Acquired company receives 60 days for success-fee safe-harbor election

Plain-English summary

A holding company paid two success-based advisory fees in connection with its acquisition. Its return preparer used figures from another adviser's financial-statement analysis, overlooked the required election statement for one fee, and did not know that the other fee also qualified for the Revenue Procedure 2011-29 safe harbor. A later review uncovered both issues, and the taxpayer promptly requested relief. 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 make the safe-harbor election, treat 70 percent of each success-based fee as nonfacilitative, capitalize the remaining 30 percent, and attach the required statement to the relevant return. The ruling did not decide whether the listed costs were proper success-based fees or whether the acquisition otherwise fell within the revenue procedure.

Ruling snapshot

• Question: Could the taxpayer make a late safe-harbor election for success-based acquisition fees?
• Outcome: Approved. The taxpayer received 60 days to comply with Revenue Procedure 2011-29.
• Key authorities: IRC § 263(a); 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: 201922022                                              [Third Party Communication:
Release Date: 5/31/2019                                        Date of Communication: Month DD, YYYY]
Index Number: 9100.00-00
                                                               Person To Contact:
------------------------------                                 -----------------------, ID No. -------------------
--------------------------------                               ---------------------------------------------------
--------------------------------------                         Telephone Number:
                                                               ----------------------
In Re: -----------------------                                 Refer Reply To:
                                                               CC:ITA:B02
                                                               PLR-122622-18
                                                               Date:
                                                               February 15, 2019


Legend:

TY                         =        ---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------

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

A                          =        ------------------------------------------------

B                          =        ----------------------------------------

C                          =        ----------------------------------------------

D                          =        -------------------------------------------

E                          =        -------------------------------------------------

F                          =        -------------------------------------------

G                          =        --------------------------------

H                          =        -----------------------------------------

State1                     =        -------------------

CountryA                   =        ----------------------------

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

Date2                      =        --------------------------------
PLR-122622-18                                    2

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

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

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

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

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

Amount1                  =   ------------------------

Amount2                  =   ---------------------

Amount3                  =   -----------------

Amount4                  =   ---------------------

Amount5                  =   ---------------------

Year1                    =   ------------

Month1                   =   ------------------------

a%                       =   -----------

b%                       =   -----------

c%                       =   -----------


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

      This is in response to a letter dated Date1, requesting an extension of time to file
and perfect a safe-harbor election under Rev. Proc. 2011-29, 2011-18 C.B. 746. This
safe-harbor election is needed to allocate success-based fees between facilitative and
non-facilitative amounts for Taxpayer’s transaction during 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:

1. Taxpayer Information
PLR-122622-18                                         3


      Taxpayer is a corporation organized under the laws of State1. Taxpayer has a
calendar year end and uses an accrual method of accounting for federal income tax
purposes.

      Taxpayer is a holding company. Through its operating subsidiaries, Taxpayer
provides consulting, engineering, and testing services.

        Taxpayer was acquired by A on Date2 (the Acquisition). Prior to the acquisition
of Taxpayer by A, Taxpayer was principally owned by B, a State1 limited partnership
and investment fund. Also prior to the Acquisition, Taxpayer and its subsidiaries joined
in the filing of consolidated U.S. federal tax returns with Taxpayer as the common
parent (the “Taxpayer Group”).

2. Facts Relating to the Acquisition

        Overview of the Acquisition

      On Date 3, C, D,1 Taxpayer, and B entered into an Agreement and Plan of
Merger (the “Merger Agreement”). The Merger Agreement provided that A would
acquire all issued and outstanding shares of Taxpayer via a merger of D with and into
Taxpayer, with Taxpayer surviving as a direct wholly-owned subsidiary of A. The
Acquisition, valued at Amount1, closed on Date2.

        Immediately after the Acquisition, A directly owned all of the stock of Taxpayer.
Consequently, following the Acquisition, A and Taxpayer were members of a controlled
group. Taxpayer became a member of the affiliated group of corporations that joined in
filing consolidated U.S. federal income tax returns with A as the common parent (the A
Group).2 The Acquisition is a covered transaction under § 1.263(a)-5(e)(3)(ii) of the
Income Tax Regulations.

        Description of Success-Based Fees

      Taxpayer paid a success-based fee of Amount2 to E (the “E Advisory Fee”) in
connection with the Acquisition. This payment was for services performed in the


1D was wholly owned by A and, like A, was formed solely for the purpose of entering into the Merger
Agreement (defined herein) and consummating the transaction contemplated by the Merger Agreement.
Neither A nor D engaged in any activity other than as required in connection with the Acquisition.

2Prior to and immediately after the Acquisition, A was directly owned by C, a private company formed
under the laws of CountryA. On Date7, A was transferred to H, a wholly owned subsidiary of C. As a
result, Taxpayer, which remains a wholly owned subsidiary of A, is currently a member of an affiliated
group of corporations that join in filing a consolidated U.S. federal income tax return, of which H is the
parent (the “H Group”).
PLR-122622-18                                4

process of investigating or otherwise pursuing the Acquisition. Taxpayer also paid non-
success based fees of Amount3 for out-of-pocket expenses.

      Taxpayer also paid F a success-based fee of Amount4 (the “F Fee”) for services
performed in the process of investigating or otherwise pursuing the Acquisition. The E
Advisory Fee and the F Fee (collectively, the “Success-Based Fees”) totaling Amount 5
were contingent upon the successful closing of the Acquisition as described in
§ 1.263(a)-5(f).

       The Discovery of the Missed Election

       On or about Date4, C engaged G to prepare Taxpayer’s final consolidated U.S.
federal income tax return for the TY. On Date 5, Taxpayer provided G with the total
deductible amount for costs incurred by Taxpayer in connection with the Acquisition (the
“Acquisition Costs”). The information provided by Taxpayer was from an analysis that
had been prepared by a different tax advisor (the “Other Advisor”) for the Year1 year-
end tax provision for the audited financial statements (“Financial Statements”) and did
not include detailed information about the Acquisition Costs. For purposes of the
Financial Statements, the E Advisory Fee was treated as a% deductible and a%
capitalizable. The F Fee was treated as b% deductible and c% capitalizable.

       G used these figures to prepare the return for the TY because G was unable to
obtain additional information about the fees prior to the filing of the return for the TY on
Date6 and G had no reason to question the work done by Other Advisor. Because the
F Fee was treated as b% deductible and c% capitalizable, G assumed that the F Fee
was a success-based fee at the time the return for the TY was prepared. However, G
inadvertently overlooked the ministerial requirement of filing the election statement for
the F Fee, as required by Rev. Proc. 2011-29 (the “Election Statement”). At that time, G
was not aware that the E Advisory Fee was a success-based fee eligible for the safe
harbor election under Rev. Proc. 2011-29.

       In Month1, G undertook a more detailed review of the Acquisition Costs to
determine whether some of the costs that had been capitalized could be appropriately
deducted. During the Month1 review, G, discovered that the Election Statement had not
been filed for the F Fee. G promptly informed Taxpayer, and Taxpayer requested that
G commence preparation of a request for relief under §§ 301.9100-1 and 301.9100-3.

       Also, during the Month1 review, G discovered that the E Advisory Fee is also a
success-based fee. G determined that the E Advisory Fee is eligible for the safe harbor
election under Rev. Proc. 2011-29.

       Accordingly, Taxpayer is seeking relief to file and perfect an election under Rev.
Proc. 2011-29 with respect to the Success-Based Fees incurred in connection with the
services provided by E and F.
PLR-122622-18                                 5


LAW

        Section 263(a)(1) of the Internal Revenue Code generally provides 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 § 1.263(a)-5, a taxpayer must capitalize an amount paid to facilitate a
business acquisition or reorganization transaction described in § 1.263(a)-5(a). 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 that is contingent on the
successful closing of a transaction described in § 1.263(a)-5(a) (success-based fee) is
presumed to facilitate the transaction, and thus 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, and thus may be
deductible.

         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. See section 2.04 of Rev. Proc. 2011-29.

         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
§ 1.263(a)-5(e)(3). In lieu of maintaining the documentation required by § 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 § 1.263(a)-5(e)(3) and activities that do not facilitate
the transaction if the taxpayer does three things. First, the taxpayer must treat seventy
percent of the amount of the success-based fee as an amount that does not facilitate
the transaction. Second, the taxpayer must capitalize the remaining amount of the
PLR-122622-18                                 6

success-based fee as an amount which does facilitate the transaction. Third, 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. This statement should: state that the
taxpayer is electing the safe harbor; identify the transaction; and state the success-
based fee amounts that are deducted and capitalized.

       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 301.9100-1(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 extensions of time for regulatory
elections 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(b)(1) provides that, in general, a taxpayer is 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 reasonable 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, and the tax professional failed to
make, or advise the taxpayer to make, the election.

       Section 301.9100-3(b)(3) provides that a taxpayer is deemed to have not 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 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.

       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
PLR-122622-18                                7

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 under
§ 6501(a) before the taxpayer’s receipt of a ruling granting relief under this section.

       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.

      Taxpayer’s election is a regulatory election as defined in § 301.9100-1(b)
because the due date of the election is prescribed in § 1.263(a)-5(f). 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.

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
comply with the requirements of section 4.01 of Rev. Proc. 2011-29. First, the taxpayer
must treat seventy percent of the amounts of the success-based fees as amounts that
do not facilitate the transaction. Second, the taxpayer must capitalize the remaining
amounts of the success-based fees as amounts which do facilitate the transaction.
Third, the taxpayer must attach a statement to its federal income tax return for the
taxable year the success-based fees are paid or incurred. This statement should: state
that the taxpayer is electing the safe harbor; identify the transaction; and state the
success-based fee amounts that are deducted and capitalized.

CAVEATS

      The rulings contained in this letter are based on 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.
PLR-122622-18                                8

       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 whether Taxpayer
properly included the correct costs as its success-based fees subject to the retroactive
election, or whether the Acquisition 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 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.

      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.

                                                 Sincerely,



                                                 Jason D. Kristall
                                                 Senior Technician Reviewer, Branch 2
                                                 Office of Associate Chief Counsel
                                                 (Income Tax & Accounting)


Enclosure:

 Copy for § 6110 purposes