Corporation receives more time for success-fee safe harbor election

Plain-English summary

A corporation intended to elect the Revenue Procedure 2011-29 safe harbor for success-based fees incurred in a business acquisition. Its accounting firm prepared the return using the safe harbor's 70 percent deductible and 30 percent capitalized allocation but inadvertently omitted the required election statement. The IRS found that the corporation acted reasonably and in good faith through its reliance on a qualified tax professional. Because relief would not prejudice the government's interests, the IRS granted 60 days from the ruling date to file the statement. The ruling did not decide whether the identified costs qualified as success-based fees or whether the transaction fell within the revenue procedure.

Ruling snapshot

• Question: May the corporation file a late election for the Revenue Procedure 2011-29 success-fee safe harbor?
• Outcome: Approved, with 60 days from the ruling date to file the required statement
• Key authorities: IRC § 263(a); Treas. Reg. §§ 1.263(a)-5 and 301.9100-1 through 301.9100-3; Rev. Proc. 2011-29

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201603024 [Third Party Communication:
Release Date: 1/15/2016 Date of Communication: Month DD, YYYY]
Index Number: 9100.00-00
Person To Contact:
----------------- ----------------------, ID No. -------------
------------------------------ Telephone Number:
------------------------------------------ ---------------------
----------------------------------- Refer Reply To:
-------------------------------------------- CC:ITA:B03
PLR-125464-15
Date:
October 08, 2015

TY: -------

LEGEND:

Taxpayer = -------------------------------------------------------------------
Private Equity Firm = ---------------------------------------
Taxpayer’s Parent = ---------------------------------------------
Seller = -------------------------
Target’s Parent = ------------------------
Target = ---------------------------------------
Accounting Firm = ----------------------------------------
Products = -----------------------------
Business = -----------------------------
Month 1 = ------------------
Date 1 = -----------------------
Date 2 = ---------------------------
Date 3 = ---------------------------
Date 4 = -------------------------
Year 1 = -------
$A = ----------------
$B = -----------------
$C = ---------------
$D = ---------------
$E = ---------------

Dear ---------------:

This is in response to your letter dated ------------------. In your letter, you requested an
extension of time to file the forms necessary to make a safe harbor election under Rev.
Proc. 2011-29 to allocate success-based fees between facilitative and non-facilitative
amounts incurred for a covered transaction for the taxpayer’s tax year ending December
29, Year 1. The request is based on sections 301.9100-1 and 301.9100-3 of the
PLR-125464-15 2

Procedure and Administrative Regulations.

FACTS

Taxpayer is the parent of a consolidated group formed for purposes of acquiring Target,
a large supplier of Products.

In Month 1, Seller agreed to the sale of the majority of its Business to Private Equity
Firm and other investors. To facilitate the transaction, Taxpayer’s Parent, owned by
Private Equity Firm and other investors, formed an acquisition structure with Taxpayer
as the top-tier corporation. Seller owned Target’s Parent, which in turn owned Target.

On Date 1, Taxpayer and its subsidiaries and Seller executed an investment agreement
whereby a subsidiary of Taxpayer would acquire the preferred stock of Target’s Parent,
in exchange for cash consideration and common stock in Taxpayer. Pursuant to the
terms of the investment agreement, upon closing, Target’s Parent and Target would
merge with and into subsidiaries of Taxpayer, with Target’s Parent and Target surviving.
The transaction closed on Date 2, following which Seller owned the common stock of
Taxpayer and Taxpayer’s Parent owned the preferred stock. Total consideration for the
transaction was approximately $A.

In conjunction with the transaction, Taxpayer and one of its subsidiaries engaged
Private Equity Firm for financial advisory services and negotiation support relating to the
transaction. Pursuant to the terms of the engagement letter, Taxpayer paid the Private
Equity Firm fees associated with financial advisory and investment banking services.
Subsequent to the closing of the transaction, Taxpayer engaged Accounting Firm to
perform a transaction costs analysis with respect to the various costs associated with
Taxpayer’s acquisition of Target’s Parent and Target. At the conclusion of the analysis,
Accounting Firm provided one of Taxpayer’s subsidiaries with a written summary of the
results of the transaction costs analysis. As reflected in the summary document, costs
associated with the transaction totaled $B. The portion of the total costs associated
with success-based fees was identified as $C. This latter amount was specifically
identified as available for treatment under the safe-harbor election allowed by Rev.
Proc. 2011-29. Moreover, the transaction costs analysis contained as an exhibit a
statement to be filed in order to make the safe-harbor election pursuant to the revenue
procedure, specifically setting forth the amounts to be deducted and the amounts to be
capitalized.

In addition to engaging Accounting Firm to prepare the transaction costs analysis,
Taxpayer also engaged Accounting Firm for tax preparation services. Included in this
engagement was the preparation of Taxpayer’s Form 1120, U.S. Corporation Income
Tax Return, including for the year in which the transaction occurred.
PLR-125464-15 3

At the time the tax return was prepared, Accounting Firm was aware of the transaction
costs analysis and the determination to allocate the success-based fees under the
safe-harbor election provisions of Rev. Proc. 2011-29. Accounting Firm thus prepared
Taxpayer’s return consistent with the allocation permitted under the safe harbor, with $D
(70 percent) of the fees deductible either immediately or over time as non-facilitative
costs, and the remaining $E (30 percent) capitalized as facilitative costs. However, due
to an oversight, Accounting firm did not attach the statement required by Rev.
Proc. 2011-29 to make the election to Taxpayer’s Form 1120. Taxpayer’s chief financial
officer signed the finalized return, which Accounting Firm timely filed without the
statement attached on Date 3.

Subsequent to the filing of Taxpayer’s Form 1120 for the taxable year at issue,
Taxpayer’s independent auditors reviewed its financial statements. In the course of that
review, the auditors discovered that the election statement was not attached to the
return despite the success-based fees being allocated as permitted under the revenue
procedure. The auditors then discussed the missing election statement with Accounting
Firm on Date 4. At that point, Accounting Firm, after consulting with Taxpayer’s chief
financial officer, recommended that Taxpayer seek section 9100 relief.

LAW AND ANALYSIS

Section 263(a)(1) of the Internal Revenue Code and section 1.263(a)-2(a) of the Income
Tax Regulations provide that no deduction shall be allowed for any amount paid out for
property having a useful life substantially beyond the taxable year. In the case of an
acquisition or reorganization of a business entity, costs that are incurred in the process
of acquisition and that produce significant long-term benefits must be capitalized.
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 89-90 (1992); Woodward v.
Commissioner, 397 U.S. 572, 575-576 (1970).

Under section 1.263(a)-5, a taxpayer must capitalize an amount paid to facilitate a
business acquisition or reorganization transaction described in section 1.263(a)-5(a). An
amount is paid to facilitate a transaction described in section 1.263(a)-5(a) if the amount
is paid in the process of investigating or otherwise pursuing the transaction.

Section 1.263(a)-5(f) of the Regulations provides that an amount that is contingent on
the successful closing of a transaction described in section 1.263(a)-5(a), or success-
based fee, is presumed to facilitate the transaction. A taxpayer may rebut the
presumption by maintaining sufficient documentation to establish that a portion of the
fee is allocable to activities that do not facilitate the transaction.

To reduce controversy between the IRS and taxpayers over the documentation required
to allocate success-based fees alternatively to the regulatory presumption, the IRS
issued Rev. Proc. 2011-29, 2011-1 C.B. 746. The revenue procedure states that the
IRS would not challenge a taxpayer's allocation of a success-based fee between
PLR-125464-15 4

activities that facilitate a transaction described in section 1.263(a)-5(e)(3) and activities
that do not facilitate the transaction if the taxpayer --

(1) treats 70 percent of the amount of the success-based fee as an amount that does
not facilitate the transaction;

(2) capitalizes the remaining 30 percent as an amount that does facilitate the
transaction; and

(3) attaches a statement to its original federal income tax return for the taxable year the
success-based fee is paid or incurred, stating that the taxpayer is electing the safe
harbor, identifying the transaction, and stating the success-based fee amounts that are
deducted and capitalized.

The revenue procedure applies to covered transactions described in section 1.263(a)-
5(e)(3), which include --

(i) A taxable acquisition by the taxpayer of assets that constitute a trade or business;

(ii) A taxable acquisition of an ownership interest in a business entity (whether the
taxpayer is the acquirer in the acquisition or the target of the acquisition) if, immediately
after the acquisition, the acquirer and the target are related within the meaning of
section 267(b) or section 707(b); or

(iii) A reorganization described in section 368(a)(1)(A), (B), or (C) or a reorganization
described in section 368(a)(1)(D) in which stock or securities of the corporation to which
the assets are transferred are distributed in a transaction which qualifies under section
354 or 356 (whether the taxpayer is the acquirer or the target in the reorganization).

Sections 301.9100-1 through 301.9100-3 of the Procedure and Administration
Regulations provide the standards the Commissioner uses to determine whether to
grant an extension of time to make a regulatory election. Section 301.9100-2 provides
automatic extensions of time for making certain elections. Section 301.9100-3 provides
extensions of time for making elections that do not meet the requirements of section
301.9100-2.

Section 301.9100-1(b) defines the term "regulatory election" as an election whose due
date is prescribed by a regulation published in the Federal Register, or a revenue ruling,
procedure, notice or announcement published in the Internal Revenue Bulletin.

Section 301.9100-1(c) provides that the Commissioner may grant a reasonable
extension of time to make a regulatory election, or a statutory election (but no more than
six months except in the case of a taxpayer who is abroad) under all subtitles of the
Internal Revenue Code except subtitles E, G, H and I.
PLR-125464-15 5

Section 301.9100-3 provides extensions of time to make a regulatory election under
Code sections other than those for which section 301.9100-2 expressly permits
automatic extensions. Requests for extensions of time for regulatory elections will be
granted when the taxpayer provides evidence (including affidavits described in the
regulations) to establish to the satisfaction of the Commissioner that the taxpayer acted
reasonably and in good faith, and granting relief will not prejudice the interests of the
government.

Section 301.9100-3(b)(1) states that a taxpayer will be deemed to have acted
reasonably and in good faith if the taxpayer --

(i) requests relief before the failure to make the regulatory election is discovered by the
Service;

(ii) failed to make the election because of intervening events beyond the taxpayer's
control;

(iii) failed to make the election because, after exercising due diligence, the taxpayer was
unaware of the necessity for the election;

(iv) reasonably relied on the written advice of the Service; or

(v) reasonably relied on a qualified tax professional, and the tax professional failed to
make, or advise the taxpayer to make the election.

Under section 301.9100-3(b)(3), a taxpayer will not be considered to have acted
reasonably and in good faith if the taxpayer --

(i) seeks to alter a return position for which an accuracy related penalty has been or
could be imposed under section 6662 at the time the taxpayer requests relief (taking
into account section 1.6664-2(c)(3)) and the new position requires or permits a
regulatory election for which relief is requested;

(ii) was informed in all material respects of the required election and related tax
consequences, but chose not to file the election; or

(iii) uses hindsight in requesting relief. If specific facts have changed since the original
deadline that make the election advantageous to a taxpayer, the Service will not
ordinarily grant relief.

Taxpayer in this case has represented that it has requested relief before the failure to
make the regulatory election was discovered by the Service. Taxpayer has also
represented that it reasonably relied on a qualified tax professional, and the tax
PLR-125464-15 6

professional failed to make, or advise the taxpayer to make, the election. Thus, under
sections 301.9100-3(b)(1)(i) and 301.9100-3(b)(1)(v), Taxpayer will be deemed to have
acted reasonably and in good faith. Taxpayer has also represented that none of the
circumstances listed in section 301.9100-3(b)(3) apply.

Section 301.9100-3(c)(1)(i) provides, in part, that the interests of the government are
prejudiced if granting relief would result in the 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).
Section 301.9100-3(c)(1)(ii) provides, in part, that 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 these criteria, the interests of the government are not prejudiced in this case.
Taxpayer has represented that granting relief would not result in a lower tax liability in
the aggregate for all taxable years affected by the election than Taxpayer would have
had if the election had been timely made (taking into account the time value of money).
Furthermore, the taxable year in which the regulatory election should have been made
and any taxable years that would have been affected had it been timely made, are not
closed by the period of assessment.

CONCLUSION

Taxpayer's election is a regulatory election, as defined under section 301.9100-1(b),
because the due date of the election is prescribed in Rev. Proc. 2011-29. In the present
situation, the requirements of sections 301.9100-1, 301.9100-3(b)(1)(i), and 301.9100-
3(b)(1)(v) of the regulations have been satisfied. The information and representations
made by Taxpayer establish that Taxpayer acted reasonably and in good faith.
Furthermore, granting an extension will not prejudice the interests of the Government.
Taxpayer represented that it will not have a lower tax liability in the aggregate for all
taxable years affected by the election if given permission to make the election than
Taxpayer would have if the election were made by the original deadline for making the
election. Taxpayer also represented that the period of assessment for Year 1 will not be
closed before receipt of a ruling. Accordingly, Taxpayer is granted an extension of time
to file the statement required by section 4.01(3) of Rev. Proc. 2011-29 until 60 days
following the date of this letter.

Except as expressly provided herein, no opinion is expressed or implied concerning the
federal income tax consequences of any aspect of any transaction or item discussed or
referenced in this ruling including whether Taxpayer properly included the correct costs
as its success-based fees subject to the election, or whether Taxpayer’s transaction
was within the scope of Rev. Proc. 2011-29.
PLR-125464-15 7

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

                                           Sincerely,



                                           Christopher F. Kane
                                           Branch Chief, Branch 3
                                           (Income Tax & Accounting)

cc: --------------------------------------
-----------------------------------------------------------------
----------------------------------
-----------------------------