PLR 1338009: IRS grants more time to make a success-based fee election

Plain-English summary

A publicly traded company used the safe harbor in Rev. Proc. 2011-29 to capitalize 30 percent of success-based fees from an acquisition and deduct the remaining 70 percent. The company intended to make the election but its advisor failed to attach the required statement to the original return. The IRS granted an extension of 45 days from the ruling date to file the statement and identify the transaction and fee allocation. The ruling did not decide whether the fees or the transaction otherwise qualified for the safe harbor.

Ruling snapshot

• Question: May the taxpayer file late the statement required for the success-based fee safe harbor election?
• Outcome: Approved, with 45 days to file the required statement.
• 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: 201338009 Third Party Communication: None
Release Date: 9/20/2013 Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
------------------------------------------------- -----------------------, ID No. -------------
---------------------------------------- Telephone Number:
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Refer Reply To:
----------------------------- CC:ITA:B01
------------------------------------------------------ PLR-103850-13
Date:
May 31, 2013

LEGEND

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

Taxable Year = -------

Target = ---------------------------------------------------------------------------------
-----------------------

Firm 1 = ---------------------------

Firm 2 = ---------------------

Firm 3 = ----------------------------------

Advisor = -----------------------------------------

Year 1 = -------

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

a = -----

b = --------------

Dear --------------:
PLR-103850-13 2

This letter responds to a letter ruling request dated January 18, 2013, submitted on
behalf of Taxpayer. Taxpayer requests an extension of time under §§ 301.9100-1 and
-3 of the Procedure and Administration Regulations to make the election described in
section 4 of Rev. Proc. 2011-29, 2011-18 I.R.B. 746, which includes attaching a
statement to Taxpayer’s original federal income tax return for Taxable Year.

Taxpayer is a publicly traded company formed in Year 1 and is the common parent of a
consolidated group. On Date 1, Taxpayer acquired a percent of Target in a taxable
stock acquisition described in § 1.263(a)-5(e)(3)(ii) of the Income Tax Regulations (the
acquisition). At the time of the acquisition, Target was a privately-held corporation.

In connection with the acquisition, Taxpayer and Target incurred success-based fees
payable to three investment banking advisors: Firm 1, Firm 2, and Firm 3. Pursuant to
formal engagement letters, each investment banking advisor earned a success-based
fee based on the value of the acquisition and due only when and if the acquisition
closed successfully. In total, the three investment banking advisors earned
success-based fees of $b upon the successful closing of the acquisition.

On Taxpayer’s original federal income tax return prepared by Advisor for Taxable Year,
Taxpayer capitalized under § 263(a) of the Internal Revenue Code 30 percent of $b,
and deducted the remaining 70 percent, consistent with Taxpayer’s intent to make the
election provided in Rev. Proc. 2011-29. However, in reliance on Advisor, Taxpayer
failed to attach the mandatory statement identifying the transaction and setting forth this
allocation as required by section 4.01(3) of Rev. Proc. 2011-29.

Taxpayer requests that an extension of time be granted solely for the purpose of
allowing taxpayer to attach to its return for Taxable Year the mandatory statement.

Section 263(a) 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)-1T(c)(3) provides that no deduction is allowed for an amount paid to
acquire or create an intangible, which under § 1.263(a)-4(c)(1)(i) and (d)(2)(i)(A)
includes an ownership interest in a corporation or other entity. See also § 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 § 1.263(a)-5, a taxpayer must capitalize an amount paid to facilitate the business
acquisition or reorganization transactions described in § 1.263(a)-5(a). In general, 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).
PLR-103850-13 3

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) (i.e., a 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.

Section 4.01 of Rev. Proc. 2011-29 provides a safe harbor election for taxpayers that
pay or incur success-based fees for services performed in the process of investigating
or otherwise pursuing a covered transaction described in § 1.263(a)-5(e)(3). In lieu of
maintaining the documentation required by § 1.263(a)-5(f), a taxpayer may elect to
allocate a success-based fee between activities that facilitate the transaction and
activities that do not facilitate the transaction by treating 70 percent of the amount of the
success-based fee as an amount that does not facilitate the transaction and by
capitalizing the remaining 30 percent as an amount that does facilitate the transaction.
In addition, 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, stating that the taxpayer
is electing the safe harbor, indentifying the transaction, and stating the success-based
fee amounts that are deducted and capitalized.

Taxpayer is requesting permission with this ruling request to attach the statement
required by section 4.01(3) of Rev. Proc. 2011-29 to its return, by amending its original
filed return and superseding it with a return with the proper election statement
completed and attached.

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.

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 301.9100-3(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. See also § 301.9100-3(b) and
(c).
PLR-103850-13 4

CONCLUSION

Based solely on the facts and representations submitted, we conclude that Taxpayer
acted reasonably and in good faith, and granting relief will not prejudice the interests of
the government. Accordingly, the requirements of §§ 301.9100-1 and 301.9100-3 have
been met.

Taxpayer is granted an extension of 45 days from the date of this ruling to file the
statement required by section 4.01(3) of Rev. Proc. 2011-29, stating that it 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 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, including whether Taxpayer properly included the correct costs as
success-based fees subject to the retroactive election, or whether Taxpayer’s
transaction was within the scope of Rev. Proc. 2011-29. Moreover, this ruling does not
express or imply any opinion concerning whether Target appropriately reported on
Taxpayer’s consolidated return for Taxable Year the success-based fees that Target
incurred, as opposed to Target reporting those success-based fees on its return for the
short taxable year ending at the close of Date 1.

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 should be attached to Taxpayer’s federal tax returns for the tax
years affected. Alternatively, taxpayers filing returns electronically may satisfy this
requirement by attaching a statement to their return that provides the date and control
number of this 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.

                                    Sincerely,



                                    Lewis K Brickates
                                    Branch Chief, Branch 1
                                    Office of Associate Chief Counsel
                                    (Income Tax & Accounting)