Corporation gets more time for success-fee safe harbor

Plain-English summary

A corporate group paid an investment bank a success-based fee when its parent was acquired in a taxable stock transaction. Its accounting firm prepared the short-year consolidated return using Revenue Procedure 2011-29's safe harbor, deducting 70 percent of the fee and capitalizing 30 percent. Tax software dropped the required election statement when it combined the group members' returns, and the mistake was discovered later by the acquirer's accounting firm. The IRS found that the taxpayer acted reasonably and in good faith and that relief would not prejudice the government. It granted 60 days to file the statement electing safe-harbor treatment and identifying the transaction and the deducted and capitalized amounts.

Ruling snapshot

• Question: May the taxpayer make a late Revenue Procedure 2011-29 election for success-based transaction fees?
• Outcome: approved, with 60 days to file the required election statement
• Key authorities: 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: 201751004                                             Third Party Communication: None
Release Date: 12/22/2017                                      Date of Communication: Not Applicable
Index Number: 9100.00-00
                                                              Person To Contact:
--------------------------------------------------------      ---------------------------, ID No. ---------------
-------------------------------------                         -----------------
----------------------                                        Telephone Number:
----------------------------                                  ----------------------
                                                              Refer Reply To:
In Re: A request for relief under § 301.9100-1 CC:ITA:B03
of the Federal Income Tax Regulations          PLR-105713-17
                                                              Date:
                                                              July 6, 2017


Taxpayer Identification Number: -----------------

Legend:

Date1                      = --------------------------
X                          = -------------------------------------
Date2                      = ----------------------
Y                          = --------------------------------------------------
CPAFirm                    = -----------------------------------------
Date3                      = -----------------------
Date4                      = --------------------
Date5                      = ----------------------------
Date6                      = -----------------------

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

This letter responds to a letter dated Date1, submitted on behalf of X (“Taxpayer”),
requesting a ruling that Taxpayer be granted an extension of time under sections
301.9100-1(c) and 301.9100-3 of the Procedure and Administration Regulations to file a
safe harbor election under Revenue Procedure 2011-29, 2011-18 I.R.B. 746.

Facts

According to the information submitted, Taxpayer is the common parent of an affiliated
group of corporations filing a consolidated U.S. federal income tax return engaged in the
business of producing construction materials: primarily supplying aggregate, ready-mix
concrete, asphalt, and paving and architectural products. On Date2, Taxpayer merged
with and into a wholly owned subsidiary of Y in a taxable acquisition of the stock of
Taxpayer by Y. Taxpayer did not make an election under § 338(h)(10)of the Internal
Revenue Code. Taxpayer engaged the services of an investment bank to advise it on
the sale of its business, under a success-based fee arrangement. As a result of the
PLR-105713-17                                 2

sale Taxpayer paid a success-based fee to the investment bank upon completion of the
sale.

Taxpayer engaged CPAFirm to prepare the short-year tax return for Taxpayer for the
tax period Date3 to Date2. The return was initially due on Date4, but Taxpayer timely
filed for an extension until Date5. CPAFirm prepared the return making use of the safe
harbor for success based fees in Rev. Proc. 2011-29, deducting 70% of the fee as an
amount which does not facilitate the transaction, capitalizing the remaining 30%, and
attaching the required statement to Taxpayer’s individual return. However, when
CPAFirm’s tax preparation software merged the individual returns for Taxpayer’s group
into a consolidated return, it dropped the required election statement for the safe harbor.
This return was timely filed on Date5, without the election statement. The mistake was
not discovered until Date6, when the acquirer’s CPA firm was preparing the tax return
for the full year. Taxpayer then applied for relief under Treas. Reg. § 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 and Analysis

Treasury Regulations § 1.263(a)-5(a) requires taxpayers to capitalize amounts paid or
incurred to facilitate certain transactions. Section 1.263(a)-5(a)(2) includes an
acquisition of an ownership interest in a business entity as one such transaction.

Treasury Regulations § 1.263(a)-5(e)(1) provides that an amount paid by the taxpayer
in the process of investigating or otherwise pursuing a covered transaction facilitates
that transaction only if the amount relates to activities performed on or after the earlier
of (i) the date a letter of intent, exclusivity agreement, or similar written communication
is executed, or (ii) the date on which the material terms of the transaction are approved
by the taxpayer’s board of directors. Section 1.263(a)-5(e)(3) defines a covered
transaction as (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 or the target) if immediately after the acquisition
the acquirer and the target are related within the meaning of §§ 267(b) or 707(b), or (iii)
a reorganization described in §§ 368(a)(1)(A), (B), or (C), or a reorganization described
in § 368(a)(1)(D) in which the stock or securities of the corporation to which the assets
are transferred are distributed in a transaction that qualifies under §§ 354 or 356.

Section 1.263(a)-5(f) provides that an amount paid that is contingent on the successful
closing of a covered transaction 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.
PLR-105713-17                                  3

Section 4 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). Under the safe harbor, taxpayers 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 (i) capitalizes the remaining
30%, and (ii) attaches a statement to its original return for the year the fee is paid or
incurred electing to use the safe harbor treatment.

Under § 301-9100-1(c), 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 301.9100-1(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.

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
301.9100-1(a).

Section 301.9100-2 provides automatic extensions of time for making certain elections.
Paragraph (b) provides for an automatic extension of 6 months from the due date of a
return excluding extensions if the due date of the election is the due date of the return
including extensions, provided the taxpayer timely filed its return and takes corrective
action within that 6-month extension period.

Section 301.9100-3 provides extensions of time for making elections that do not meet
the requirements of § 301.9100-2.

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. Section 301.9100-3(a).

Section 301.9100-3(b)(1) provides that a taxpayer will be deemed to have acted in good
faith if the taxpayer requests relief before the failure to make the election is discovered
by the Service, or if the taxpayer 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 in
good faith if the taxpayer: (1) 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; (2) was informed
in all material respects of the required election but chose not to file the election; or (3)
PLR-105713-17                                  4

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 interests of the government will be 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, or if the taxable year in which the election should have been made is closed
at the time the relief would be granted.

In this case, Taxpayer is beyond the 6-month period from the due date of the original
return excluding extensions. Taxpayer represents that the issue is not under
examination, and that it reasonably relied upon the advice of a tax professional. It is not
the case that Taxpayer was informed of the need to file the election but chose not to do
so. Taxpayer represents that it is not altering a return position for which an accuracy-
related penalty could be imposed, because it is not altering its return position at all; it is
filing the election that was required with its original return. Taxpayer also represents
that no specific facts have changed since the due date for filing the election that make
the election advantageous. Finally, taxpayer represents that its tax liability for the year
at issue will not be lower if relief is granted than it would have been had the election
been timely filed. The tax year at issue is not a closed year at the time relief would be
granted.

Conclusion

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 Taxpayer
properly included the correct costs as its success-based fees subject to the election, or
PLR-105713-17                                 5

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.

In accordance with the provisions of a power of attorney currently on file, we are
sending a copy of the ruling 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,



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

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


cc: