In PLR 201639009, the Service denied a holding company an extension of time to elect the success-based fees safe harbor under Section 4.01(3) of Revenue Procedure 2011-29.

Facts

Taxpayer is a holding company and uses the accrual method of accounting. Taxpayer acquired another entity, which became Taxpayer's wholly owned subsidiary.

Because of the acquisition, Taxpayer incurred deal-related expenses (e.g., due diligence costs, legal and accounting costs) some of which were paid by Taxpayer's parent company (Parent). Taxpayer filed its tax return and failed to capitalize or deduct any of the deal-related expenses because its tax director advised that the expenses were Parent's responsibility. Taxpayer's return preparer did not advise Taxpayer to the contrary. As a result, Taxpayer's tax return showed a net operating loss.

Taxpayer later discovered that, under Reg. Section 1.263(a)-5, it should have deducted or capitalized the deal-related expenses. Taxpayer filed an amended tax return, claiming additional deductions for non-facilitative costs connected to the acquisition, which increased Taxpayer's net operating loss carryforward.

The day before the statute of limitations expired, Taxpayer filed a request for an extension of time under Reg. Sections 301.9100-1 and 301.9100-3 to elect the success-based fees safe harbor in Section 4.01(3) of Revenue Procedure 2011-29.

Analysis

Taxpayer argued that the closing of the statute of limitations does not mean the government's interests are prejudiced if the extension is granted. Taxpayer asserted that the expiration of the statute of limitations leads to a rebuttable presumption that may be overcome by a determination that granting relief will not result in Taxpayer having a lower tax liability than Taxpayer would have had if the election had been timely filed. Because Taxpayer had net operating loss carryforward amounts and no tax liability, Taxpayer argued that granting relief would only increase the net operating loss carryforward amounts.

The Service rejected Taxpayer's argument, concluding that the requirements of Reg. Sections 301.9100-3(c)(1)(i)¹ and 301.9100-3(c)(1)(ii)² are separate and satisfying the requirements of Reg. Section 301.9100-3(c)(1)(i) does not mean the requirements of Reg. Section 301.9100-3(c)(i)(ii) will be satisfied. Therefore, the Service ruled that granting the extension under Reg. Section 301.9100-3(c)(1)(ii) would prejudice the government's interests because the Service would have to issue a letter ruling granting the extension after the expiration of the statute of limitations for the tax year for which Taxpayer is requesting the late election.

Additionally, the Service concluded that the success-based fees safe harbor election must be made on an original tax return. Because Taxpayer had in the interim filed an amended return, Taxpayer cannot make the election on the original return.

Taxpayer contended that the amended return is not separate from the original return and cited PLR 201102031 as proof that the Service has granted relief in the past when a taxpayer filed an amended return and then requested an extension of time to make an election under Section 163. Citing Haggar Co. v. Helvering, 308 U.S. 389 (1940), the Service noted that an amended tax return is separate from an original tax return because it "is deemed not to incorporate anything into the original tax return."

The Service also stated that Taxpayer's reliance on PLR 201102031 is misplaced because the Section 163 election must be made on or before the due date (including extensions) of the income tax return, which is different from the success-based fees election. The election under Section 4.01(3) of Revenue Procedure 2011-29 must be made on the original tax return for the tax year in question.

Accordingly, the Service denied Taxpayer's request for an extension to elect the success-based fees safe harbor under Section 4.01(3) of Revenue Procedure 2011-29.

Implications

Often, a "look-back" opportunity will exist with regards to professional service fees that were fully capitalized. Taxpayers often will be permitted to amend their previously filed return for the year in which the transaction occurred or obtain a change in method of accounting for those professional services fees that are not success-based in nature. Because of the timing requirements in Reg. Section 1.263(a)-5(f) and Revenue Procedure 2011-29 to treat a portion of a success-based fee as non-facilitative, taxpayers must generally obtain 9100 relief for such fees. Taxpayers that failed to elect the success-based fees safe harbor on their originally filed return should consider the discussion in PLR 201639009 in determining appropriate next steps.

The PLR's analysis fails to take into account that an amended return filed after the extended due date and not claiming a refund is simply an amendment or supplement to a return already upon the IRS's files, not a return in its own right. See Zellerbach Paper Co. v. Helvering, 293 U.S. 172 (1934). Long-standing case-law and IRS administrative guidance expressly provide that an amended return is a nullity for most tax purposes. See Badaracco v. Commissioner, 464 U.S. 386 (1984); WM. B. Scaife & Sons Co. v. Commissioner, 117 F.2d 572 (3d Cir. 1941); Revenue Ruling 77-217, 1977-1 CB 64. Moreover, the IRS has granted numerous 9100 requests relating to Revenue Procedure 2011-29 by requiring the taxpayer to file an amended return within 45 days from the date of the 9100 ruling that includes the mandatory statements as required by Section 4.01 of Revenue Procedure 2011-29. See e.g., PLR 201528034. Thus, the IRS itself has historically granted 9100 relief itself through perfection on an amended return rather than a statement attached to an original return; it is unclear why the IRS lacks authority to provide 9100 relief to an election required to be made on an "original return." Nevertheless, although the PLR's analysis concerning the "original return" requirement is difficult to reconcile with the foregoing authorities, it is likely that the IRS Office of Chief Counsel will take a similar position in other cases going forward. Because granting 9100 relief is discretionary, taxpayers have limited opportunities³ to challenge the Service's denial of an extension of time to file an election under Revenue Procedure 2011-29 based on the failure to satisfy the "original return" requirement.

Finally, it is interesting to note that PLR 201639009 does not address the language in Reg. Section 301.9100-3(c)(1)(ii) that allows the IRS to grant 9100 relief even for a closed tax year when the taxpayer provides the IRS with a statement from an independent auditor certifying that the interests of the Government are not prejudiced under the standards set forth in Reg. Section 301.9100-3(c)(1)(i). While it is unclear why this language is not discussed here, taxpayers should consider this auditor certification exception when considering seeking 9100 relief for other potentially closed elections.

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ENDNOTES

¹ Reg. Section 301.9100-3(c)(1)(i) provides: "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 (taking into account the time value of money). Similarly, if the tax consequences of more than one taxpayer are affected by the election, the Government's interests are prejudiced if extending the time for making the election may result in the affected taxpayers, in the aggregate, having a lower tax liability than if the election had been timely made."

² Reg. Section 301.9100-3(c)(1)(ii) provides: "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. The IRS may condition a grant of relief on the taxpayer providing the IRS with a statement from an independent auditor (other than an auditor providing an affidavit pursuant to paragraph (e)(3) of this section) certifying that the interests of the Government are not prejudiced under the standards set forth in paragraph (c)(1)(i) of this section."

³ See e.g., Vines v. Commissioner, 126 T.C. 279 (2006) (granting the taxpayer an extention of time to file a late election)