Corporation receives more time for success-fee safe harbor election

Plain-English summary

A corporation intended to elect the Revenue Procedure 2011-29 safe harbor for success-based fees incurred in a business acquisition. Its accounting firm prepared the return using the safe harbor's 70 percent deductible and 30 percent capitalized allocation but inadvertently omitted the required election statement. The IRS found that the corporation acted reasonably and in good faith through its reliance on a qualified tax professional. Because relief would not prejudice the government's interests, the IRS granted 60 days from the ruling date to file the statement. The ruling did not decide whether the identified costs qualified as success-based fees or whether the transaction fell within the revenue procedure.

Ruling snapshot

• Question: May the corporation file a late election for the Revenue Procedure 2011-29 success-fee safe harbor?
• Outcome: Approved, with 60 days from the ruling date 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: 201603024
[Third Party Communication:
Release Date: 1/15/2016
Date of Communication: Month DD, YYYY]
Index Number: 9100.00-00
Person To Contact:
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----------------------, ID No. -------------
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Telephone Number:
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Refer Reply To:
-------------------------------------------- CC:ITA:B03 PLR-125464-15
Date:
October 08, 2015

TY: -------

LEGEND:

Taxpayer = ------------------------------------------------------------------- Private Equity Firm = --------------------------------------- Taxpayer’s Parent = --------------------------------------------- Seller = ------------------------- Target’s Parent = ------------------------ Target = --------------------------------------- Accounting Firm = ---------------------------------------- Products = ----------------------------- Business = ----------------------------- Month 1 = ------------------ Date 1 = ----------------------- Date 2 = --------------------------- Date 3 = --------------------------- Date 4 = ------------------------- Year 1 = -------
$A = ----------------
$B = -----------------
$C = ---------------
$D = ---------------
$E = ---------------

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

This is in response to your letter dated ------------------. In your letter, you requested an extension of time to file the forms necessary to make a safe harbor election under Rev. Proc. 2011-29 to allocate success-based fees between facilitative and non-facilitative amounts incurred for a covered transaction for the taxpayer’s tax year ending December 29, Year 1. The request is based on sections 301.9100-1 and 301.9100-3 of the
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Procedure and Administrative Regulations.

FACTS

Taxpayer is the parent of a consolidated group formed for purposes of acquiring Target, a large supplier of Products.

In Month 1, Seller agreed to the sale of the majority of its Business to Private Equity Firm and other investors. To facilitate the transaction, Taxpayer’s Parent, owned by Private Equity Firm and other investors, formed an acquisition structure with Taxpayer as the top-tier corporation. Seller owned Target’s Parent, which in turn owned Target.

On Date 1, Taxpayer and its subsidiaries and Seller executed an investment agreement whereby a subsidiary of Taxpayer would acquire the preferred stock of Target’s Parent, in exchange for cash consideration and common stock in Taxpayer. Pursuant to the terms of the investment agreement, upon closing, Target’s Parent and Target would merge with and into subsidiaries of Taxpayer, with Target’s Parent and Target surviving. The transaction closed on Date 2, following which Seller owned the common stock of Taxpayer and Taxpayer’s Parent owned the preferred stock. Total consideration for the transaction was approximately $A.

In conjunction with the transaction, Taxpayer and one of its subsidiaries engaged Private Equity Firm for financial advisory services and negotiation support relating to the transaction. Pursuant to the terms of the engagement letter, Taxpayer paid the Private Equity Firm fees associated with financial advisory and investment banking services. Subsequent to the closing of the transaction, Taxpayer engaged Accounting Firm to perform a transaction costs analysis with respect to the various costs associated with Taxpayer’s acquisition of Target’s Parent and Target. At the conclusion of the analysis, Accounting Firm provided one of Taxpayer’s subsidiaries with a written summary of the results of the transaction costs analysis. As reflected in the summary document, costs associated with the transaction totaled $B. The portion of the total costs associated with success-based fees was identified as $C. This latter amount was specifically identified as available for treatment under the safe-harbor election allowed by Rev. Proc. 2011-29. Moreover, the transaction costs analysis contained as an exhibit a statement to be filed in order to make the safe-harbor election pursuant to the revenue procedure, specifically setting forth the amounts to be deducted and the amounts to be capitalized.

In addition to engaging Accounting Firm to prepare the transaction costs analysis, Taxpayer also engaged Accounting Firm for tax preparation services. Included in this engagement was the preparation of Taxpayer’s Form 1120, U.S. Corporation Income Tax Return, including for the year in which the transaction occurred.
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At the time the tax return was prepared, Accounting Firm was aware of the transaction costs analysis and the determination to allocate the success-based fees under the safe-harbor election provisions of Rev. Proc. 2011-29. Accounting Firm thus prepared Taxpayer’s return consistent with the allocation permitted under the safe harbor, with $D (70 percent) of the fees deductible either immediately or over time as non-facilitative costs, and the remaining $E (30 percent) capitalized as facilitative costs. However, due to an oversight, Accounting firm did not attach the statement required by Rev. Proc. 2011-29 to make the election to Taxpayer’s Form 1120. Taxpayer’s chief financial officer signed the finalized return, which Accounting Firm timely filed without the statement attached on Date 3.

Subsequent to the filing of Taxpayer’s Form 1120 for the taxable year at issue, Taxpayer’s independent auditors reviewed its financial statements. In the course of that review, the auditors discovered that the election statement was not attached to the return despite the success-based fees being allocated as permitted under the revenue procedure. The auditors then discussed the missing election statement with Accounting Firm on Date 4. At that point, Accounting Firm, after consulting with Taxpayer’s chief financial officer, recommended that Taxpayer seek section 9100 relief.

LAW AND ANALYSIS

Section 263(a)(1) of the Internal Revenue Code and section 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 (1992); Woodward v. Commissioner, 397 U.S. 572, 575-576 (1970).

Under section 1.263(a)-5, a taxpayer must capitalize an amount paid to facilitate a business acquisition or reorganization transaction described in section 1.263(a)-5(a). An amount is paid to facilitate a transaction described in section 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) of the Regulations provides that an amount that is contingent on the successful closing of a transaction described in section 1.263(a)-5(a), or 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.

To reduce controversy between the IRS and taxpayers over the documentation required to allocate success-based fees alternatively to the regulatory presumption, the IRS issued Rev. Proc. 2011-29, 2011-1 C.B. 746. The revenue procedure states that the IRS would not challenge a taxpayer's allocation of a success-based fee between
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activities that facilitate a transaction described in section 1.263(a)-5(e)(3) and activities that do not facilitate the transaction if the taxpayer --

(1) treats 70 percent of the amount of the success-based fee as an amount that does not facilitate the transaction;

(2) capitalizes the remaining 30 percent as an amount that does facilitate the transaction; and

(3) attaches 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.

The revenue procedure applies to covered transactions described in section 1.263(a)- 5(e)(3), which include --

(i) A taxable acquisition by the taxpayer of assets that constitute a trade or business;

(ii) A taxable acquisition of an ownership interest in a business entity (whether the taxpayer is the acquirer in the acquisition or the target of the acquisition) if, immediately after the acquisition, the acquirer and the target are related within the meaning of section 267(b) or section 707(b); or

(iii) A reorganization described in section 368(a)(1)(A), (B), or (C) or a reorganization described in section 368(a)(1)(D) in which stock or securities of the corporation to which the assets are transferred are distributed in a transaction which qualifies under section 354 or 356 (whether the taxpayer is the acquirer or the target in the reorganization).

Sections 301.9100-1 through 301.9100-3 of the Procedure and Administration Regulations provide the standards the Commissioner uses to determine whether to grant an extension of time to make a regulatory 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 section 301.9100-2.

Section 301.9100-1(b) defines the term "regulatory election" as an election whose due date is prescribed by a regulation published in the Federal Register, or a revenue ruling, procedure, notice or announcement published in the Internal Revenue Bulletin.

Section 301.9100-1(c) provides that the Commissioner may grant a reasonable extension of time to make a regulatory election, or a statutory election (but no more than six months except in the case of a taxpayer who is abroad) under all subtitles of the Internal Revenue Code except subtitles E, G, H and I.
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Section 301.9100-3 provides extensions of time to make a regulatory election under Code sections other than those for which section 301.9100-2 expressly permits automatic extensions. Requests for extensions of time for regulatory elections 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 granting relief will not prejudice the interests of the government.

Section 301.9100-3(b)(1) states 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 Service;

(ii) failed to make the election because of intervening events beyond the taxpayer's control;

(iii) failed to make the election because, after exercising due 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.

Under section 301.9100-3(b)(3), 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 has been or could be imposed under section 6662 at the time the taxpayer requests relief (taking into account section 1.6664-2(c)(3)) 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.

Taxpayer in this case has represented that it has requested relief before the failure to make the regulatory election was discovered by the Service. Taxpayer has also represented that it reasonably relied on a qualified tax professional, and the tax
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professional failed to make, or advise the taxpayer to make, the election. Thus, under sections 301.9100-3(b)(1)(i) and 301.9100-3(b)(1)(v), Taxpayer will be deemed to have acted reasonably and in good faith. Taxpayer has also represented that none of the circumstances listed in section 301.9100-3(b)(3) apply.

Section 301.9100-3(c)(1)(i) provides, in part, that the interests of the government are prejudiced if granting relief would result in the 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 (taking into account the time value of money). Section 301.9100-3(c)(1)(ii) provides, in part, that 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 section 6501(a) before the taxpayer’s receipt of a ruling granting relief.

Under these criteria, the interests of the government are not prejudiced in this case. Taxpayer has represented that granting relief would not result in a lower tax liability in the aggregate for all taxable years affected by the election than Taxpayer would have had if the election had been timely made (taking into account the time value of money). Furthermore, the taxable year in which the regulatory election should have been made and any taxable years that would have been affected had it been timely made, are not closed by the period of assessment.

CONCLUSION

Taxpayer's election is a regulatory election, as defined under section 301.9100-1(b), because the due date of the election is prescribed in Rev. Proc. 2011-29. In the present situation, the requirements of sections 301.9100-1, 301.9100-3(b)(1)(i), and 301.9100- 3(b)(1)(v) of the regulations have been satisfied. The information and representations made by Taxpayer establish that Taxpayer acted reasonably and in good faith. Furthermore, granting an extension will not prejudice the interests of the Government. Taxpayer represented that it 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 than Taxpayer would have if the election were made by the original deadline for making the election. Taxpayer also represented that the period of assessment for Year 1 will not be closed before receipt of a ruling. Accordingly, Taxpayer is granted an extension of time to file the statement required by section 4.01(3) of Rev. Proc. 2011-29 until 60 days following the date of this letter.

Except as expressly provided herein, no opinion is expressed or implied concerning the federal income tax consequences of any aspect of any transaction or item discussed or referenced in this ruling 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.
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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 letter must be attached to any income tax return to which it is relevant. 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.

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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