Taxpayer received 60 days to make the success-based fee safe-harbor election

Plain-English summary

A corporation paid success-based adviser fees in a taxable stock acquisition. Its return deducted 70% of the fees and capitalized 30%, following the safe harbor in Revenue Procedure 2011-29, but its tax preparer failed to attach the required election statement. The omission was later raised during an IRS examination, which proposed disallowing the safe-harbor treatment. The taxpayer represented that it had reasonably relied on a qualified tax professional, had not used hindsight, and would not obtain a lower aggregate tax liability from late relief. The IRS concluded that the good-faith and government-prejudice standards were satisfied and granted 60 days to file the election statement. The ruling did not decide whether the reported costs or transaction otherwise qualified for the safe harbor.

Ruling snapshot

• Question: Could the taxpayer make a late Revenue Procedure 2011-29 election for success-based transaction fees after omitting the election statement from its return?
• Outcome: approved
• Key authorities: IRC § 263(a); Treas. Reg. §§ 1.263(a)-5, 301.9100-3; Rev. Proc. 2011-29

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201736009                                              [Third Party Communication:
Release Date: 9/8/2017                                         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-112449-17
                                                               Date:
                                                               June 05, 2017




TY: -------

LEGEND:

Taxpayer = -------------------------------------------------------
Company = ---------------------------------------
Merger Sub = --------------------------------
Target = ------------------------
Adviser A = -----------------------------
Adviser B = -----------------------------------------
Adviser C = ----------------------------------------------------------
Tax Preparer = ---------------------------
Date 1 = ---------------------------
Date 2 = ---------------------------
Date 3 = --------------------------
Date 4 = ------------------------
Date 5 = ------------------------
Date 6 = -------------------
Date 7 = -------------------
Date 8 = ------------------
Date 9 = -------------------
Date 10 = ------------------------
Year 1 = -------
$D = ----------------
$E = -----------------
$F = --------------

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

This is in response to a letter sent on your behalf by your representatives dated -----------
-------. In the letter, your representatives requested on your behalf an extension of time
PLR-112449-17                               2

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 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 a Company. On Date 2, Taxpayer, Target, and Merger Sub, a wholly-
owned subsidiary of Taxpayer entered into a merger agreement. On Date 3, pursuant
to the merger agreement, Merger Sub commenced a tender offer to purchase all of the
outstanding shares of common stock of Target. On Date 4, Taxpayer announced that it
had successfully completed the tender offer for all outstanding shares of common stock
of Target and had accepted for payment all shares validly tendered and not withdrawn
as of the expiration time of the tender offer and would promptly pay for such shares.
On Date 5, pursuant to the terms of the merger agreement, Merger Sub merged with
and into Target, the separate corporate existence of Merger Sub ceased, and Target
continued as the surviving corporation. As a result of the completion of the merger,
Target became a wholly-owned subsidiary of Taxpayer. Taxpayer represents that for
federal income tax purposes, the Transaction was a direct taxable purchase of stock of
Target by Taxpayer. As part of the transaction, Taxpayer paid Adviser A, Adviser B,
and Adviser C success-based fees of $D, $E and $F, respectively, that were contingent
upon the successful closing of the merger transaction.

Tax Preparer prepared Taxpayer’s consolidated U.S. federal income tax return for the
tax year ending on Year 1. Tax Preparer worked closely with Taxpayer in the
preparation of the Year 1 tax return, with Taxpayer’s tax department providing, among
other items, its Year 1 workpapers reflecting the calculation of the Rev. Proc. 2011-29
safe harbor amount. Taxpayer performed its own technical analysis of the Year 1
transaction costs, relying on the methodology of the Year 1 transaction costs analysis
which Tax Preparer performed for the merger transaction. Tax Preparer’s team
reviewed and approved Taxpayer’s Year 1 transaction costs methodology. Taxpayer
represents that Tax Preparer’s team complied with the substantive requirements of Rev.
Proc. 2011-29 by deducting 70 percent of the success-based fees and capitalizing 30
percent of the success-based fees on the Year 1 tax return, but the team was not aware
of the ministerial requirement of filing the election statement required by Rev. Proc.
2011-29 and thus it was not filed with the Year 1 return.

On or around Date 6, a member of Tax Preparer’s team learned through an internal
communication that an election statement is a requirement for making a valid election.
Realizing that Tax Preparer had inadvertently failed to include the election statement in
the Year 1 return filing, Tax Preparer alerted Taxpayer’s tax department. On or around
the same time, the Internal Revenue Service, which was examining the Year 1 return,
inquired as to whether the election statement was included with the Year 1 return. On
PLR-112449-17                                3

Date 7, Taxpayer responded that it had erroneously omitted the election statement from
the Year 1 return.

In the period following this communication to the Internal Revenue Service’s
examination team, employee turnover occurred in both Taxpayer’s tax department and
on Tax Preparer’s team, resulting in none of the persons most familiar with the missed
election statement remaining on hand to address this unresolved issue. On or around
Date 8, during the Internal Revenue Service’s audit of the Year 1 return, the examining
agent issued a draft Form 5701, Notice of Proposed Adjustment, proposing the
disallowance of the safe harbor treatment. Taxpayer immediately started discussions
with the agent and scheduled a formal meeting with the examination team on Date 9.
During the meeting, Taxpayer represents that it reiterated the substantive correctness of
its Year 1 return position (i.e., the deduction of 70% of the success-based fees and
capitalization of the remaining 30%) as permitted by Rev. Proc. 2011-29 and specifically
addressed the potential relief under sections 301.9100-1 through 301.9100-3 of the
Procedure and Administration Regulations for the missing election statement. Taxpayer
represents that the examining agent agreed to reconsider and discuss the election with
the team manager. However, Taxpayer represents that it did not receive any further
communication from the Internal Revenue Service until Date 10, when the Internal
Revenue Service issued the final Form 5701 disallowing the safe harbor treatment.
Taxpayer represents that the examining agent advised Taxpayer to request relief under
sections 301.9100-1 through 301.9100-3 of the Procedure and Administration
Regulations.

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.
PLR-112449-17                                  4


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
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.
PLR-112449-17                                 5


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

(iii) uses hindsight in requesting relief.
PLR-112449-17                                  6


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 represents that for federal income tax purposes, the transaction was a direct
taxable purchase of stock of Target by Taxpayer. Thus, immediately after the
transaction, Taxpayer and Target were related within the meaning of sections 267(b) or
707(b). The transaction thus qualifies as a “covered transaction” described in section
1.263(a)-5(e)(3)(ii).

Taxpayer in this case has represented that it reasonably relied on a qualified tax
professional, 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
PLR-112449-17                                  7

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.

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:    Internal Revenue Service