Taxpayer receives more time for success-fee elections on two acquisitions

Plain-English summary

A corporate group paid success-based investment banking fees for two acquisitions. Its return deducted 70 percent of each fee and capitalized 30 percent, consistent with the safe harbor in Rev. Proc. 2011-29, but its adviser omitted the required election statements. The IRS found that the taxpayer acted reasonably and in good faith and that relief would not prejudice the government. It granted 45 days to file a statement electing the safe harbor, identifying the transactions, and stating the amounts deducted and capitalized.

Ruling snapshot

• Question: May the taxpayer receive an extension to complete Rev. Proc. 2011-29 safe harbor elections for success-based fees on two acquisitions?
• Outcome: Approved, with 45 days to file the required election statement
• Key authorities: IRC § 263(a); Treas. Reg. §§ 1.263(a)-4, 1.263(a)-5, 301.9100-1, and 301.9100-3; Rev. Proc. 2011-29

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201447015 Third Party Communication: None
Release Date: 11/21/2014 Date of Communication: Not Applicable
Index Number: 9100.00-00, 263.00-00
Person To Contact:

------------------------------------- ---------------

-----------------

Telephone Number:

Refer Reply To:

CC:ITA:B01
PLR-109025-14
Date:
August 4, 2014

LEGEND

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

Taxable Year = -------

Target 1 = --------------------.

Target 2 = -------------------------------------------------------

Firm = ------------------------------

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

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

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

Dear ---------:

PLR-109025-14 2

This letter responds to a letter ruling request dated March 3, 2014, submitted on
behalf of Taxpayer. Taxpayer requests an extension of time under §§ 301.9100-1 and
301.9100-3 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.

FACTS

Taxpayer is the common parent of an affiliated group of corporations that files a
consolidated federal income tax return. On Date 1, Taxpayer entered into an
agreement to acquire the assets constituting a trade or business Target 1 in a
transaction described in § 1.263(a)-5(e)(3)(i) of the Income Tax Regulations (the first
acquisition).

In connection with the first acquisition, Taxpayer paid success-based fees to an
investment banking advisor, Firm. Pursuant to a formal engagement letter, Firm earned
a success-based fee based on the value of the acquisition and due only when and if the
acquisition closed successfully. Firm earned a success-based fee upon the successful
closing of the first acquisition during the Taxable Year.

On Date 2, Taxpayer entered into an agreement to acquire all of the issued and
outstanding shares of stock of Target 2 in a transaction described in § 1.263(a)-
5(e)(3)(ii) (the second acquisition).

In connection with the second acquisition, Taxpayer paid success-based fees to
an investment banking advisor, Firm. Pursuant to a formal engagement letter, Firm
earned a success-based fee based on the value of the acquisition and due only when
and if the acquisition closed successfully. Firm earned a success-based fees upon the
successful closing of the second acquisition during the Taxable Year.

On Taxpayer’s original federal income tax return Advisor prepared for Taxable
Year, Taxpayer deducted 70% of the success-based fees for the first acquisition and
the second acquisition, and capitalizing the remaining 30% of the success-based fees
under § 263(a), consistent with Taxpayer’s intent to make the election provided in Rev.
Proc. 2011-29. However, Advisor did not satisfy the requirement of attaching the
mandatory statement identifying the transactions 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 satisfy the requirement of filing the election statements with its
federal income tax returns for the Taxable Year.

LAW

PLR-109025-14 3

Section 263(a)(1) 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(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).

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

PLR-109025-14 4

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).

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

PLR-109025-14 5

transaction was within the scope of Rev. Proc. 2011-29. Moreover, this ruling does not
express or imply any opinion concerning whether Target 1 or Target 2 appropriately
reported on Taxpayer’s consolidated return for Taxable Year the success-based fees
that either Target incurred, as opposed to either Target reporting those success-based
fees on its return for the short taxable year ending at the close of Date 1 or Date 2,
respectively.

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)