A success-fee election statement received 60 days for correction

Plain-English summary

A corporate group acquired a target through a disregarded subsidiary and paid a contingent advisory fee. Its consolidated return deducted 70 percent and capitalized 30 percent under Revenue Procedure 2011-29, and it attached the required safe-harbor election statement. The statement mistakenly named the acquired target rather than the parent as the entity making the election. The group discovered the identical error after reviewing a separate acquisition and then examined this transaction's statement. The IRS found that the parent intended the safe-harbor treatment from the outset, relied on a qualified return preparer, was not using hindsight, and would not reduce aggregate tax liability. It granted 60 days to file a corrected statement identifying the proper electing entity, the transaction, and the amounts deducted and capitalized.

Ruling snapshot

• Question: Could the parent correct a timely filed success-fee safe-harbor statement that named the wrong entity?
• Outcome: Approved, a 60-day extension was granted
• Key authorities: IRC § 263(a); Treas. Reg. §§ 1.263(a)-5 and 301.9100-3; Rev. Proc. 2011-29

Full text (IRS public release)

Internal Revenue Service                                    Department of the Treasury
                                                            Washington, DC 20224

Number: 201624008                                           Third Party Communication: None
Release Date: 6/10/2016                                     Date of Communication: Not Applicable
Index Number: 9100.00-00
                                                            Person To Contact:
----------------------                                      -----------------, ID No. --------------
------------------------------------------------            Telephone Number:
----------------------------                                ----------------------
----------------------------                                Refer Reply To:
--------------------------                                  CC:ITA:B03
                                                            PLR-129787-15
                                                            Date:
                                                            March 08, 2016




                  TY: -------

LEGEND:

Parent = --------------------------------------------------------

Disregarded Entity = -------------------------------------------------------------

Taxpayer = -------------------------------------------------------------

Target = --------------------------------------------------

Merger Sub = -------------------------------------------------

Date 1 = ---------------------------

Date 2 = ------------------

Date 3 = --------------------

Date 4 = ---------------

Date 5 = --------------

Taxable Year = -------

$a = ----------------

Financial Advisor = --------------------------

Tax Return Preparer = ---------------------------
PLR-129787-15                               2


CPA Firm = -----------------


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

This responds to a letter ruling request dated Date 1, submitted on behalf of Parent.
Parent requests an extension of time under §§ 301.9100-1 and 301.9100- 3 of the
Procedure and Administration Regulations to make a late election concerning the
treatment of success-based fees in accordance with Rev. Proc. 2011-29, 2011-1 C.B.
746.
                                          FACTS

On Date 2, Disregarded Entity, a wholly-owned subsidiary of Taxpayer, which itself is a
wholly-owned subsidiary of Parent, acquired 100% of the outstanding stock of Target,
an unrelated corporation. The acquisition was structured a reverse subsidiary merger,
whereby Merger Sub, a wholly-owned subsidiary of Disregarded Entity, merged with
and into Target, with Target surviving. For U.S. federal income tax purposes, the
formation of Merger Sub and its merger into Target was disregarded and instead treated
as a direct taxable purchase of stock of Target by Corporation. Since Disregarded
Entity is treated as a disregarded entity, Corporation is treated as having directly
acquired the stock of Target for U.S. federal income tax purposes.

In connection with the acquisition, Parent engaged Financial Advisor to provide various
advisory services. As compensation for the services, Parent agreed to pay Financial
Advisor a fee of $a, which was contingent upon the consummation of the acquisition
and was a success-based fee for services performed in the process of investigating or
otherwise pursuing the acquisition.

Parent’s tax department prepared, and Tax Return Preparer reviewed and signed,
Parent’s consolidated U.S. federal income tax return for the tax year ended Date 3. On
the return, Parent’s tax department, in accordance with Rev. Proc. 2011-29, deducted
70% of the success-based fee and capitalized the remaining 30% of the success-based
fee. Parent’s tax department complied with the ministerial requirement of filing an
election statement pursuant to Rev. Proc. 2011-29 with the return. However, the
incorrect taxpayer, Target, was inadvertently listed on the election statement as the
party making the election.

On Date 4, CPA Firm provided preliminary findings from its review of the transaction
cost analysis pertaining to an acquisition separate from, and unrelated to, the above
described acquisition. During its review, CPA Firm observed that the wrong taxpayer
had been listed on the election statement with respect to the unrelated acquisition.
PLR-129787-15                                  3

On Date 5, Parent and CPA Firm determined that the unrelated acquisition’s election
statement was invalid and that Parent should seek relief under Rev. Proc. 2015-1 and
Treas. Reg. §§ 301.9100-1 and 301.9100-3. After receiving this advice, Parent
examined the election statement for the above described acquisition and discovered an
identical error had been made. Parent engaged Tax Return Preparer to prepare a
request for relief.
                                         LAW

Section 263(a) of the Internal Revenue Code provides generally that no deduction is
allowed for any amount paid out for new buildings or for permanent improvements or
betterments made to increase the value of any property or estate or any amount
expended in restoring property or in making good the exhaustion thereof for which an
allowance is or has been made.

Section 1.263(a)-1(d)(3) of the Income Tax Regulations provides that no deduction is
allowed for an amount paid to acquire or create an intangible, which under §§ 1.263(a)-
4(c)(1)(i) and 1.263(a)-4(d)(2)(i)(A) includes an ownership interest in a corporation or
other entity. See also § 1.263(a)-4(a).

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. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992);
Woodward v. Commissioner, 397 U.S. 572 (1970).

Under § 1.263(a)-5, a taxpayer must capitalize an amount paid to facilitate the business
acquisition or reorganization transactions described in § 1.263(a)-5(a). In general, an
amount is paid to facilitate a transaction described in § 1.263(a)-5(a) if the amount is
paid in the process of investigating or otherwise pursuing the transaction. Whether an
amount is paid in the process of investigating or otherwise pursuing the transaction is
determined based on all of the facts and circumstances. Section 1.263(a)-5(b)(1).

Section 1.263(a)-5(f) provides that an amount that is contingent on the successful
closing of a transaction described in § 1.263(a)-5(a) (i.e., a success-based fee) is an
amount paid to facilitate the transaction except to the extent the taxpayer maintains
sufficient documentation to establish that a portion of the fee is allocable to activities
that do not facilitate the transaction. This documentation must be completed on or
before the due date of the taxpayer's timely filed original federal income tax return
(including extensions) for the taxable year during which the transaction closes.

Section 4.01 of Rev. Proc. 2011-29 provides 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 § 1.263(a)-5(e)(3). In lieu of
maintaining the documentation required by § 1.263(a)-5(f), a taxpayer may elect to
allocate a success-based fee between activities that facilitate the transaction and
PLR-129787-15                                 4

activities that do not facilitate the transaction by treating 70 percent of the amount of the
success-based fee as an amount that does not facilitate the transaction and by
capitalizing the remaining 30 percent as an amount that does facilitate the transaction.
In addition, the taxpayer must attach 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.

Section 301.9100-1(c) provides that the Commissioner has discretion to grant a
reasonable extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3
to make certain regulatory elections. Section 301.9100-1(b) defines a “regulatory
election” as an election whose due date is prescribed by a regulation published in the
Federal Register, or a revenue ruling, revenue procedure, notice or announcement
published in the Internal Revenue Bulletin.

Sections 301.9100-1 through 301.9100-3 provide the standards the Commissioner will
use to determine whether to grant an extension of time to make an 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 § 301.9100-2.

Section 301.9100-3(a) provides that requests for extensions of time for regulatory
elections (other than automatic changes covered under section 301.9100-2) 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 that granting relief will not prejudice the interests of
the Government.

Section 301.9100-3(b)(1) provides 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) inadvertently 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.
PLR-129787-15                                  5


Section 301.9100-3(b)(3) provides that 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 could be
imposed under § 6662 at the time the taxpayer requests relief and the new position
requires 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.

Section 301.9100-3(c)(1) provides that the Commissioner will grant a reasonable
extension of time only when the interests of the Government will not be prejudiced by
the granting of relief. 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. 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 § 6501(a) before the taxpayer's receipt of a
ruling granting relief under this section.

                                         ANALYSIS

The election provided for in Rev. Proc. 2011-29 is a regulatory election, as defined
under § 301.9100-1(b). The Commissioner has the authority under §§ 301.9100-1 and
301.9100-3 to grant an extension of time to file a late regulatory election.

The information and representations made by Parent establish that Parent acted
reasonably and in good faith. Parent reasonably relied on Tax Return Preparer, a
qualified tax professional, to prepare its federal income tax return for Taxable Year.
Parent is not seeking to alter a return position for which an accuracy related penalty has
been or could be imposed under § 6662 at the time relief is requested. Parent did not
affirmatively choose not to make the election after having been informed in all material
respects of the required election and related tax consequences. Rather, Parent
intended to take advantage of the safe harbor provisions in Rev. Proc. 2011-29 and filed
its return for Taxable Year reflecting those provisions but failed to properly identify the
correct party making the election on the required statement. Parent is not using
hindsight in requesting relief.
PLR-129787-15                                 6

Further, based on the facts of the case provided, granting an extension will not
prejudice the interests of the Government. Parent 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 at this time than Parent would have had if the election had been timely made. In
addition, the taxable year in which the regulatory election should have been made and
any taxable years that would have been affected by the election had it been timely
made will not be closed by the period of limitations on assessment under § 6501(a)
before Parent's receipt of the ruling granting an extension of time to make a late
election.
                                           RULING
Based upon our analysis of the facts as represented, we conclude that Parent acted
reasonably and in good faith, and granting relief will not prejudice the interests of the
government. Accordingly, the requirements of §§ 301.9100-1 and 301.9100-3 have
been met.

Parent is granted an extension of 60 days from the date of this ruling to file the
statement required by section 4.01(3) of Rev. Proc. 2011-29, stating that it is electing
the safe harbor for success-based fees, properly identifying the entity making the
election, identifying the transaction, and stating the success-based fee amounts that are
deducted and capitalized.

The rulings contained in this letter are based upon information and representations
submitted by Parent and accompanied by a penalty of perjury statement executed by
appropriate parties. 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.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter, including whether the correct costs were properly included as success-based
fees subject to the election, or whether the transaction was within the scope of Rev.
Proc. 2011-29.

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

A copy of this ruling should be attached to Parent's federal income tax returns for the
tax years affected. Alternatively, taxpayers filing returns electronically may satisfy this
requirement by attaching a statement to their return that provides the date and control
number of this ruling.

In accordance with the power of attorney on file with this office, a copy of this letter is
being sent to your authorized representative. We are also sending a copy of this letter to
the appropriate operating division director. Enclosed is a copy of the letter ruling
PLR-129787-15                               7

showing the deletions proposed to be made in the letter when it is disclosed under
§ 6110.

                                        Sincerely,



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

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