Acquired corporation receives 60 days to file a late success-fee safe-harbor election

Plain-English summary

A corporation paid financial and transaction advisers success-based fees in connection with a cash acquisition. It intended to use the Rev. Proc. 2011-29 safe harbor, which generally treats 70 percent of qualifying success fees as nonfacilitative and deductible while capitalizing the rest. Its timely return used that treatment, but the tax preparer failed to attach the required election statement. An accountant later found the omission, and the corporation requested relief before the IRS discovered the failure, although the short-year return had been selected for examination. The IRS found reasonable, good-faith conduct with no prejudice to the government and granted 60 days to file the election.

Ruling snapshot

• Question: May the corporation late-file the Rev. Proc. 2011-29 success-fee safe-harbor election?
• Outcome: approved
• Key authorities: IRC §§ 263(a), 446, 481(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: 201809004 Third Party Communication: None
Release Date: 3/2/2018 Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
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ID No. ------------------
-------------------------------------------------------- Telephone Number:
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----------------------- Refer Reply To:
CC:ITA:B02
------------------------------------------------------------ PLR-121328-17
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Date:
November 29, 2017

Legend

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

Date1 = -----------------

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

Date3 = -------------------

Date4 = ------------------------

Date5 = ------------------------

Date6 = ----------------------

Date7 = -----------------

Acquirer = -------------------------------------
--------------------------

Shareholder = --------------------------------------------------------------

X = ------------------------------------------------
PLR-121328-17
Y = -------------------------------------

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

Tax Preparer = ---------------------------

Tax Preparer2 = --------------------------

Accountant = ----------------

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

This is in response to a letter dated Date1, requesting an extension of time to file a safe-
harbor election under Rev. Proc. 2011-29, 2011-1 C.B. 746, to allocate success-based
fees for the short taxable year ending Date2. This request is made in accordance with
§§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations.

FACTS AND REPRESENTATIONS

Taxpayer represents the following:

Taxpayer is a corporation that was the parent of an affiliated group of corporations that
elected to file consolidated federal income tax returns until Date2. On Date2, Acquirer
acquired with cash all of the outstanding stock of Taxpayer. The acquisition involved
Acquirer, Taxpayer, and Shareholder, the sole shareholder of Taxpayer at the time of
the acquisition. As a result of the acquisition, Acquirer became the new parent
corporation and Taxpayer’s consolidated group terminated; however, the subsidiaries of
Taxpayer remained subsidiaries of Taxpayer following the acquisition.

Taxpayer paid fees to X to serve as a financial advisor in the process of investigating or
otherwise pursuing the acquisition. Taxpayer also paid fees to Y to serve as a
transaction advisor in the process of investigating or otherwise pursuing the acquisition.
The fees paid to X and Y, totaling $a, are the fees that Taxpayer treats as success-
based fees for purposes of this request. Taxpayer paid the fees at closing from the
proceeds of the acquisition.

In preparing Taxpayer’s tax return for the short taxable year ending Date2, Taxpayer
advised Tax Preparer that Taxpayer decided to make the safe harbor election pursuant
to Rev. Proc. 2011-29 to treat 70 percent of the success-based fees as amounts that do
not facilitate the acquisition. The tax return, with an extension, was filed timely, and
treated the success-based fees consistently with the making of an election under Rev.

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Proc. 2011-29. However, Tax Preparer failed to attach the required election statement
to Taxpayer’s original federal tax return for the short taxable year ending Date2.

In Date3, Accountant, in performing a reconciliation of Taxpayer’s taxable income to
Taxpayer’s financial reporting records, noticed that the required election statement
under Rev. Proc. 2011-29 was not attached to Taxpayer’s tax return for the short
taxable year ending Date2. On Date4, Accountant contacted Tax Preparer2 of Tax
Preparer to inquire about the safe harbor election statement; at this time, Tax Preparer
realized that it failed to include the safe harbor election statement with Taxpayer’s tax
return for the short taxable year ending Date2.

On Date5, Tax Preparer2 contacted Taxpayer regarding the failure to include the safe
harbor election statement with the Taxpayer’s tax return for the short taxable year
ending Date2 and recommended that Taxpayer file this request. On Date6, Taxpayer
requested that Tax Preparer prepare this request for an extension of time to file the
election statement required by Rev. Proc. 2011-29 under §§ 301.9100-1 and 301.9100-
3.

Taxpayer represents that Taxpayer paid or incurred success-based fees of $a as
defined by § 1.263(a)-5(f) of the Income Tax Regulations, and that the acquisition by
Acquirer was a “covered transaction” as defined by Treas. Reg. § 1.263(a)-(5)(e)(3).

In a notice dated Date7, Taxpayer was notified by the Internal Revenue Service that its
tax return for the short taxable year ending Date2 was selected for examination. At the
time of the filing of this private letter ruling request, the examination had not yet begun.
Taxpayer filed this request before the failure to make the election was discovered by the
Internal Revenue Service.

LAW AND ANALYSIS:

Section 263(a)(1) of the Internal Revenue Code and Treas. Reg. § 1.263(a)-2(a)
generally 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 Treas. Reg. § 1.263(a)-5, a taxpayer must capitalize an amount paid to facilitate
a business acquisition or reorganization transaction described in Treas. Reg.
§ 1.263(a)-5(a). An amount is paid to facilitate a transaction described in Treas. Reg.
§ 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

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otherwise pursuing the transaction is determined based on all of the facts and
circumstances. See Treas. Reg. § 1.263(a)-5(b)(1).

Treasury Regulation § 1.263(a)-5(f) provides that an amount that is contingent on the
successful closing of a transaction described in Treas. Reg. § 1.263(a)-5(a) ("success-
based fee") is presumed to facilitate the transaction, and, therefore, must be capitalized.
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.

A taxpayer's method for determining the portion of a success-based fee that facilitates a
transaction and the portion that does not facilitate the transaction is a method of
accounting under § 446.

Because the treatment of success-based fees was a continuing subject of controversy
between taxpayers and the Service, the Service published Rev. Proc. 2011-29. Rev.
Proc. 2011-29 provides a safe harbor method of accounting for allocating success-
based fees paid in business acquisitions or reorganizations described in Treas. Reg.
§ 1.263(a)-5(e)(3). In lieu of maintaining the documentation required by Treas. Reg.
§ 1.263(a)-5(f), this safe harbor permits electing taxpayers to treat 70 percent of the
success-based fee as an amount that does not facilitate the transaction, i.e., an amount
that can be deducted. The remaining portion of the fee must be capitalized as an
amount that facilitates the transaction.

Section 4.01 of Rev. Proc. 2011-29 allows a taxpayer to make a safe harbor election
with respect to success-based fees. Section 4.01 provides that the Service will not
challenge a taxpayer's allocation of success-based fees between activities that facilitate
a transaction described in Treas. Reg. § 1.263(a)-5(e)(3) (costs that must be
capitalized) and activities that do not facilitate the transaction (costs that may be
deducted) if the taxpayer: (1) treats 70 percent of the amount of the success-based fee
as an amount that does not facilitate the transaction and thus may be deducted; (2)
capitalizes the remaining amount of the success-based fee as an amount which 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 pursuant to the safe harbor
election.

Sections 301.9100-1 through 301.9100-3 of the Procedure and Administration
Regulations 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

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§ 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 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.

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.

Section 301.9100-3(c)(1) provides 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. 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.

Section 301.9100-3(c)(2) provides special rules for accounting method regulatory
elections. Section 301.9100-3(c)(2) provides that the interests of the Government are
deemed prejudiced, except in unusual or compelling circumstances, if the accounting
method regulatory election for which relief is requested is subject to the advance
consent procedures for method changes, requires a § 481(a) adjustment, would permit
a change from an impermissible method of accounting that is an issue under
consideration by examination or any other setting, or provides a more favorable method
of accounting if the election is made by a certain date or taxable year.

CONCLUSION:

Based upon our analysis of the facts and representations provided, Taxpayer acted
reasonably and in good faith, and granting relief will not prejudice the interests of the
Government. Therefore, the requirements of §§ 301.9100-1 and 301.9100-3 have been
met.

Taxpayer is granted an extension of 60 days from the date of this ruling to file a safe
harbor election for success-based fees under Rev. Proc. 2011-29 for its taxable year
ending Date2.

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The ruling contained in this letter is based on 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. In particular, no opinion is expressed as to Taxpayer’s classification of its
costs as success-based fees or whether the acquisition of Taxpayer by Acquirer is
within the scope of Rev. Proc. 2011-29.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, a taxpayer filing its return electronically may satisfy this requirement by
attaching a statement to its 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. We are also
sending a copy of this letter to the appropriate operating division director.

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.

                                  Sincerely,



                                  ______________________________
                                  BRIDGET E. TOMBUL
                                  Branch Chief, Branch 2
                                  Office of Associate Chief Counsel
                                  (Income Tax & Accounting)

Enc: copy for § 6110 purposes

cc:

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