Taxpayer receives more time for success-based fee safe harbor election

Plain-English summary

A corporate taxpayer paid an investment bank a success-based fee for an acquisition. Its return capitalized 30 percent of the fee and treated 70 percent as a start-up expenditure, consistent with the safe harbor in Rev. Proc. 2011-29, but its adviser failed to attach 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 statements electing the safe harbor, identifying the transaction, and stating the amounts deducted and capitalized.

Ruling snapshot

• Question: May the taxpayer receive an extension to complete the Rev. Proc. 2011-29 safe harbor election for a success-based fee?
• Outcome: Approved, with 45 days to file the mandatory election statements
• Key authorities: IRC § 263(a); Treas. Reg. §§ 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: 201447016 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:

---------------------------, ID No. ---------------

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

Telephone Number:

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

Refer Reply To:
CC:ITA:B01
PLR-109230-14
Date:

August 4, 2014
Taxpayer = ------------------------------------------------
Taxable Year = -------
X = --------------------------------------------------------------------------------------

Sub 1 = ---------------------------------------------------------------------------
Sub 2 = --------------------------------------------------------------------------------------

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

Date 1 = ----------------------
Advisor = --------------------------------------------------------------------------------------
Firm = ---------------------------------------------------------
Investor 1 = --------------------------------------------------------------
Investor 2 = -------------------------------------------------------------------------

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

This letter responds to your letter dated April 7, 2014, submitted on behalf of
Taxpayer, requesting 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 statements to
Taxpayer’s original federal income tax return for Taxable Year.

FACTS

Taxpayer is the common parent of an affiliated group engaged in the business of
X. Taxpayer is a holding company that does not have any operating activities, and for
federal income tax purposes, uses the accrual method of accounting and has a
calendar year end.

PLR-109230-14 2

Target is in the trade or business of X. On Date, Taxpayer acquired Target in a
transaction that Taxpayer asserts qualifies as a reorganization under §§ 368(1)(A) and
368(a)(2)(E) of the Internal Revenue Code. Target survived a merger with Sub 1. Sub
1 was formed by Sub 2. Sub 2 is disregarded for federal income tax purposes.
Pursuant to the terms of the Agreement and Plan of Merger, the shareholders of
Taxpayer, Investor 1, and Investor 2, acquired all of Target’s outstanding stock,
redeemed all of Target’s Series A preferred stock and provided refinancing to Target’s
credit facilities. In connection with the acquisition, Taxpayer incurred a success-based
fee payable to Firm, an investment banking 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 acquisition during the Taxable Year.

On Taxpayer’s original federal income tax return for Taxable Year prepared by
Advisor, Taxpayer capitalized under § 263(a) of the Internal Revenue Code, 30 percent
of the success-based fee related to the acquisition, and treated the remaining 70
percent of the success-based fee as a start-up expenditure under § 195, 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 statements identifying the
transaction and setting forth this allocation as required by Section 4.01(3) of Rev. Proc.
2011-29.

LAW

Section 263(a)(1) of the Internal Revenue Code and § 1.263(a)-2(a) of the
Income Tax Regulations 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, 112 S. Ct. 1039, 117
L. Ed. 2d 226 (1992); Woodward v. Commissioner, 397 U.S. 572, 575-576, 90 S. Ct.
1302, 25 L. Ed. 2d 577 (1970).

Under § 1.263(a)-5, a taxpayer must capitalize an amount paid to facilitate
abusiness acquisition or reorganization transaction 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-109230-14 3

Section 1.263(a)-5(f) provides that an amount paid 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 this 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 and 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, identifying the transaction, and
stating the success-based fee amounts that are deducted and capitalized.

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

PLR-109230-14 4

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 its
mandatory statements as required by Section 4.01 of Revenue Procedure 2011-29,
stating that it is electing the safe harbor for success-based fees, identifying the
transaction, and stating the success-based fee amount that is deducted and capitalized.

The ruling contained in this letter is 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 a success-based fee 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 whether Taxpayer’s acquisition is within the scope of Rev.
Rul. 90-95.

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 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 provisions of the power of attorney currently on file with
this office, a copy of this letter is being sent to your authorized representative.

Sincerely,

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