Taxpayer receives more time to complete success-fee election

Plain-English summary

A corporation paid success-based fees in an acquisition and timely reported 70 percent as deductible and 30 percent as capitalized, consistent with the Rev. Proc. 2011-29 safe harbor. Its return preparer failed to attach the required statements identifying the transaction and the amounts allocated to each category. The IRS found that the taxpayer acted reasonably and in good faith and that relief would not prejudice the government's interests. It granted 45 days to file the missing statements and complete the safe-harbor election.

Ruling snapshot

• Question: Could the taxpayer file the statements omitted from its timely Rev. Proc. 2011-29 safe-harbor election?
• Outcome: Approved, with 45 days to file the required statements.
• 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: 201639007                                             Third Party Communication: None
Release Date: 9/23/2016                                       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-106976-16
                                                              Date:
                                                              June 24, 2016

Taxpayer          = ---------------------------------------------------------
Date1             = ---------------------
Date2             = --------------------------
Date3             = --------------------------
A                 = --------------------
B                 = ------------------
C                 = -----------------------------------------------------------------------------------------------
                    -------------------
D                 = --------------------------------------
E                 = -----
F                 = ---------------
G                 = --------------------------

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

This letter responds to your letter dated February 22, 2016, and subsequent
correspondence, 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 ended Date1.

FACTS

Taxpayer is a corporation located in A that is engaged in the business of providing
hospitals and healthcare systems throughout the B with information technology
services, web products, and other services that contribute to improving patient care
while reducing healthcare costs. Taxpayer uses an accrual method of accounting and
has a March 31 fiscal year end.

Taxpayer was owned by C. On Date2, pursuant to a plan of merger (the “Transaction”),
D acquired E% of the stock of Taxpayer from C.
PLR-106976-16                                2


In the process of investigating or otherwise pursuing the Transaction, Taxpayer incurred
certain transaction costs, which included payments to certain professional advisors for
legal, accounting, and consultative services. Some of those costs related to payments
by Taxpayer to a professional financial advisor due only upon successful closing of the
Transaction (“success-based fees”). Taxpayer paid the professional financial advisor
success-based fees in the amount of F upon closing of the Transaction.

Taxpayer engaged G, a tax advisory and accounting firm, to prepare Taxpayer’s federal
income tax return for the taxable year ended Date1. G determined that the success-
based fee paid by Taxpayer to the professional financial advisor upon closing of the
Transaction satisfied the requirements of Rev. Proc. 2011-29, and that the transaction
qualified as a covered transaction under the requirements of § 1.263(a)-5(e)(3) of the
Income Tax Regulations. Accordingly, on Taxpayer’s original federal income tax return
for the taxable year ended Date1 prepared by G, which was timely filed on Date3,
Taxpayer capitalized under § 263(a) of the Internal Revenue Code 30 percent of the
success-based fees related to the Transaction, and deducted the remaining 70 percent,
consistent with Taxpayer’s intent to make the election provided in Rev. Proc. 2011-29.
However, in reliance on G, Taxpayer failed to attach the mandatory statements
identifying the transactions 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 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 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
PLR-106976-16                                 3

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 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,
PLR-106976-16                                  4

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 transactions were
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.

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 representatives.

                                       Sincerely,

                                       Lewis K Brickates

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