Corporation receives 60 days to perfect success-fee safe-harbor election

Plain-English summary

A corporation paid success-based investment-banking fees in an acquisition. Its return deducted 70 percent of those fees and capitalized 30 percent, consistent with the safe harbor in Revenue Procedure 2011-29, but inadvertently omitted the required election statement. The IRS found that the corporation acted reasonably and in good faith because it intended to use the safe harbor, reflected that position on the return, and sought relief before the IRS discovered the omission. Granting relief would not reduce aggregate tax liability compared with a timely election or prejudice the government. The corporation received 60 days to file the required statement identifying the transaction and the deducted and capitalized amounts.

Ruling snapshot

• Question: Could the corporation file a late Revenue Procedure 2011-29 election for success-based acquisition fees?
• Outcome: approved
• Key authorities: IRC § 263(a); Treas. Reg. §§ 1.263(a)-5(f) and 301.9100-3; Rev. Proc. 2011-29 § 4.01

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201729019 Third Party Communication: None
Release Date: 7/21/2017 Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
-------------------------, ID No. -----------------
--------------------------------------- ----------------------------------------------------
------------------------------------------------------ Telephone Number:
------------------------------- --------------------
-------------------------------------- Refer Reply To:
CC:ITA:B03
PLR-139678-16
------------------------------------------------ Date:
-------------------------------- April 21, 2017

Legend:

Taxpayer = ---------------------------------------
Target = ---------------------------------
Bank1 = ------------------------------
Bank2 = -----------------------------------
AccountingFirm = --------------
Date1 = --------------------------
Date2 = -----------------------
Date3 = --------------------
Date4 = ----------------
Date5 = ------------------------
Year1 = ------
Year2 = ------
$a = ---------------
$b = ----------
$c = ----------------
$d = ----------
$e = ---------------
$f = ------------
$g = ----------------

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

This letter responds to a letter dated Date1, submitted on behalf of Taxpayer,
requesting a ruling that Taxpayer be granted an extension of time under §§ 301.9100-1
and 301.9100-3 of the Procedure and Administration Regulations to file a safe harbor
PLR-139678-16 2

election under Revenue Procedure 2011-29, 2011-18 I.R.B. 746.

                                                FACTS

Taxpayer is a corporation that designs, develops, manufactures, distributes, and sells a
variety of --------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------. On Date2, Taxpayer
submitted an indication of interest in acquiring Target. In Year1, Taxpayer entered into
engagement letters with two investment banking firms, Bank1 and Bank2, to serve as
financial advisors in a potential acquisition of Target. Both engagement letters called for
a $a fee contingent upon closing the transactions. The agreement with Bank2 also
included a non-refundable monthly $b retainer fee that would reduce its $a contingent
fee. Both firms ultimately reduced their fees to $c, and Bank2 reduced the monthly
retainer to $d. On Date3, Taxpayer submitted a revised indication of interest. On
Date4, Taxpayer and Target entered into an exclusivity agreement. The transaction
closed on Date5. As a result of this transaction, Taxpayer and Target became related
entities within the meaning of § 267(b) of the Internal Revenue Code.

The fees ultimately paid to Bank1 and Bank2 totaled $e, consisting of $f in retainer fees
incurred prior to Date4 and $g in success-based fees. On its Year1 Form 1120,
Taxpayer deducted the $f in retainer fees as expenses which did not facilitate the
transaction. Further, Taxpayer deducted ----% of the success-based fees as amounts
that did not facilitate the transaction, and capitalized the remaining ----% under the safe
harbor election of Rev. Proc. 2011-29. However, Taxpayer inadvertently did not include
the election statement required by Rev. Proc. 2011-29 with its Year1 income tax return.
This omission was not discovered until Taxpayer’s Year1 return was reviewed by a new
employee of Taxpayer in Year2. Upon discovery, Taxpayer engaged the services of
AccountingFirm to assist with its request to obtain relief under § 301.9100-3. Taxpayer
asserts that no return that would be affected by this ruling is under examination, before
appeals, or before a Federal Court.

                                                  LAW

Section 263(a) 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).
PLR-139678-16 3

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. § 1.263(a)-5(b)(1).

Section 1.263(a)-5(f) provides that an amount paid that is contingent on the successful
closing of a covered transaction described in § 1.263(a)-5(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 Revenue Procedure 2011-29 provides a safe harbor election for
allocating success based fees paid in business acquisitions or reorganizations
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 treat 70% of such success-based fees as
amounts which do not facilitate the transaction and therefore are not required to be
capitalized, provided that the taxpayer capitalizes the remaining amount of the success-
based fees as an amount which does facilitate the transaction. The taxpayer must also
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 (treated as not facilitating the transaction) and capitalized (treated as
facilitating the transaction).

It is this last requirement that Taxpayer requests permission to accomplish with this
ruling request. Taxpayer requests permission with this ruling request to attach the
statement required by section 4.01 of Rev. Proc. 2011-29 to its return, by amending its
original filed return and superseding it with a return with the proper election statement
completed and attached.
PLR-139678-16 4

Sections 301.9100-1 through 301.9100-3 provide the standards that 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 301.9100-1(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 the term
"regulatory election" as including an election whose deadline is prescribed by a
regulation published in the Federal Register or a Revenue Procedure published in the
Internal Revenue Bulletin.

Requests for relief under § 301.9100-3 will be granted when the taxpayer provides
evidence to establish that the taxpayer acted reasonably and in good faith, and that
granting relief will not prejudice the interests of the government. § 301.9100-3(a).

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 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 who failed to make the election
or to advise the taxpayer to make the election.

Section 301.9100-3(b)(3) provides that a taxpayer will not be deemed to have acted
reasonably or 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 § 6662 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 but chose not to file
the election; or
PLR-139678-16 5

(iii) uses hindsight in requesting relief, when specific facts have changed since the
due date for making the election that make the election advantageous to the
taxpayer.

Section 301.9100-3(c) 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 lower tax liability in the aggregate for all tax years affected by the
election than the taxpayer would have had if the election had been timely filed. 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.

                                    ANALYSIS

Taxpayer's election is a regulatory election, as defined under § 301.9100-1(b), because
the due date of the election is prescribed in Rev. Proc. 2011-29. 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 Taxpayer establish that Taxpayer acted
reasonably and in good faith. Taxpayer requested relief before its failure to make the
election was discovered by the Service. Taxpayer did not affirmatively choose not to
make the election after it was informed of the need to file the election. Rather,
Taxpayer intended to take advantage of the safe harbor provisions in Rev. Proc. 2011-
29 and filed its return for Year1 reflecting those provisions but failed to include the
required election statement. Taxpayer is not seeking to alter a return position for which
an accuracy-related penalty had been or could be imposed under § 6662 at the time
relief was requested. Taxpayer is not using hindsight in requesting relief, and no
specific facts have changed since the due date for filing the election that make the
election advantageous.

Further, based on the information and representations made by Taxpayer, granting an
extension will not prejudice the interests of the Government. Taxpayer will not have a
lower tax liability in the aggregate for Year1 and all taxable years affected by the
election had it been timely made if relief is granted to make the election at this time than
Taxpayer would have had if the election had been timely filed. In addition, Year1 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 Taxpayer receives the ruling granting an extension of time to make a late
election.
PLR-139678-16 6

                                     RULING

Based solely on the facts submitted and the representations made, we conclude that
Taxpayer acted reasonably and in good faith, and that granting the request will not
prejudice the interests of the government. Accordingly, the requirements of
§§ 301.9100-1 and 301.9100-3 have been satisfied.

Taxpayer is granted an extension of 60 days from the date of this ruling to file the
statement required by § 4.01(3) of Rev. Proc. 2011-29, stating that it is electing the safe
harbor for success-based fees, properly identifying the party 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 Taxpayer 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 specifically provided herein, no opinion is expressed or implied concerning
the federal tax consequences of the facts described above under any other provision of
the Code. In particular, no opinion is expressed or implied as to whether the 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) provides
that it may not be used or cited as precedent.

A copy of this ruling should be attached to Taxpayer'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.
PLR-139678-16 7

In accordance with the provisions of a power of attorney currently on file, we are
sending a copy of the ruling letter to your authorized representatives. We are also
sending a copy of this letter to the appropriate operating division director. Enclosed is a
copy of the letter ruling showing the deletions proposed to be made in the letter when it
is disclosed under § 6110.

                                             Sincerely,



                                             Jamie J. Kim
                                             Assistant to the Branch Chief, Branch 3
                                             (Income Tax & Accounting)

Enclosures (2):
Copy of this letter
Copy for § 6110 purposes

cc: