Late success-based fee election statements received an extension

Plain-English summary

A corporate taxpayer paid success-based consulting fees for a taxable stock acquisition. On its original return, it used the Revenue Procedure 2011-29 safe harbor by deducting 70 percent of the fees and capitalizing 30 percent, but its adviser failed to attach the required election statements. The taxpayer requested discretionary relief under Treasury Regulations §§ 301.9100-1 and 301.9100-3. 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 identifying the transaction and the amounts deducted and capitalized, without deciding whether the transaction or fees otherwise qualified for the safe harbor.

Ruling snapshot

• Question: Could the taxpayer receive more time to file the statements required for the success-based fee safe harbor election?
• Outcome: Approved.
• Key authorities: IRC § 263; Treas. Reg. §§ 1.263(a)-5 and 301.9100-3; Rev. Proc. 2011-29.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201642013 [Third Party Communication:
Release Date: 10/14/2016 Date of Communication: Month DD, YYYY]
Index Number: 263.00-00
Person To Contact:
--------------------------------- ------------------------, ID No. ------------------
------------------------------- ---------------------------------------------------
--------------------------- Telephone Number:
---------------------------------- --------------------
Refer Reply To:
CC:ITA:B01
PLR-110347-16
Date:
July 14, 2016

              TY:

Taxpayer = ---------------------------------------------------------
Taxable Year = ------
x = --------------------------------------------
Year 1 = ------
Company A = ---------------------------------------------
y = ----------------------------------------------
Date 2 = ----------------
Company B = ---------------
Company C = ----------------
Firm 1 = ------------------
Firm 2 = ---------------------
Firm 3 = -----------------------------
Advisor = ---------------------------------------

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

This letter responds to your letter dated March 28, 2016, 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 a consolidated group engaged in the business of x.
In Year 1, Taxpayer was formed for the purpose of acquiring Company A, which was
engaged in the business of y. On Date 2, Taxpayer acquired 100 percent of the stock
of Company A in a taxable stock acquisition. Shortly after the acquisition, Company A’s
PLR-110347-16 2

name was changed to Company B.1 Taxpayer incurred success-based fees payable to
three consultants, Firm 1, Firm 2, and Firm 3, in connection with the acquisition of
Company A. Pursuant to the formal engagement letters, Firm 1, Firm 2, and Firm 3
earned the fees based on the value of the acquisition which were due only when and if
the transaction closed successfully.

On Taxpayer’s original federal income tax return for Taxable Year prepared by Advisor,
Taxpayer capitalized 30 percent of the success-based fee related to the acquisition and
deducted the remaining 70 percent, pursuant to § 263(a) and the safe harbor 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 the
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, cost 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, 575-76, 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 pursing 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
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
1
The acquisition of Company B was part of a larger transaction which included other businesses of
Company B’s ultimate parent, Company C. Only the success-based fees associated with the stock
acquisition of Company B are at issue in this ruling request.
PLR-110347-16 3

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 that 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
the 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,
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 the taxpayer and accompanied by a penalty of perjury statement executed
PLR-110347-16 4

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. Moreover, this ruling does not express or imply
any opinion whether Taxpayer’s acquisitions are 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 Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

                                   Sincerely,



                                   Lewis K Brickates
                                   Branch Chief, Branch 1
                                   (Income Tax & Accounting)

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