IRS declines to extend time to make late success-based fee election

Tax Hot Topics: IRS declines late success-based fee electionIn a recent private letter ruling (PLR 201639009), the IRS Office of Chief Counsel ruled that it could not grant a taxpayer’s request for an extension of time to file a safe harbor election under Rev. Proc. 2011-29, related to the treatment of success-based fees incurred in the process of investigating or otherwise pursuing certain transactions.

Specifically, the PLR states that the IRS is adverse and would not grant relief because a letter ruling granting relief would necessarily need to be issued after the statute of limitations has closed for the taxable year in which the taxpayer is requesting the late election, and also because the taxpayer had already filed an amended return for the tax year at issue. Under the safe harbor election described in Rev. Proc. 2011-29, the election must be made on an original tax return.

Rev. Proc. 2011-29 allows taxpayers that have incurred success-based fees in investigating or otherwise pursuing a covered transaction, as described in Treas. Reg. Sec. 1.263(a)-5(e)(3), to allocate 30% of the success-based fee to activities that facilitate the transaction and 70% to activities that do not facilitate the transaction. A taxpayer electing the safe harbor must reflect the allocation on its tax return for the year the fee was paid or incurred, and attach an election statement to that return.

Taxpayers that fail to timely make this regulatory election may be able to obtain an extension of time under Treas. Reg. Sec. 301.9100-1 (9100 Relief). The granting of 9100 Relief is based on various factors, one of which is whether the grant would prejudice the government. One way the government may be prejudiced is if the taxable year in which the election should have been made is closed by the period of limitation on assessment under Section 6501.

Under the facts of the PLR, which are ambiguous, the taxpayer acquired a target company and incurred various acquisition-related costs. The taxpayer filed its original income tax return but did not capitalize or deduct any of the acquisition-related costs, believing that such costs were not allocable to the taxpayer but rather to the taxpayer’s parent company. After the return was filed, the taxpayer determined that the acquisition-related costs could be allocable to the taxpayer, and therefore should have been deducted or capitalized on the original return.

The taxpayer engaged an accounting firm to perform a transaction cost analysis to determine the treatment of those costs and subsequently filed an amended return reflecting additional deductions for non-facilitative costs, which resulted in an increase to the taxpayer’s net operating loss (NOL) carryforward. In the days before filing the amended return, the taxpayer also tried to extend the statute of limitations by filing a Form 872, “Consent to Extend Limitations Period.” The Form 872 was not executed by both the taxpayer and the IRS. The taxpayer then filed for 9100 Relief on the day before the statute of limitations closed.

As described previously, the IRS declined to grant an extension of time to file for the success-based fee safe harbor election under Rev. Proc. 2011-29 because the statute of limitations would have closed by the time relief would have been granted. The taxpayer argued that the government would not be prejudiced because the granting of relief would not result in a lower tax liability in the aggregate for the years affected by the election, namely because the taxpayer did not have a tax liability due to its utilization of NOL carryforward amounts. The IRS said that the prejudice to the government is not a rebuttable presumption that may be overcome by showing that the aggregate tax liability is not lower as a result of the election being made. Rather, the 9100 Relief elements showing prejudice are separate and distinct requirements, and the closing of the statute of limitations is deemed to prejudice the government.

Second, the IRS said it is adverse because under Rev. Proc. 2011-29, the safe harbor election must be made on an original return, and in this case, the taxpayer had filed an amended tax return for that year. The IRS also disagreed with the taxpayer’s assertion that an amended return is not recognized as a separate tax return from the original and does not displace the original return, citing various cases describing the filing of superseding tax returns as different from amended tax returns. Superseding tax returns are treated as original tax returns, whereas amended tax returns are not treated as original tax returns, the IRS said.

Contact David Auclair
National Managing Principal, Washington National Tax Office
+1 202 521 1515

Shamik Trivedi
Manager, Washington National Tax Office
+1 202 521 1511

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