Recently, the IRS Office of Chief Counsel held, in a private letter ruling, 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. This election is related to the treatment of success-based fees incurred in the process of pursuing certain transactions. Under the safe harbor election described in Rev. Proc. 2011-29, the election must be made on an original tax return. The election applies to covered transactions under Treas. Reg. Sec. 1.263(a)-5(e)(3).
In this case, the IRS would not grant relief because the statute of limitations had closed for the taxable year in which the taxpayer was requesting the late election, and also because the taxpayer had already filed an amended return for the same year. The IRS proclaimed that a letter ruling granting relief would need to be issued to grant the taxpayer any relief.
Rev. Proc. 2011-29 permits taxpayers that have incurred success-based fees in investigating or otherwise pursuing a covered transaction to allocate 70% to activities that do not facilitate the transaction and 30% of the success-based fee to activities that do, in fact, facilitate the transaction. A taxpayer electing the safe harbor must attach an election statement reflect the allocation on its tax return for the year any fees were incurred.
In the fact pattern decided by PLR 201639009, the taxpayer acquired a target company and incurred acquisition-related costs. An original income tax return was filed but nowhere on the return did it capitalize or deduct any of these costs. This omission was based on the taxpayer’s belief that such costs were only allocable to the taxpayer’s parent company. Only after the taxpayer filed the return was it determined that the acquisition-related costs could have been deducted or capitalized on the original return.
The taxpayer subsequently filed an amended return reflecting additional deductions for non-facilitative costs, thus increasing the taxpayer’s net operating loss (NOL). The taxpayer also tried unsuccessfully to extend the statute of limitations by filing Form 872. Finally, the taxpayer filed to obtain an extension of time under Treas. Reg. Sec. 301.9100-1 on the day before the statute of limitations closed.
The granting of Relief under Treas. Reg. Sec. 301.9100-1 considers various factors, including one which determines whether the grant would prejudice the government. Because the government may be prejudiced if the taxable year in which the election should have been made is closed by the period of limitation on assessment under § 6501, no relief was given. The IRS successfully contended that the prejudice to the government is not a rebuttable presumption that may be overcome by showing that any tax liability is not lower as a result of the taxpayer’s election. Rather, it argued that relief elements showing prejudice to the government under this regulation are requirements that are separate and distinct.
The taxpayer asserted that an amended return is not recognized as a separate tax return from the original, and is only a superseding return. The IRS disagreed and counter-argued that while superseding tax returns are treated as original tax returns, amended tax returns are not.
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