Success-fee safe-harbor election gets 60-day extension

Plain-English summary

A taxpayer properly deducted 70 percent of a success-based acquisition fee and capitalized 30 percent under the safe harbor in Rev. Proc. 2011-29, but its tax department omitted the required election statement from the return. The taxpayer discovered the omission while responding to an IRS audit request and immediately disclosed it. The IRS found reasonable reliance on a qualified in-house tax professional, good faith, and no prejudice to the government. It granted 60 days from the ruling date to file the missing election statement.

Ruling snapshot

• Question: May the taxpayer file a late Rev. Proc. 2011-29 election for success-based transaction fees?
• Outcome: Approved
• 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: 201615011                                              [Third Party Communication:
Release Date: 4/8/2016                                         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-136833-15
Date:
December 28, 2015

TY: -------

LEGEND:

Taxpayer = ----------------------------------------------
Stores = -------------------
Merger Sub = -------------------------------
Target = --------------------------------------------
Financial Adviser = ----------------------------------------
Date 1 = -----------------------
Date 2= -----------------------
Date 3 = -------------------------
A = -----
$B = ---------------------
$C = -----------------
$D = ---------------
$E = -----------------

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

This is in response to your letter dated November 5, 2015. 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
Date 1. The request is based on sections 301.9100-1 and 301.9100-3 of the Procedure
and Administrative Regulations.

FACTS

Taxpayer is in the business of operating Stores. Taxpayer formed Merger Sub for the
purposes of acquiring Target. On Date 2, Merger Sub merged with and into Target with

PLR-136833-15                                2

Target surviving. Pursuant to the transaction, Taxpayer acquired A% of the stock of
Target for approximately $B. Financial Adviser provided various advisory services to
Taxpayer during and related to the transaction for which Taxpayer agreed to pay
Financial Adviser a fee of $C. Of this amount, $D was related to the provision of an
opinion. The remaining $E was a success-based fee for services performed in the
process of investigating or otherwise pursing the transaction. Accordingly, upon
execution of the transaction on Date 2, Taxpayer paid Financial Adviser $E, which
reflected a credit for $D paid on Date 3 for the opinion.

Taxpayer’s tax department prepared and filed Taxpayer’s consolidated U.S. federal
income tax return for its tax year ending on Date 1. Taxpayer’s tax department, in
accordance with Rev. Proc. 2011-29, properly deducted 70% of the success-based fee
on the return and capitalized the remaining 30%. However, although Taxpayer’s tax
department was familiar with Rev. Proc. 2011-29 and its requirements for making a
valid election, it failed to file the election statement required by Rev. Proc. 2011-29 with
its timely filed Year 1 return.

Taxpayer is under audit by the Internal Revenue Service for, amongst other tax years,
the year ending on Date 1, which includes the date of transaction. As part of the audit
the IRS issued an information data request seeking information on costs related to the
transaction generally. As Taxpayer’s tax department gathered data to respond to the
request it discovered that it had not filed the election statement required by Rev. Proc.
2011-29 with the return. Taxpayer immediately informed the IRS audit team of the
omission and submitted the request for an extension of time to file the safe harbor
election mentioned above.

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

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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
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

PLR-136833-15                                 4

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.

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, including a tax professional
employed by the taxpayer, 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

PLR-136833-15                                  5

(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 reasonably relied on a qualified tax
professional in its tax department, and the tax professional failed to make, or advise
Taxpayer to make, the election. Thus, under section 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 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

PLR-136833-15                                  6

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.

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-)