The IRS has released a private letter ruling (PLR 2012-50-015) extending the time for a corporation to elect safe harbor treatment under Rev. Proc. 2011-29 for a success-based transaction fee.
In general, Treas. Reg. Sec. 1.263(a)-5 provides that a taxpayer must capitalize amounts paid to facilitate the acquisition of a business entity. A "success-based fee" under Treas. Reg. Sec. 1.263(a)-5(f) that is contingent on the successful closing of certain types of transactions is presumed to facilitate the underlying transaction and must be capitalized. This general rule of capitalization is subject to a documentation exception. Under this documentation exception, the taxpayer may deduct a portion of the success-based fee by maintaining sufficient documentation to show that such portion of the success-based fee can be allocated to activities that do not facilitate the transaction.
There has been substantial controversy regarding the application of the success-based fee documentation exception, and the IRS addressed the issue in Rev. Proc. 2011-29 in April 2011. Rev. Proc. 2011-29 provides taxpayers an elective "safe harbor" method of accounting that permits taxpayers, in lieu of meeting the documentation exception, to deduct 70% of a success-based fee as an amount that does not facilitate the transaction. The remaining 30% must be capitalized as an amount that facilitates the transaction.
The revenue procedure specifically requires the taxpayer to (1) treat 70% of the success-based fee as an amount that does not facilitate the transaction, (2) capitalize 30% of the success-based fee as an amount that does facilitate the transaction the transaction, and (3) attach a statement to the taxpayer's original federal income tax return for the taxable year the success-based fee is paid or incurred. The statement must indicate that the taxpayer is electing the safe harbor, identify the transaction and state both the amount that is deducted (i.e., treated as not facilitating the transaction) and the amount that is capitalized (i.e., treated as facilitating the transaction).
The taxpayer who requested PLR 2012-50-015 satisfied the first two requirements of Rev. Proc. 2011-29 by treating 70% of the success-based fee for the transaction at issue as nonfacilitative (deductible) and 30% as facilitative (capitalizable). The taxpayer, however, failed to satisfy the third requirement when it did not attach the required election statement. The IRS found that the taxpayer had acted reasonably and in good faith, and that granting relief to the taxpayer for a late election under Treas. Reg. Secs. 301.9100-1 through 301.9100-3 would not prejudice the government's interests. Consequently, the IRS granted the taxpayer a 45-day extension to file the required election statement required by Rev. Proc. 2011-29.
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