Late merger-fee safe-harbor election granted

Plain-English summary

A corporation incurred success-based fees in merger transactions carried out through bankruptcy plans. Its timely return deducted 70 percent and capitalized 30 percent under the Revenue Procedure 2011-29 safe harbor, but omitted the required election statement. The taxpayer discovered the omission before the IRS, had consistently intended the safe-harbor treatment, and had relied on a tax professional who did not notice the missing statement. The IRS found reasonable conduct, good faith, and no prejudice to the government, and granted 60 days to file the statement.

Ruling snapshot

• Question: May the taxpayer file a late safe-harbor election statement for success-based merger fees?
• Outcome: Approved, with 60 days to file the required statement
• Key authorities: IRC § 263(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: 201535011 Third Party Communication: None
Release Date: 8/28/2015 Date of Communication: Not Applicable
Index Number: 263.00-00,9100.00-00 Person To Contact:
------------------, ID No. ----------------
Telephone Number:
--------------------
Refer Reply To:
------------------------- CC:IT&A:01
-------------------------------------- PLR-142164-14
------------------------------------------- Date:
---------------------- May 13, 2015

In re: ---------------------

LEGEND:

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

Taxable Year = ------

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

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

Corporation P = ----------------------------

Corporation Q = -----------------

Corporation R = ---------------------------------------

Corporation S = ----------------------

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

T = --------------------

V = ------------------------

Date 4 = ------------------------------

2
PLR-142164-14

Date 5 = ------------------

Accounting Firm = ------------------------------------
-----------------
Date 6 = ----------------------------

Date 7 = ---------------------------

Dear ---------------

This responds to a letter ruling request dated October 30, 2014, submitted on behalf of
Taxpayer. Taxpayer requests an extension of time under §§ 301.9100-1 and 301.9100-3
of the Income Tax Regulations on Procedure and Administration to make an election for
the treatment of a success-based fee 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 the success-based fee is paid or incurred.
Taxpayer makes the request in connection with its federal income tax return for Taxable
Year. Taxpayer uses a calendar year accounting period.

FACTS

On Date 1, and as amended on Date 2, Corporation P, Corporation Q, Corporation R, and
Corporation S entered into a merger agreement. Pursuant to the merger agreement, (i)
Corporation P agreed to merge with and into Corporation Q, with Corporation Q
continuing as the surviving entity and (ii) Corporation R agreed to merge with and into
Corporation S with Corporation S continuing as the surviving entity and a wholly-owned
subsidiary of Corporation Q. Pursuant to the merger agreement, the Corporation S
merger would occur immediately following the consummation of the Corporation P
merger. As a result of the mergers, former Corporation P shareholders would hold 60
percent of the outstanding equity of Corporation Q as the surviving corporation and
former Corporation S shareholders would hold 40 percent of the outstanding equity of
Corporation Q. The Corporation P and Corporation S mergers were to be effectuated
through a voluntary prepackaged plan under the Bankruptcy Code.

On Date 3, T and V filed separate voluntary bankruptcy petitions in the Bankruptcy Court.
On Date 4, the Bankruptcy Court entered separate orders confirming the bankruptcy
plans. On Date 5, Corporation S and Corporation P consummated the transactions
contemplated by the merger agreement, including the mergers, effectuated the
transactions contemplated by the bankruptcy plans and emerged from Chapter 11

PLR-142164-14 3

protection. The name of the surviving corporation was changed to Taxpayer and
Corporation S became a subsidiary of Taxpayer.

Taxpayer incurred fees related to the mergers. The fees were contingent on the
successful closing of the mergers (success-based fees), and were paid on or
about Date 5.

Taxpayer’s tax department prepared the Taxpayer’s consolidated federal income tax
return for Taxable Year. Taxpayer decided to take advantage of the safe harbor election
provided in Rev. Proc. 2011-29. The federal income tax return, as filed, reflected a
deduction of 70 percent of the success-based fee and capitalization of the remaining 30
percent, consistent with the requirements of the safe harbor election. Taxpayer engaged
Accounting Firm to review the return. The return did not include, as an attachment, the
statement required by section 4.01(3) of Rev. Proc. 2011-29 (taxpayer states it is electing
the safe harbor election, identifies the transaction, and sets forth the success-based fees
that are capitalized and those that are deducted). Taxpayer filed its return for Taxable
Year on Date 6 pursuant to a timely-filed extension.

On Date 7, prior to discovery by the Internal Revenue Service, a member of Taxpayer’s
tax department discovered that the election statement had been omitted.
Taxpayer requests relief to late file the election. Permission to file a late election is within
the discretion of the Commissioner under §§ 301.9100-1 and 301.9100-3. The statute of
limitations has not run for Taxable Year, and thus, Taxable Year is still open to tax
assessment.

LAW

Section 263(a)(1) of the Internal Revenue Code and § 1.263(a)-2(a)1 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 a business
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. § 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 an amount paid

1
The reference is to § 1.263(a)-2 as contained in 26 CFR part 1 edition revised as of April 1, 2011.

PLR-142164-14 4

to facilitate the transaction except to the extent the taxpayer maintains 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.

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.
To make this election, 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 a certain regulatory election. 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 extensions of time for regulatory
elections (other than automatic changes covered under section 301.9100-2) 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 that the grant of relief will not prejudice the interests of
the Government.

Section 301.9100-3(b)(1) provides 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
Internal Revenue Service;

PLR-142164-14 5

(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 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 could be imposed
under § 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. 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. The interests of the Government are prejudiced if granting relief would
result in a 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.

ANALYSIS

Taxpayer's election is a regulatory election, as defined in § 301.9100-1(b), because the
due date of the election is prescribed in the Income Tax Regulations under
§ 1.263(a)-5(f). 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.

The information and representations made by Taxpayer establish that Taxpayer acted

PLR-142164-14 6

reasonably and in good faith. One fact illustrating this is that Taxpayer discovered
that the required statement was not filed with the return prior to any such discovery by the
Service. Taxpayer is not seeking to alter a return position for which an accuracy-related
penalty has been or could be imposed under § 6662 at the time relief is
requested. Taxpayer did not affirmatively choose not to make the election after having
been informed in all material respects of the required election and related tax
consequences. Rather,Taxpayer intended to take advantage of the safe-harbor provisions
in Rev. Proc. 2011-29 and filed its return for Taxable Year reflecting those provisions
but failed to include the required election statement. Taxpayer reasonably relied on a tax
professional who failed to notice the omission of the required election statement.
Taxpayer is not using hindsight in requesting relief.

Further, based on the facts of the case provided, granting an extension will not prejudice
the interests of the Government. Taxpayer 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 at this time than Taxpayer would have had if the election had been timely made.
In addition, the taxable year in which the regulatory election should have been made and
any taxable years that would have been affected by the election had it been timely made
will not be closed by the period of limitations on assessment under § 6501(a) before
Taxpayer's receipt of the ruling granting an extension of time to make a late election.

RULING

Based upon our analysis of the facts as represented, 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 60 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 setting forth the
success-based fee amounts that are deducted and that are 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
appropriate parties. While this office has not verified any of the material submitted in
support of the request for the ruling, 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 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.

PLR-142164-14 7

A copy of this ruling should be attached to Taxpayer's statement.

In accordance with the power of attorney on file with this office, a copy of this letter is
being sent to Taxpayer’s 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
of the Code.

Sincerely,

Karin Gross
Senior Technician Reviewer
Branch 1
(Income Tax & Accounting)
Enclosure (1)