United States: IRS Grants Extension For Safe Harbor Method Of Allocating Success-Based Fee

In a private letter ruling (PLR 201338018), the IRS granted the taxpayer an extension to file a statement required by Rev. Proc. 2011-29 to elect to use the safe harbor method of allocating success-based fees paid or incurred in a covered transaction.

In Rev. Proc. 2011-29, the IRS provided 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. Sec. 1.263(a)-5(e)(3).

In lieu of maintaining the documentation required by Treas. Reg. Sec. 1.263(a)-5(f), a taxpayer may elect to allocate a success-based fee between activities that facilitate and do not facilitate the transaction by treating 70% of the amount of the success-based fee as an amount that doesn’t facilitate the transaction and by capitalizing the remaining 30% as an amount that does facilitate the transaction.

Additionally, the taxpayer must attach a statement to his or her income tax return for the taxable year in which the success-based fee was paid or incurred. That statement must indicate that the taxpayer is electing the safe harbor, identify the transaction and state the success-based fee amounts that are deducted and capitalized.

The taxpayer in the letter ruling incurred a success-based fee connected to a covered transaction. On the income tax return, which was prepared by a tax adviser, the taxpayer capitalized 30% of the success-based fee and deducted the remaining 70%, consistent with the intent to make the safe harbor election provided in Rev. Proc. 2011-29. Relying on the tax adviser, the taxpayer failed to attach the statement required by Rev. Proc. 2011-29. The taxpayer requested an extension to attach the mandatory statement to the return. 

Based on the facts and representations submitted, the IRS concluded the taxpayer acted reasonably and in good faith, and that granting relief would not prejudice the government’s interest.  Accordingly, the IRS stated that the requirements of Treas. Reg. Sections 301.9100-1 and 301.9100-3 were met and granted the taxpayer an extension to file the required statement. 

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