Post-merger company received 60 days to make transaction-fee election

Plain-English summary

A company paid success-based fees to eight firms in connection with a series of mergers. An accounting firm advised that the fees qualified for the Revenue Procedure 2011-29 safe harbor, and the return deducted 70 percent and capitalized 30 percent as required. The company and its advisers nevertheless overlooked the separate requirement to attach an election statement to the original return. A later internal review found the omission before the IRS did. The IRS concluded that the company acted reasonably and in good faith and that relief would not prejudice the government, so it granted 60 days to file an amended return with the election statement.

Ruling snapshot

• Question: Could the post-merger company make a late safe-harbor election for success-based transaction fees?
• Outcome: approved, with 60 days to file an amended return and election statement
• Key authorities: IRC §§ 263(a), 368(a)(1)(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: 201930022                                              Third Party Communication: None
Release Date: 7/26/2019                                        Date of Communication: Not Applicable
Index Number: 9100.00-00
                                                               Person To Contact:
--------------------                                           -----------------------, ID No. -------------------
-----------------------------------------------------          ---------------------------------------------------
-----------------------------------------                      Telephone Number:
------------------------------------------------------------   ----------------------
--                                                             Refer Reply To:
---------------------------------------------------            CC:ITA:B03
                                                               PLR-134576-18
                                                               Date:
                                                               April 22, 2019


TY: -------

LEGEND:

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

Company = ----------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
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Former Parent = -----------------------------------------

Former Parent Sub A = ----------------

Former Parent Sub B = ----------------

Former Parent Sub C = ------------------------------------------------------

Competitor = ----------------------------------

Merger Sub 1 = ------------------------------

Merger Sub 2 = ------------------------------

Merger Sub 3 = --------------------------------

Firm A = ---------------

Firm B = ----------------

Firm C = -------------

Firm D = ----------------------

Firm E = --------------------------

Firm F = ----------------

Firm G = ---------------------------------------------------

Firm H = --------------

Accounting Firm = ---------------------------

Date 1 = ---------------------------

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

Date 3 = -------------------

$I = ------------------

$J = ------------------

$K = ------------------

$L = ------------------

$M = ----------------

$N = ------------------

$O = ----------------

$P = --------------

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

This responds to a letter ruling request dated ---------------------------, submitted on behalf
of Taxpayer. Taxpayer requests an extension of time under sections 301.9100-1 and
301.9100-3 of the Procedure and Administration Regulations to make a late election
concerning the treatment of success-based fees in accordance with Rev. Proc. 2011-
29, 2011-1 C.B. 746, which requires that a statement be attached to Taxpayer's original
federal income tax return for the taxable year ending on Date 1.

Before the transactions at issue, Former Parent was a Company filing consolidated
returns as common parent of an affiliated group of corporations. Former Parent formed
Former Parent Sub A as a wholly-owned subsidiary of Former Parent to engage in the
transactions. Former Parent Sub A owned all of the interests in Former Parent Sub B,
which in turn owned all of the interests in Former Parent Sub C. Former Parent Sub A
also owned all of the interests in Merger Sub 2 and Merger Sub 3. Competitor operated
in the same industry as Former Parent. Competitor formed Merger Sub 1 to engage in
the transactions.

On Date 2, Former Parent and Competitor entered into a merger agreement. On Date
3, Former Parent and Competitor consummated the transactions to effect the mergers
and acquisitions. Former Parent caused Former Parent Sub A to convert from a limited
liability company to a corporation. Former Parent Sub A was also renamed to
Taxpayer. In the first merger, Merger Sub 1 merged with and into Competitor, with
Competitor surviving. In the second merger, Competitor merged with and into Merger
Sub 2 with Merger Sub 2 surviving. Competitor’s shareholders received shares of
Taxpayer, the owner of Merger Sub 2. Former Parent redeemed all of its shares in
Taxpayer. As a result, Competitor’s shareholders owned all the stock of Taxpayer. The
merger of Competitor into Merger Sub 2 was treated as a reorganization under section
368(a)(1)(F) of the Code, with Taxpayer treated as a continuation of Competitor.

Immediately following the second merger, Former Parent merged with and into Merger
Sub 3, with Merger Sub 3 surviving. Former Parent’s shareholders received shares in
Taxpayer, the regarded owner of Merger Sub 3. The merger of Former Parent into
Merger Sub 3 was treated as a reorganization within the meaning of section
368(a)(1)(A) of the Code. Taxpayer represents that the merger of Former Parent into
Merger Sub 3 is a covered transaction within the meaning of section 1.263(a)-5(e)(3)(iii)
of the Regulations.

Taxpayer paid success based fees to Firm A, Firm B, Firm C, Firm D, Firm E, Firm F,
Firm G, and Firm H for services performed in the process of investigating or otherwise
pursuing the mergers in the amounts of $I, $J, $K, $L, $M, $N, $O, and $P respectively.
Taxpayer represents that the success based fees were contingent upon the successful
closing of the transactions as described in section 1.263(a)-5(f) of the Regulations.

Taxpayer engaged Accounting Firm to provide an opinion regarding the proper U.S.
federal income tax treatment of the success based fees. Accounting Firm concluded in
the opinion that Taxpayer was eligible to apply the safe harbor under Rev. Proc. 2011-
29 to the success based fees, and noted the requirement to file an election with the
return for Former Parent.

Taxpayer used the legacy departments of both Competitor and Former Parent to
prepare Taxpayer’s return for the taxable year ending on Date 1. Competitor’s legacy
tax advisor also helped to prepare the pre-closing period of the return while Taxpayer
engaged Accounting Firm to review the post-closing period of the return prepared by
Competitor’s legacy tax department and to sign the return. Taxpayer prepared the
return in accordance with the advice provided by Accounting Firm and complied with the
substantive requirements of Rev. Proc. 2011-29 by treating the success based fees as
70% deductible and 30% capitalizable on the return ending on Date 1. However,
Taxpayer inadvertently overlooked the ministerial requirement of filing the election
statement for the success based fees, as required by Rev. Proc. 2011-29. Neither
Accounting Firm nor the Taxpayer noticed that the election was not included before the
return was filed. As part of a decision to confirm the accuracy the U.S. federal income
tax treatment of the success based fees, Taxpayer reviewed the return ending on Date
1 to confirm the treatment of the success based fees. Taxpayer confirmed that 70% of
the success based fees were deducted on the return ending on Date 1, and identified at
that time that the election statement was not included with the filed return.

                                           LAW

Section 263(a) of the Internal Revenue Code provides generally that no deduction is
allowed for any amount paid out for new buildings or for permanent improvements or
betterments made to increase the value of any property or estate or any amount
expended in restoring property or in making good the exhaustion thereof for which an
allowance is or has been made. Section 1.263(a)-1(d)(3) provides that no deduction is
allowed for an amount paid to acquire or create an intangible, which under sections
1.263(a)-4(c)(1)(i) and 1.263(a)-4(d)(2)(i)(A) includes an ownership interest in a
corporation or other entity. See also section 1.263(a)-4(a).

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 section 1.263(a)-5, a taxpayer must capitalize an amount paid to facilitate a
business acquisition or reorganization transaction described in section 1.263(a)-5(a). In
general, an amount is paid to facilitate a transaction described in section 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. Section 1.263(a)-
5(b)(1).

Section 1.263(a)-5(f) of the Regulations provides that an amount that is contingent on
the successful closing of a transaction described in section 1.263(a)-5(a), or success-
based fee, is presumed to facilitate the transaction. 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. This documentation
must be completed on or before the due date of the taxpayer's timely filed original
federal income tax return (including extensions) for the taxable year during which the
transaction closes.

To reduce controversy between the IRS and taxpayers over the documentation required
to allocate success-based fees between the activities that facilitate the transaction and
activities that do not facilitate the transaction, the IRS issued Rev. Proc. 2011-29, 2011-
1 C.B. 746. The revenue procedure states that the IRS would not challenge a
taxpayer's allocation of a success-based fee between activities that facilitate a
transaction described in section 1.263(a)-5(e)(3) and activities that do not facilitate the
transaction if the taxpayer --

(1) treats 70 percent of the amount of the success-based fee as an amount that does
not facilitate the transaction;

(2) capitalizes the remaining 30 percent as an amount that 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.

The revenue procedure applies to covered transactions described in section 1.263(a)-
5(e)(3), which include --

(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 in the acquisition or the target of the acquisition) if, immediately
after the acquisition, the acquirer and the target are related within the meaning of
section 267(b) or section 707(b); or

(iii) A reorganization described in section 368(a)(1)(A), (B), or (C) or a reorganization
described in section 368(a)(1)(D) in which stock or securities of the corporation to which
the assets are transferred are distributed in a transaction which qualifies under section
354 or 356 (whether the taxpayer is the acquirer or the target in the reorganization).

Sections 301.9100-1 through 301.9100-3 of the Procedure and Administration
Regulations provide the standards the Commissioner uses to determine whether to
grant an extension of time to make a regulatory 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 section
301.9100-2.

Section 301.9100-1(b) defines the term "regulatory election" as an election whose due
date is prescribed by a regulation published in the Federal Register, or a revenue ruling,
procedure, notice or announcement published in the Internal Revenue Bulletin.

Section 301.9100-1(c) provides that 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 301.9100-3(a) provides extensions of time to make a regulatory election under
Code sections other than those for which section 301.9100-2 expressly permits
automatic extensions. Requests for extensions of time for regulatory elections will be
granted when the taxpayer provides evidence (including affidavits described in the
regulations) to establish to the satisfaction of the Commissioner that the taxpayer acted
reasonably and in good faith, and granting relief will not prejudice the interests of the
government.

Section 301.9100-3(b)(1) states that a taxpayer will be 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 due 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, including a tax professional
employed by the taxpayer, and the tax professional failed to make, or advise the
taxpayer to make the election.

Under section 301.9100-3(b)(3), a taxpayer will not be considered to have 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 (taking
into account section 1.6664-2(c)(3)) 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.

If specific facts have changed since the original deadline that make the election
advantageous to a taxpayer, the Service will not ordinarily grant relief.

Section 301.9100-3(c)(1) provides that the Commissioner will grant a reasonable
extension of time only when the interests of the Government will not be prejudiced by
the granting of relief. Section 301.9100-3(c)(1)(i) provides, in part, 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 (taking into account the
time value of money). Section 301.9100-3(c)(1)(ii) provides, in part, that 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 section 6501(a) before the taxpayer’s receipt of a ruling granting
relief.

                                             ANALYSIS

Taxpayer's election is a regulatory election, as defined under section 301.9100-1(b),
because the due date of the election is prescribed in the Income Tax Regulations under
section 1.263(a)-5(f). The Commissioner has the authority under sections 301.9100-1
and 301.9100-3 to grant an extension of time to file a late regulatory election.

Taxpayer represented that for federal income tax purposes, the merger transaction was
reorganization described in section 368(a)(1)(A). The transaction thus qualifies as a
covered transaction described in section 1.263(a)-5(e)(3)(iii).

Taxpayer in this case has represented that it requested relief before the failure to make
the regulatory election was discovered by the Service and that it reasonably relied on a
qualified tax professional, and the tax professional failed to make, or advise Taxpayer to
make, the election. Thus, under sections 301.9100-3(b)(1)(i) and (v), Taxpayer will be
deemed to have acted reasonably and in good faith. Taxpayer has also represented
that none of the circumstances listed in section 301.9100-3(b)(3) apply.

Based on the facts of the case Taxpayer provided, granting an extension of time to file
the election will not prejudice the interests of the government under section 301.9100-
3(c)(1). Taxpayer has represented that granting relief would not result in a lower tax
liability in the aggregate for all taxable years affected by the election than Taxpayer
would have had if the election had been timely made (taking into account the time value
of money). Furthermore, Taxpayer has represented that the taxable year in which the
regulatory election should have been made and any taxable years that would have been
affected had it been timely made, are not closed by the period of assessment.

                                      CONCLUSION

In the present situation, the requirements of sections 301.9100-1 and 301.9100-3(b)(1)
of the regulations have been satisfied. The information and representations made by
Taxpayer establish that Taxpayer acted reasonably and in good faith. Furthermore,
granting an extension will not prejudice the interests of the Government under section
301.9100-3(c)(1). Taxpayer represented that it will not have a lower tax liability in the
aggregate for all taxable years affected by the election if given permission to make the
election than Taxpayer would have if the election were made by the original deadline for
making the election. Taxpayer also represented that the period of assessment for Year
1 will not be closed before receipt of a ruling. Accordingly, Taxpayer is granted an
extension of time until 60 days following the date of this ruling to file an amended return
for the tax year ending Date 1 electing safe harbor treatment of its success-based fees
under section 4.01(3) of Rev. Proc. 2011-29. The amended return must include an
election statement stating that Taxpayer 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 the 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
federal income tax consequences of any aspect of any transaction or item discussed or
referenced in this ruling including whether Taxpayer properly included the correct costs
as its success-based fees subject to the election, or 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) of the Code
provides that it may not be used or cited as precedent.

A copy of this ruling must be attached to any income tax return to which it is relevant.
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 Power of Attorney 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. Enclosed is a copy of the letter ruling
showing the deletions proposed to be made in the letter when it is disclosed under
section 6110 of the Code.


                                       Sincerely,



                                       Brinton Warren
                                       Chief, Branch 3
                                       (Income Tax & Accounting)