Surviving company received 60 days to file merger-fee election

Plain-English summary

A company incurred success-based fees when another company merged into its wholly owned subsidiary. Its internal tax department, chief financial officer, and outside preparer intended to use the Revenue Procedure 2011-29 safe harbor, and the timely return deducted 70 percent of the fees. The return omitted the required election statement because of a good-faith oversight. The preparer notified the company as soon as the omission was found, and the company sought relief without changing any return positions or relying on hindsight. The IRS granted 60 days to file the statement for the short tax year ending on the merger date.

Ruling snapshot

• Question: Could the surviving company make a late safe-harbor election for its success-based merger fees?
• Outcome: approved, with 60 days to file the election statement
• Key authorities: IRC §§ 263(a), 446, 481(a), 6501(a), 6662; 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: 201930013                                            [Third Party Communication:
Release Date: 7/26/2019                                      Date of Communication: Month DD, YYYY]
Index Number: 9100.00-00
                                                             Person To Contact:
--------------------                                         -----------------------, ID No. -------------------
-----------------------------                                ---------------------------------------------------
-------------------------------                              Telephone Number:
                                                             ----------------------
In re: --------------------                                  Refer Reply To:
TIN: -----------------                                       CC:ITA:B02
                                                             PLR-133626-18
                                                             Date: April 26, 2019
Attn: ---------------------




TY: --------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------

Legend

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

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

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

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

Date2                                       =       ---------------------------

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

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

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

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

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

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

X                                           =       ------------------------------


Outside Paid Tax Preparer           =      -----------------------------

Chief Financial Officer             =      ---------------------

Law Firm                            =      -------------------------


Dear ---- ----:

         This is in response to a letter dated Date1, requesting an extension of time to file
the required election statement to make a safe-harbor election under Rev. Proc. 2011-
29, 2011-1 C.B. 746, to allocate success-based fees between facilitative and non-
facilitative amounts for Taxpayer’s transaction on 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.         Description of Taxpayer’s Business Operations

      Taxpayer is involved in the business of X. Taxpayer uses an accrual method of
accounting and has a calendar year-end.

       2.         Merger with A

       During Date3, Taxpayer began merger discussions with A. On Date4, both
companies’ boards of directors approved the Merger Agreement. On Date5, Taxpayer
formally announced that it would merge with A, with Taxpayer as the surviving entity.
The merger closed on Date2.

       Pursuant to the Merger Agreement, on Date2, A merged with and into B, a wholly
owned subsidiary of Taxpayer, whereupon the separate existence of A ceased, with B
surviving and remaining a wholly owned subsidiary of Taxpayer. Taxpayer incurred
Amount1 of success-based fees during TY in connection with the merger.

       3.         Tax Return and Rev. Proc. 2011-29 Election

       Taxpayer’s consolidated federal income tax return for TY was prepared by its in-
house tax department in conjunction with its Outside Paid Tax Preparer and its Chief
Financial Officer. Chief Financial Officer, Taxpayer’s tax department, and Outside Paid
Tax Preparer spent significant time discussing the income and financial accounting
consequences of the various fees incurred in connection with the merger. With respect
to the success-based fees, all parties were in agreement that it would be advisable to
make the safe-harbor election to deduct 70% of Taxpayer’s success-based fees for TY
under Rev. Proc. 2011-29.

        Taxpayer’s in-house tax department performed the basic accounting and
preparation work required for the federal income tax return for TY. Outside Paid Tax
Preparer reviewed and proposed changes to the federal return at key stages of its
completion. When the return was completed, Chief Financial Officer performed a high-
level review of the return and discussed it with both Outside Paid Tax Preparer and the
in-house tax department before it was filed. Outside Paid Tax Preparer signed the TY
return as paid preparer. Chief Financial Officer signed the TY return and the return was
timely filed.

       Taxpayer’s TY federal income tax return included a deduction for 70% of
success-based fees incurred in connection with the merger pursuant to the safe harbor
of Rev. Proc. 2011-29. However, it did not include the required statement expressly
availing itself of such election as required by Section 4.01(3) of Rev. Proc. 2011-29.

        Outside Paid Tax Preparer and Chief Financial Officer have represented that, at
all times before and after the merger and the filing of Taxpayer’s TY consolidated
federal income tax return, they fully intended to make the safe-harbor election under
Rev. Proc. 2011-29 allowing Taxpayer to deduct 70% of success-based fees in
connection with the merger.

       Outside Paid Tax Preparer has represented that Taxpayer’s omission of the
statement expressly availing it of the safe-harbor election as required by Rev. Proc.
2011-29 was the result of a good-faith oversight by him and Taxpayer’s internal tax
department. Chief Financial Officer has represented that Taxpayer relied on Outside
Paid Tax Preparer as a qualified tax professional to review the corporate return and to
ensure that the statement expressly availing Taxpayer of the safe-harbor election was
attached. As soon as Outside Paid Tax Preparer discovered, on Date6, that Taxpayer
had not properly availed itself of the Rev. Proc. 2011-29 election, he immediately
informed Taxpayer, who contacted Law Firm for advice to remedy the situation on
Date7.

       Outside Paid Tax Preparer and Chief Financial Officer represent that they are not
using hindsight in their request for relief for Taxpayer. Assuming the requested relief is
granted, no alterations of any positions on any of Taxpayer’s income tax returns are
necessary.

LAW

       Section 263(a)(1) of the Internal Revenue Code and § 1.263(a)-2(a) of the
Income Tax Regulations 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 § 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% 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 70% 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
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. It is this third requirement that
Taxpayer requests permission to accomplish with this ruling request. Taxpayer
requests permission to attach the statement required by section 4.01(3) of Rev. Proc.

2011-29 to its return by amending its original return for TY and superseding it with a
return attaching a completed election statement.

       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
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) of the Income Tax
Regulations. 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 file
the statement required under section 4.01(3) of Rev. Proc. 2011-29 stating that it is
electing the safe harbor treatment for success-based fees, identifying the transaction,
and stating the success-based fee amounts that are deducted and capitalized for the
short taxable year ending Date2.

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.

       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 Taxpayer's transaction 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) of the Code
provides that it may not be used or cited as precedent.

                                                 Sincerely yours,



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



Enclosure:

 Copy for § 6110 purposes