Acquired company received more time for success-based fee safe harbor

Plain-English summary

A corporation incurred success-based fees while arranging its acquisition by another company. Its merger agreement required the Rev. Proc. 2011-29 safe harbor election, and its return treated 70 percent of the fees as deductible and the remaining 30 percent as capitalized, but the return preparer inadvertently omitted the election statement. Although the return was under examination, the IRS had not identified or requested information about this issue. The IRS found that the corporation acted reasonably and in good faith and granted 60 days to file the statement, while declining to rule on whether the fees or transaction otherwise qualified for the safe harbor.

Ruling snapshot

• Question: Could the acquired corporation receive more time to file the Rev. Proc. 2011-29 election for success-based transaction fees?
• Outcome: approved, with a 60-day extension
• Key authorities: 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: 201645002                                             Third Party Communication: None
Release Date: 11/4/2016                                       Date of Communication: Not Applicable
Index Number: 9100.00-00
                                                              Person To Contact:
--------------------------------------                        ---------------------------, ID No. ---------------
-----------------------------------------------------------   -----------------
-----------------------------------------------               Telephone Number:
--------------------------                                    ----------------------
                                                              Refer Reply To:
In Re: ---------------------------------------------------- CC:ITA:B03
------------------------------------------------------------ PLR-103782-16
---------------------------------------------------          Date:
                                                             August 03, 2016




Taxpayer Identification Number: -----------------

Legend:

Date1                      = ------------------------
X                          = -----------------------------------------------------------
Y                          = ---------------------------------------------------
Date2                      = --------------------
AccountingFirm             = -----------------------
Date3                      = -------------------
Year1                      = -------
Year2                      = -------
$a                         = ----------------
$b                         = --------------

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

This letter responds to a letter dated Date1, submitted on behalf of X (“Taxpayer”),
requesting a ruling that Taxpayer be granted an extension of time under sections
301.9100-1(c) and 301.9100-3 of the Procedure and Administration Regulations to file a
safe harbor election under Revenue Procedure 2011-29, 2011-18 I.R.B. 746.

Facts

According to the information submitted, Taxpayer is a corporation that provides
protective packaging materials and systems. Taxpayer engaged the services of certain
financial advisors, private equity firms, and investment bankers in order to facilitate the
possible acquisition of Taxpayer by another company. These service providers agreed
to be paid only upon successful consummation of such a transaction (the “success-
based fees”), in addition to reimbursement of out-of-pocket expenses not at issue here.

PLR-103782-16                                  2

On May 19, 2014, Taxpayer was acquired by Y when Y’s wholly owned subsidiary
merged with and into Taxpayer. As a result of this transaction, Taxpayer and Y became
related entities within the meaning of section 267(b) of the Internal Revenue Code.

The Agreement and Plan of Merger, signed Date2, provided that Taxpayer would make
the safe harbor election under Revenue Procedure 2011-29 to treat 70% of the
Taxpayer’s success based transaction fees as an amount which did not facilitate the
transaction. A copy of this agreement was provided to Taxpayer’s income tax return
preparer—AccountingFirm—for the short tax year ending Date3. Taxpayer’s income tax
return treats 70% of the success-based fees as deductible amounts that do not facilitate
the transaction. The total success-based fee was $a, 70% of which was $b.
AccountingFirm inadvertently did not include the election required under Rev. Proc.
2011-29 with Taxpayer’s income tax return. This omission was not discovered until
after the return was filed, and Taxpayer then filed the request for 9100 relief.

Taxpayer asserts that its Year1 tax return is under examination, but that the issue in
question is not, that Exam has requested no information about the transaction, and that
Exam has not identified the missed election as an issue to be examined.

Law and Analysis

Treasury Regulations § 1.263(a)-5(a) requires taxpayers to capitalize amounts paid or
incurred to facilitate certain transactions. Section 1.263(a)-5(a)(3) includes an
acquisition of an ownership interest in the taxpayer as one such transaction.

Treasury Regulations § 1.263(a)-5(e)(1) provides that an amount paid by the taxpayer
in the process of investigating or otherwise pursuing a covered transaction facilitates
that transaction only if the amount relates to activities performed on or after the earlier
of (i) the date a letter of intent is executed, or (ii) the date on which the material terms of
the transaction are approved by the taxpayer’s board of directors. Section 1.263(a)-
5(e)(3) defines a covered transaction as (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 or the target) if
immediately after the acquisition the acquirer and the target are related within the
meaning of §§ 267(b) or 707(b), or (iii) a reorganization described in §§ 368(a)(1)(A),
(B), or (C), or a reorganization described in § 368(a)(1)(D) in which the stock or
securities of the corporation to which the assets are transferred are distributed in a
transaction that qualifies under §§ 354 or 356.

Section 1.263(a)-5(f) provides that an amount paid that is contingent on the successful
closing of a covered transaction is an amount paid 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.

PLR-103782-16                                 3

Section 4 of Revenue Procedure 2011-29 provides a safe harbor election for allocating
success based fees paid in business acquisitions or reorganizations described in §
1.263(a)-5(e)(3). Under the safe harbor, taxpayers may elect to treat 70% of such
success based fees as amounts which do not facilitate the transaction and therefore are
not required to be capitalized, provided that the taxpayer (i) capitalizes the remaining
30%, and (ii) attaches a statement to its timely filed return electing to use the safe
harbor treatment.

Under § 301-9100-1(c), 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. Section 301.9100-1(b) defines the term
"regulatory election" as including an election whose deadline is prescribed by a
regulation published in the Federal Register or a Revenue Procedure published in the
Internal Revenue Bulletin.

Sections 301.9100-1 through 301.9100-3 provide the standards that the Commissioner
will use to determine whether to grant an extension of time to make an election. Section
301.9100-1(a).

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.

Requests for relief under § 301.9100-3 will be granted when the taxpayer provides
evidence to establish that the taxpayer acted reasonably and in good faith, and that
granting relief will not prejudice the interests of the government. Section 301.9100-3(a).

Section 301.9100-3(b)(1) provides that a taxpayer will be deemed to have acted in good
faith if the taxpayer requests relief before the failure to make the election is discovered
by the Service, or if the taxpayer reasonably relied on a qualified tax professional who
failed to make the election or to advise the taxpayer to make the election.

Section 301.9100-3(b)(3) provides that a taxpayer will not be deemed to have acted in
good faith if the taxpayer: (1) seeks to alter a return position for which an accuracy-
related penalty has been or could be imposed under § 6662 and the new position
requires or permits a regulatory election for which relief is requested; (2) was informed
in all material respects of the required election but chose not to file the election; or (3)
uses hindsight in requesting relief, when specific facts have changed since the due date
for making the election that make the election advantageous to the taxpayer.

Section 301.9100-3(c) provides that interests of the government will be prejudiced if
granting relief would result in a lower tax liability in the aggregate for all tax years
affected by the election than the taxpayer would have had if the election had been

PLR-103782-16                                 4

timely filed, or if the taxable year in which the election should have been made is closed
at the time the relief would be granted.

In this case, Taxpayer represents that the issue is not under examination. It is not the
case that Taxpayer was informed of the need to file the election but chose not to do so.
Taxpayer represents that it is not altering a return position for which an accuracy-related
penalty could be imposed, because it is not altering its return position at all; it is filing
the election that was required with its original return. Taxpayer also represents that no
specific facts have changed since the due date for filing the election that make the
election advantageous. Finally, taxpayer represents that its tax liability for the year at
issue will not be lower if relief is granted than it would have been had the election been
timely filed. The tax year at issue is not a closed year at the time relief would be
granted.

Conclusion

Based solely on the facts submitted and the representations made, we conclude that
Taxpayer acted reasonably and in good faith, and that granting the request will not
prejudice the interests of the government. Accordingly, the requirements of §§
301.9100-1 and 301.9100-3 have been satisfied.

Taxpayer is granted an extension of 60 days from the date of this ruling to file the
statement required by § 4.01(3) of Rev. Proc. 2011-29, stating that it is electing the safe
harbor for success-based fees, properly identifying the party making the election,
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
appropriate parties. 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 specifically provided herein, no opinion is expressed or implied concerning
the federal tax consequences of the facts described above under any other provision of
the Code. In particular, no opinion is expressed or implied as to whether the 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) provides that
it may not be used or cited as precedent.

PLR-103782-16                               5

In accordance with the provisions of a power of attorney currently on file, we are
sending a copy of the ruling 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.

Sincerely,



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

Enclosures (2):
Copy of this letter
Copy for section 6110 purposes