by Section 4.01 of Rev. Proc. 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 is properly including 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.

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.

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,

Ronald J. Goldstein
Assistant to the Branch Chief, Branch 1
Office of Associate Chief Counsel
(Income Tax & Accounting)