Private Letter Ruling   
Number: 202029004   
Internal Revenue Service   
April 20, 2020   
     
     
     
Internal Revenue Service   
Department of the Treasury   
Washington, DC 20224   
     
Number: 202029004   
Release Date: 7/17/2020   
Index Number: 9100.00-00     
Third Party Communication: None   
Date of Communication: Not Applicable   
Person To Contact:   
ID No.   
Telephone Number:   
Refer Reply To:   
CC:ITA:B02   
PLR-125232-19   
Date:  April 20, 2020   
     
Dear *******:     
     
This responds to a letter ruling request dated Date 1, submitted on behalf of Taxpayer. Taxpayer requests an extension of time under §§ 301.9100-1 and 301.9100- 3 of the Procedure and Administration Regulations to make a late election concerning the treatment of success-based fees in accordance with Rev.Proc. 2011-29, 2011-1 C.B. 746, which requires that a statement be attached to Taxpayer's original federal income tax return for Taxable Year.   
     
  Facts     
     
Taxpayer is a State corporation and the common parent of an affiliated group of corporations filing consolidated federal income tax returns. Taxpayer provides Service. Related Company, a State corporation, was the common parent of an affiliated group of corporations fling consolidated federal income tax returns, prior to its acquisition by Taxpayer on Date 4.   
     
Taxpayer acquired Related Company on Date 4 in a non-taxable stock acquisition. Related Company was merged into Taxpayer, with Taxpayer surviving the merger, in a non-taxable statutory merger under Internal Revenue Code §368(a)(1)(A). Immediately after the transaction, the legacy Taxpayer shareholders held approximately 53% of the outstanding common shares of the Taxpayer and the legacy Related Company shareholders held approximately 47% of the outstanding common shares of the Taxpayer. As a result of the acquisition, Related Company was required to file a final short period return of the period beginning Date 2 and ending Date 4 and Taxpayer was required to include Related Company's activity from Date 4 to the end of the Taxable Year in its consolidated federal income tax return for Taxable Year.   
     
Related Company engaged Advisor 2 on Date 5 to be its financial advisor in connection with the acquisition. Related Company paid Advisor 2 $b in success-based fees.   
     
Taxpayer engaged Advisor 1 on Date 2 to assist in connection with the acquisition. Advisor 1 assisted with feasibility analysis, contacted potential buyers, evaluated proposals, prepared marketing materials, and provided other advisory services. In connection with those services, Taxpayer agreed to pay Advisor 1 a fee of $a payable upon the successful closing of the transaction, or a fee of 10% of the fair market value of any break-up fee should the deal not be consummated. Taxpayer also engaged Advisor 1 to provide a fairness opinion relating to the transaction at a fee of $c. The fee for the fairness opinion was non-refundable and due when the opinion was presented to Taxpayer. Under the terms of the contract, Taxpayer would receive a credit of $c, representing the amount paid for the fairness opinion, against the total fee of $a due to Advisor 1 if the transaction successfully closed. Taxpayer paid Advisor 1 $c for a fairness opinion, and upon the successful closing of the transaction Taxpayer paid Advisor 1 $d in success-based fees, representing the total fee owed ($a) reduced by the nonrefundable amount Taxpayer paid Advisor 1 for the fairness opinion ($c).   
     
Taxpayer engaged Tax Preparer to assist in determining the appropriate U.S. federal income tax treatment of transaction costs incurred by Taxpayer. Taxpayer intended to elect the safe harbor provisions for Rev.Proc. 2011-29. Tax Preparer prepared, and Taxpayer filed, the Taxpayer return consistent with the calculations provided by the Tax  Preparer. Taxpayer deducted 70% of $a as success-based fees and capitalized the remaining 30%. 1    
     
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 1       Taxpayer has represented that the proper amount of success-based fees was $d, and that it should have applied the percentages in Rev.Proc. 2011-29 to $d to determine how much of the fees could be deducted and how much of the fees needed to be capitalized.   
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In Month 1, as part of the IRS's examination of Related Company's return for taxable year ending Date 6, the examining agent inquired whether Related Company made a safe harbor election for success-based fees with respect to fees incurred in connection with a Year 1 transaction. This inquiry prompted Taxpayer to investigate whether the safe harbor election statement was attached to the Taxpayer's return. Upon investigation, Taxpayer discovered the safe harbor election statement was inadvertently omitted from Taxpayer's return and immediately brought the omission to the attention of Tax Preparer.   
     
  Law     
     
Section 263(a)(1) and Treas.Reg. § 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).   
     
Under Treas.Reg. § 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 Treas.Reg. § 1.263(a)-5(a) if the amount is paid in the process of investigating or otherwise pursuing the transaction.   
     
Under Treas.Reg. § 1.263-5(e)(2), an amount paid in the process of investigating or otherwise pursuing a covered transaction facilitates that transaction if the amount is inherently facilitative, and an amount paid for a fairness opinion is inherently facilitative under Treas.Reg. §1.263-5(e)(2)(i).   
     
Treasury Regulation §1.263(a)-5(f) provides that an amount that is contingent on the successful closing of a transaction described in Treas.Reg. § 1.263(a)-5(a) ("successbased 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. This documentation must be completed on or before the due date of the taxpayer's timely filed original federal income tax return (including extensions) for the taxable year during which the transaction closes.   
     
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 Treas.Reg. § 1.263(a)-5(e)(3). In lieu of maintaining the documentation required by Treas.Reg. § 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.   
     
A nonrefundable amount paid prior to the closing of a transaction is not a success-based fee. If a nonrefundable amount paid is later is credited against the fee owed upon the successful closing of the transaction, such credit does not convert the nonrefundable amount into a success-based fee. Accordingly, any such credits must first be subtracted from the fee owed at the closing of the transaction to determine how much of the transaction fee was success-based before applying the percentage amounts in section 4.01 of Rev.Proc. 2011-29.   
     
Treasury Regulation §301.9100-1(c) provides that the Commissioner has discretion to grant a reasonable extension of time under the rules set forth in Treas.Reg. §§ 301.9100-2 and 301.9100-3 to make certain regulatory elections. Treasury Regulation §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.   
     
Treasury Regulation §§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. Treasury Regulation §301.9100-2 provides automatic extensions of time for making certain elections. Treasury Regulation §301.9100-3 provides extensions of time for making elections that do not meet the requirements of Treas.Reg. § 301.9100-2.   
     
Treasury Regulation §301.9100-3(a) provides that requests for extensions of time for regulatory elections (other than automatic changes covered under Treas.Reg. §301.9100-2) will be granted when the taxpayer provides evidence (including affidavits described in the regulations) 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.   
     
Treasury Regulation §301.9100-3(b)(1) provides that a taxpayer will be 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. inadvertently failed to make the election because of intervening events beyond the taxpayer's control;   
     
iii. failed to make the election because, after exercising due diligence, the taxpayer was unaware of the necessity for the election;   
     
iv. reasonably relied on the written advice of the Service; or   
     
v. reasonably relied on a qualified tax professional, and the tax professional failed to make, or advise the taxpayer to make the election.   
     
Treasury Regulation §301.9100-3(b)(3) provides that a taxpayer will not be considered to have acted reasonably and in good faith if the taxpayer:   
     
i. seeks to alter a return position for which an accuracy-related penalty could be imposed under § 6662 at the time the taxpayer requests relief and the new position requires 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. If specific facts have changed since the original deadline that make the election advantageous to a taxpayer, the Service will not ordinarily grant relief.   
     
Treasury Regulation §301.9100-3(c)(1) provides that the Commissioner will grant a reasonable extension of time only when the interests of the Government will not be 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. 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.   
     
  Analysis     
     
Taxpayer's election is a regulatory election, as defined under Treas.Reg. § 301.9100-1(b), because the due date of the election is prescribed in Rev.Proc. 2011-29. As such, the Commissioner has the authority under Treas.Reg. §§ 301.9100-1 and 301.9100-3 to grant an extension of time to file a late regulatory election.   
     
Taxpayer has represented that it acted reasonably and in good faith. Taxpayer represents that it reasonably relied on Tax Return Preparer, a qualified tax professional, to prepare its federal income tax return for Taxable Year. Taxpayer also represents that it 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 also represents that it 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 represents that it intended to take advantage of the safe harbor provisions in Rev.Proc. 2011-29, filed its return for Taxable Year reflecting those provisions, but failed to include the required election statement. Taxpayer is not using hindsight in requesting relief.   
     
Further, based on the facts as represented by the 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 affected by the election if given permission to make the election 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.   
     
  Ruling     
     
Based upon our analysis of the facts as represented, 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 Treas.Reg. §§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 the statement required by section 4.01(3) 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. Per Taxpayer's representation, the amount of the success-based fee is $d, and the percentages in Rev.Proc. 2011-29 will be applied to that amount.   
     
The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. This office has not verified any of the materials submitted in support of the request for a ruling and the information materials are 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.   
     
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.   
     
In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative.   
     
A copy of this letter must be attached to any income tax return to which it is relevant. 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.   
     
Sincerely,   
     
Bridget E. Tombul   
Chief, Branch 2   
(Income Tax & Accounting)   
     
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