Corporate group receives 45 days for transaction-fee election

Plain-English summary

A consolidated corporate group incurred success-based fees when another company acquired its parent. Its accounting firm believed it had electronically filed a return extension, but the filing attempt failed, making both the short-year return and the group's safe harbor election under Revenue Procedure 2011-29 late. The IRS found that the taxpayer acted reasonably and in good faith and that relief would not prejudice the government. It granted 45 days to file the required election statements identifying the transaction and the fee amounts deducted and capitalized. The ruling did not decide whether the costs were properly treated as success-based fees or whether the transaction fell within the revenue procedure.

Ruling snapshot

• Question: May the taxpayer receive extra time to make the Revenue Procedure 2011-29 safe harbor election for success-based transaction fees?
• Outcome: approved
• Key authorities: IRC § 263(a); Treas. Reg. §§ 1.263(a)-5, 301.9100-1, 301.9100-3; Rev. Proc. 2011-29

Full text (IRS public release)

Internal Revenue Service                                          Department of the Treasury
                                                                  Washington, DC 20224

Number: 201741011                                                 Third Party Communication: None
Release Date: 10/13/2017                                          Date of Communication: Not Applicable
Index Number: 9100.00-00, 263.00-00
                                                                  Person To Contact:
---------------------------------------------------------         ------------------, ID No. ------------------
------------------------------------------------------            Telephone Number:
--------------------                                              ---------------------
--------------------------------------------                      Refer Reply To:
                                                                  CC:ITA:B01
                                                                  PLR-113766-17
                                                                  Date:
                                                                  July 13, 2017


Taxpayer       =       -------------------------------------------------------------------------------
Date1          =       --------------------------
Date2          =       -----------------------
Date3          =       --------------------------
Date4          =       --------------------------
Date5          =       -------------------
Date6          =       ----------------------
Date7          =       ----------------------------
Date8          =       ------------------------
A              =       -------------------------
B              =       ------------------------------------------------------------------------
C              =       -------------------------------------------------------------
D              =       ----------------------------
E              =       ---------------------------------------
F              =       -----------------------
G              =       -----------------------------------------------------------
H              =       ---------------------------


Dear               :

This letter responds to your letter dated April 25, 2017, submitted on behalf of Taxpayer
requesting an extension of time under §§ 301.9100-1 and 301.9100-3 of the Procedure
and Administration Regulations to make the election described in Section 4 of Rev.
Proc. 2011-29, 2011-18 I.R.B. 746, which includes attaching statements to Taxpayer’s
original consolidated federal income tax return for short taxable year ended Date1.

FACTS

Taxpayer is a corporation organized under the laws of A on Date2 and was the parent
of an affiliated group of corporations that elected to join in the filing of consolidated
PLR-113766-17
                                             2

federal income tax returns under section 1.1502-75(a)(1) of the Income Tax Regulations
(hereinafter, collectively referred to as “Taxpayer’s Consolidated Group”.

The other members of Taxpayer’s Consolidated Group are B and C. B is a corporation
organized under the laws of D on Date3, and C is a corporation organized under the
laws of D on Date4.

Each member of Taxpayer’s Consolidated Group has an annual accounting period
ending Date5 and uses an accrual method as its overall method of accounting for
financial accounting and federal income tax purposes.

Taxpayer is a holding company. B owns and operates a paper mill in E. C owns and
operates a corrugated packaging facility in F.

On Date1, G acquired all of the outstanding stock of Taxpayer (hereinafter, referred to
as “the Transaction”. The Transaction caused Taxpayer’s Consolidated Group to
terminate as a result of G becoming the new parent corporation. Also, the Transaction
was a “covered transaction” described in section 1.263(a)-5(e)(3). During the short
taxable year ended Date1, Taxpayer paid or incurred success-based fees, within the
meaning of section 1.263(a)-5(f) in connection with the Transaction.

Taxpayer engaged H, a tax advisory and accounting firm, to prepare and file both an
extension of time to file Taxpayer’s consolidated federal income tax return for the short
taxable year ended Date1 and Taxpayer’s consolidated federal income tax return for the
short taxable year ended Date1. The unextended due date for Taxpayer’s consolidated
federal income tax return for the short taxable year ended Date1 was Date6.

Prior to Date6, H took steps in an attempt to electronically file the extension and
believed that the extension was timely filed, extending the due date of Taxpayer’s
consolidated federal income tax return for the short taxable year ended Date1 to Date7.
On or about Date6, H notified Taxpayer that the due date of Taxpayer’s consolidated
federal income tax return for the short taxable year ended Date1 had been extended to
Date7. On Date7, Taxpayer’s consolidated federal income tax return for the short
taxable year ended Date1 was electronically filed by H and accepted by the Internal
Revenue Service (“Service”). Taxpayer’s consolidated federal income tax return for the
short taxable year ended Date1 was filed on a basis consistent with the safe harbor
election described in section 4 of Rev. Proc. 2011-29 for success-based fees having
been made.

On or about Date8, Taxpayer received a notice from the Service notifying Taxpayer of
its assessment of a penalty for Taxpayer’s failure to timely file Forms 5471, Information
Return of U.S. Persons With Respect to Certain Foreign Corporations, for the taxable
year ended Date1. Upon investigation, H discovered that its attempt to electronically file
the extension of time for Taxpayer’s consolidated federal income tax return for the short
PLR-113766-17
                                              3

taxable year ended Date1 was unsuccessful and, as a result, Taxpayer’s consolidated
federal income tax return for the short taxable year ended Date1 was not timely filed.
Thus, since Taxpayer’s consolidated federal income tax return for the short taxable year
ended Date1 was not timely filed, the safe harbor election described in section 4 of Rev.
Proc. 2011-29 for success-based fees associated with this tax return was not timely
filed.

LAW

Section 263(a)(1) of the Internal Revenue Code and § 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, 112 S. Ct. 1039, 117 L. Ed. 2d
226 (1992); Woodward v. Commissioner, 397 U.S. 572, 575-576, 90 S. Ct. 1302, 25 L.
Ed. 2d 577 (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. See § 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 transaction described in § 1.263(a)-(5)(a) (i.e., a success-based fee) is
presumed to facilitate the transaction. A taxpayer may rebut this presumption by
maintaining sufficient documentation to establish that a portion of the fee is allocable to
activities that do not facilitate the transaction.

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
activities that do not facilitate the transaction and 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.
PLR-113766-17
                                             4

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 relief under § 301.9100-3 will be
granted when the taxpayer provides evidence 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. See also § 301.9100-3(b) and
(c).

CONCLUSION

Based solely on the facts and representations submitted, we conclude that Taxpayer
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.

Taxpayer is granted an extension of 45 days from the date of this ruling to file its
mandatory statements as required by Section 4.01 of Revenue Procedure 2011-29,
stating that it is electing the safe harbor for success-based fees, 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
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.

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 Taxpayer properly included the correct costs as success-
based fees subject to the retroactive election, or whether Taxpayer’s transactions were
within the scope of Rev. Proc. 2011-29.
PLR-113766-17
                                              5

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.

A copy of this ruling should be attached to Taxpayer’s federal tax returns for the tax
year(s) affected. 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.

In accordance with the provisions of the power of attorney currently on file with this
office, a copy of this letter is being sent to your authorized representative.

                                       Sincerely,

                                       Lewis K Brickates

                                       Lewis K Brickates
                                       Branch Chief, Branch 1
                                       Office of Associate Chief Counsel
                                       (Income Tax & Accounting)




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