Extension of Time for Making Certain Elections

Department of the Treasury
Internal Revenue Service
Number: 202022001
Release Date: 5/29/2020
Washington, DC 20224
Third Party Communication: None
Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:ITA:B03
PLR-110390-19
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Date:
October 18, 2019
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Dear ---:
This letter responds to your letter ruling request dated April 30, 2019, submitted by Taxpayer. Taxpayer requests an extension of time pursuant to sections 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 as provided by 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 subsidiary of Tier Parent. Tier Parent is a disregarded partnership wholly owned by Common Parent (collectively, Parent). Taxpayer is a limited liability company engaged in the business of providing content and software tailored for educational use in licensure-driven occupations. Taxpayer and Parent file Federal income tax returns on a calendar year basis, and use the overall accrual method of accounting.
On Date1 and Date2, Taxpayer engaged Financial Advisor1 and Financial Advisor2, respectively, to provide Taxpayer with financial advisory services. In that regard, both were engaged to assist Taxpayer in the sale of its business, and would do so, primarily, by identifying and contacting potential purchasers, preparing marketing materials, conducting feasibility analyses, and guiding Taxpayer’s negotiation strategy. Pursuant to its engagement agreements with Financial Advisor1 and Financial Advisor2, Taxpayer was required to pay each firm a compensatory fee contingent upon the successful closing of the transaction at issue (Merger Transaction). In each instance, the amount of this fee would be calculated as a percentage of the aggregate consideration arising from that transaction.
On Date3, Taxpayer and Parent executed an Agreement and Plan of Merger (Merger Agreement). Merger Agreement provided that Parent would effectuate Merger Transaction by purchasing, in substance, all of the equity interests in Taxpayer for cash consideration of approximately $a.
On Date4, Financial Advisor1 and Financial Advisor2 invoiced Taxpayer in relation to their work as financial advisors to the transaction at issue: Financial Advisor1 for $b, plus costs; and Financial Advisor2 for $c, plus costs (Collectively, the success-based fees). On Date5, in accordance with the terms of Merger Agreement, Taxpayer and Parent consummated Merger Transaction. That same day, Taxpayer paid Financial Advisor1 and Financial Advisor2 the success-based fees as invoiced.
On Date6, Taxpayer engaged Tax Consultant to ascertain the appropriate Federal income tax treatment for the costs incurred by Taxpayer in connection with Merger Transaction. Pursuant to that engagement, Tax Consultant was tasked with determining whether Taxpayer was eligible to apply for the safe-harbor election provided by Rev. Proc. 2011-29 (safe-harbor election), with respect to the successbased fees arising from Merger Transaction. To that end, Tax Consultant was to provide Taxpayer with a detailed report and all documentation germane to the making of the safe-harbor election.
On Date7, Tax Consultant provided Taxpayer with its report and recommendations.
Tax Consultant determined that Taxpayer was eligible for the safe-harbor election, and recommended that Taxpayer make the election. Tax Consultant informed Taxpayer that in order to do so, Taxpayer needed to attach a statement making that election to its Federal income tax return for Taxable Year (required election statement). Tax Consultant failed, however, to provide Taxpayer with such a statement.
On Date 8, Taxpayer engaged Tax Return Preparer to prepare its Federal income tax return for Taxable Year. Taxpayer directed Tax Return Preparer to prepare that return in a manner consistent with Tax Consultant’s report and recommendations.
Accordingly, Tax Return Preparer prepared Taxpayer’s return in a manner that complied with the substantive requirements of Rev. Proc. 2011-29 by claiming a deduction for 70 percent of the success-based fees paid to Financial Advisor1 and Financial Advisor2, and capitalizing the remaining 30 percent.
On Date9, Taxpayer’s Tax Manager approved the return and signed it as prepared by Tax Return Preparer, and Taxpayer timely filed its return for Taxable Year. The required election statement, however, was not attached to that return.
On Date10, Tax Consultant provided Taxpayer with the required election statement to attach Taxpayer’s tax return for a subsequent, incorrect tax year. It was at this time that Taxpayer discovered that the ministerial requirement to attach the required election statement to its return for Taxable Year had been inadvertently overlooked when Taxpayer timely filed its return for Taxable Year.
On April 30, 2019, Taxpayer filed the present letter ruling request, seeking an extension of time to file the required election statement for Taxable Year, pursuant to sections 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations.
The period of limitation on assessment under section 6501(a) of the Internal Revenue Code (Code) for Taxable Year has not expired.

# LAW

Section 263(a) of the Code provides generally that no deduction is allowed for any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate or any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made.
Section 1.263(a)-1(d)(3) of the Income Tax Regulations provides that no deduction is allowed for an amount paid to acquire or create an intangible, which under sections 1.263(a)-4(c)(1)(i) and 1.263(a)-4(d)(2)(i)(A) includes an ownership interest in a corporation or other entity. See also section 1.263(a)-4(a).
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, 575-576 (1970).
Under section 1.263(a)-5, a taxpayer must capitalize an amount paid to facilitate a business acquisition or reorganization transaction described in section 1.263(a)-5(a). In general, an amount is paid to facilitate a transaction described in section 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. Section 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 section 1.263(a)-5(a), or success-based fee, is presumed to facilitate the transaction. 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. 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.
To reduce controversy between the IRS and taxpayers over the documentation required to allocate success-based fees between the activities that facilitate the transaction and activities that do not facilitate the transaction, the IRS issued Rev. Proc. 2011-29.
Section 4.01 of the revenue procedure states that the IRS would not challenge a taxpayer's allocation of a success-based fee between activities that facilitate a transaction described in section 1.263(a)-5(e)(3) and activities that do not facilitate the transaction if the taxpayer --

(1) treats 70 percent of the amount of the success-based fee as an amount that does not facilitate the transaction;

(2) capitalizes the remaining 30 percent as an amount that does facilitate the transaction; and

(3) attaches 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.
It is this last requirement that Taxpayer requests permission to accomplish with this ruling request. Taxpayer requests permission with this ruling request to attach the statement required by section 4.01(3) of Rev. Proc. 2011-29 to its return, by amending its original filed return and superseding it with a return with the proper election statement completed and attached.
Section 3 of Rev. Proc. 2011-29 provides that the revenue procedure applies to covered transactions described in section 1.263(a)-5(e)(3), which include --

(i) A taxable acquisition by the taxpayer of assets that constitute a trade or business;

(ii) A taxable acquisition of an ownership interest in a business entity (whether the taxpayer is the acquirer in the acquisition or the target of the acquisition) if, immediately after the acquisition, the acquirer and the target are related within the meaning of section 267(b) or section 707(b); or

(iii) A reorganization described in section 368(a)(1)(A), (B), or (C) or a reorganization described in section 368(a)(1)(D) in which stock or securities of the corporation to which the assets are transferred are distributed in a transaction which qualifies under section 354 or 356 (whether the taxpayer is the acquirer or the target in the reorganization).
Sections 301.9100-1 through 301.9100-3 of the Procedure and Administration Regulations provide the standards the Commissioner uses to determine whether to grant an extension of time to make a regulatory 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 section 301.9100-2.
Section 301.9100-1(b) defines the term "regulatory election" as an election whose due date is prescribed by a regulation published in the Federal Register, or a revenue ruling, procedure, notice or announcement published in the Internal Revenue Bulletin.
Section 301.9100-1(c) provides that the Commissioner may grant a reasonable extension of time to make a regulatory election, or a statutory election (but no more than six months except in the case of a taxpayer who is abroad) under all subtitles of the Internal Revenue Code except subtitles E, G, H and I.
Section 301.9100-3(a) provides extensions of time to make a regulatory election under Code sections other than those for which section 301.9100-2 expressly permits automatic extensions. Requests for extensions of time for regulatory elections 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 granting relief will not prejudice the interests of the Government.
Section 301.9100-3(b)(1) states 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) 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, including a tax professional employed by the taxpayer, and the tax professional failed to make, or advise the taxpayer to make the election.
Under section 301.9100-3(b)(3), 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 has been or could be imposed under section 6662 at the time the taxpayer requests relief (taking into account section 1.6664-2(c)(3)) 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.
If specific facts have changed since the original deadline that make the election advantageous to a taxpayer, the Service will not ordinarily grant relief.
Section 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. Section 301.9100-3(c)(1)(i) provides, in part, 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 (taking into account the time value of money). Section 301.9100-3(c)(1)(ii) provides, in part, that 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 section 6501(a) before the taxpayer’s receipt of a ruling granting relief under this section.

# ANALYSIS

Taxpayer represents that for Federal income tax purposes Merger Transaction was a taxable acquisition of an ownership interest in within the meaning of section 267(b) of the Code, and section 1.263(a)-5(a)(2) of the Income Tax Regulations. That transaction, then, is considered a covered transaction pursuant to section 1.263(a)-5(c)(3), and Taxpayer qualifies to make the safe-harbor election provided by Rev. Proc.
2011-29.
As a result of Merger Transaction, Taxpayer incurred and subsequently paid an amount of success-based fees during Taxable Year. Taxpayer complied with the substantive requirements for making the safe-harbor election by deducting 70 percent and capitalizing 30 percent of those success-based fees on its return for Taxable Year.
Taxpayer, however, failed perfect its safe-harbor election by inadvertently omitting the required election statement from that return. It is with respect to that failure that Taxpayer requests an extension of time to amend its original filed return, to supersede that original return with one that includes the required election statement as an attachment.
Taxpayer's request pertains to a regulatory election as defined in section 301.9100-1(b) of the Procedure and Administration Regulations, as the due date for the making the safe-harbor election is prescribed by section 1.263(a)-5(f) of the Income Tax Regulations. Accordingly, the Commissioner has the authority under sections 301.9100-1 and 301.9100-3, to grant Taxpayer’s request for an extension of time to file the safe-harbor election for Taxable Year.
The information submitted, and representations made by Taxpayer establish that Taxpayer acted reasonably and in good faith under section 301.9100-3(b)(1) and (2).
Taxpayer requested relief before its failure to properly make the regulatory election was discovered by the Commissioner. Additionally, despite Taxpayer’s reasonable reliance on qualified tax professionals to properly advise it in the preparation of its Federal income tax return for Taxable Year, the required election statement was inadvertently omitted from Taxpayer’s return. Accordingly, Taxpayer will be considered to have acted reasonably and in good faith.
Moreover, Taxpayer should not be deemed to have acted unreasonably or in a manner lacking good faith. Taxpayer’s representations indicate that none of the circumstances listed in section 301.9100-3(b)(3) apply.
Based on Taxpayer’s representation of the facts, granting an extension of time to file the election will not prejudice the interests of the government under section 301.9100-3(c)(1). Taxpayer has represented that granting relief would not result in a lower tax liability in the aggregate for all taxable years affected by the election than would have resulted had Taxpayer timely made the election (taking into account the time value of money). Further, Taxpayer has represented that the period of limitations on assessment under section 6501(a) has not closed for Taxable Year, or for any taxable years that would have been affected had Taxpayer timely made the election.

# 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 sections 301.9100-1 and 301.9100-3(b)(1) of the regulations have been satisfied.
Taxpayer is granted an extension of time until 60 days following the date of this ruling to file an amended tax return for Taxable Year electing safe harbor treatment of its success-based fees under section 4.01(3) of Rev. Proc. 2011-29. The amended return must include an election statement stating that Taxpayer 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 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 Federal income tax consequences of any aspect of any transaction or item discussed or referenced in this ruling under any other provision of the Code. In particular, no opinion is expressed or implied as to whether Taxpayer properly included the correct costs as its success-based fees subject to the election, or whether Taxpayer’s transaction was 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 must be attached to Taxpayer’s Federal income 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 Power of Attorney 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 when it is disclosed under section 6110 of the Code.
Sincerely,
Jamie J. Kim
Senior Technician Reviewer, Branch 3
Office of the Associate Chief Counsel
(Income Tax & Accounting)
Enclosure: Copy of the letter for section 6110 purposes cc: