Buyer receives late success-based fee safe-harbor relief

Plain-English summary

A corporation paid success-based fees to acquire a subsidiary and reported them using Revenue Procedure 2011-29's safe harbor, deducting 70 percent and capitalizing 30 percent. Its return preparer failed to attach the required election statement to the timely filed original return. The omission was discovered before the IRS identified it, and the taxpayer requested discretionary relief. The IRS granted 45 days to file the required statement identifying the transaction and the fee amounts deducted and capitalized.

Ruling snapshot

• Question: Could the taxpayer late-file the election statement for the success-based fee safe harbor?
• Outcome: Approved
• Key authorities: IRC §§ 263, 446; 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: 201538002 Third Party Communication: None
Release Date: 9/18/2015 Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
------------------------------ -------------------
--------------------------- Telephone Number:
------------------------- --------------------
Refer Reply To:
--------------------------------------------- CC:ITA:B03
PLR-104399-15
Date:
May 20, 2015

              TY: ------

Legend

Taxpayer= --------------------------------------------------------------
X= ------------------------------------------------------------------------------------------

Date 1= --------------------
Date 2= ------------------
Subsidiary 1= ---------------------------------------------
Year= ------
Date 3= ---------------------------
Date 4= --------------------------
Firm= --------------------

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

This letter responds to your letter dated January 26, 2015, 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 Year.

FACTS

Taxpayer is a corporation that conducts its operations through wholly owned
subsidiaries and is engaged in X. Taxpayer is a calendar year taxpayer and follows the
accrual method of accounting.

PLR-104399-15 2

On Date 1, Taxpayer entered into a Stock Purchase Agreement pursuant to which,
effective as of the closing on Date 2, it acquired 100% of the issued and outstanding
stock of Subsidiary 1. In connection with the acquisition, Taxpayer incurred transaction
costs, including success-based fees. The success-based fees were paid upon the
closing of the transaction on Date 2. Taxpayer capitalized the costs in accordance with
§ 263 of the Internal Revenue Code and § 1.263(a)-2(a) and § 1.263(a)-5 of the Income
Tax Regulations. Specifically, Taxpayer capitalized 30 percent of the success-based
fees, and treated the remaining 70 percent as an amount which did not facilitate the
transaction on its corporate income tax return for Year consistent with the safe harbor
election provided in Rev. Proc. 2011-29. Taxpayer timely filed its tax return on Date 3,
which was prepared by Firm.

On or about Date 4, Firm discovered that the election statement, required by § 4.01(3)
of Rev. Proc. 2011-29, was not attached to the filed return. This oversight was
uncovered prior to any discovery by the Service.

Accordingly, Taxpayer requests an extension of time be granted for the purpose of
allowing Taxpayer to attach to its Year return, the mandatory statement regarding the
election to use the safe harbor method of allocating success-based fees.

LAW

Section 263(a)(1) and § 1.263(a)-2(a) 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 v. Commissioner, 503 U.S. 79, 89-90 (1992);
Woodward v. Commissioner, 397 U.S. 572, 575-576 (1970).

Under § 1.263(a)-5 of the regulations, a taxpayer must capitalize an amount paid to
facilitate a business acquisition or reorganization transaction described in § 1.263(a)-
5(a). 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.

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) (“success- based fee”) is presumed
to facilitate the transaction, and thus must be capitalized. 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, and thus may be
deductible.

A taxpayer’s method for determining the portion of the success-based fee that facilitates
a transaction and the portion that does not facilitate the transaction is a method of
accounting under § 446.

PLR-104399-15 3

Section 4.01 of Rev. Proc. 2011-29 provides a safe-harbor method of accounting for
allocating success-based fees paid in business acquisitions or reorganizations
described in regulations § 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. Section 4.01 allows a taxpayer to treat 70 percent of the amount of the
success-based fee as an amount that does not facilitate the transaction and to
capitalize 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.

It is this last requirement that Taxpayer requests permission to accomplish with this
ruling request. Taxpayer requests permission with this ruling request to attach the
statement required by § 4.01 of Rev. Proc. 2011-29 to its return, by filing an amended
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.

PLR-104399-15 4

Taxpayer is granted an extension of 45 days from the date of this ruling to file its
mandatory statements as required by §4.01 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.

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.

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.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

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 this letter ruling.

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.

                                   Sincerely,



                                   Christopher F. Kane
                                   Branch Chief, Branch 3
                                   (Income Tax & Accounting)

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