Taxpayer receives 60 days to elect safe harbor for success-based fees

Plain-English summary

A company paid a financial adviser a success-based fee in connection with its sale. Its return allocated 70 percent of the fee to deductible activities and capitalized 30 percent, matching the safe harbor in Revenue Procedure 2011-29, but omitted the required election statement. The omission arose because one tax adviser received only a summary that did not identify the fee or mention the election. The IRS found that the taxpayer acted reasonably and in good faith and that relief would not prejudice the government. It granted 60 days to file the statement identifying the transaction and the amounts deducted and capitalized.

Ruling snapshot

• Question: Could the taxpayer make a late safe-harbor election for allocating success-based transaction fees?
• Outcome: approved
• Key authorities: IRC §§ 263(a) and 446; 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: 201716005 [Third Party Communication:
Release Date: 4/21/2017 Date of Communication: Month DD, YYYY]
Index Number: 9100.00-00
Person To Contact:
-------------------------------------------- ---------------------, ID No. -----------------
---------------------------- Telephone Number:
------------------------------ ---------------------
--------------------------- Refer Reply To:
------------------------------------- CC:ITA:B02
------------------------------ PLR-122450-16
Date: January 5, 2017
In Re: ---------------------------------------------------

      ------------------------
      c/o Designated Substitute Agent
      ---------------------------
      ------------------------

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

TY: --------------------------------------------------------------------------------------------------------------

Legend

Taxpayer = --------------------------------------------
A= -------------------------------
B= --------------------------------
C= ---------------------------
D= --------------------------
E= ----------------
F= ---------------------------
G= ----------------
Financial Advisor= ----------------------------
First Tax Advisor= --------------------
Second Tax Advisor= ------
Financial Auditor= --------------------
Senior Tax Manager= ---------------
Partner= ------------------
Date1= ------------------
Date2= -----------------------
Date3= ---------------------
Date4= ---------------------------
a= ---------------
Year1= -------
PLR-122450-16 2

Summary Report= ------------------------------------------

     This is in response to a letter dated Date1, requesting an extension of time to file

the required election statement to make a safe-harbor election under Rev. Proc. 2011-
29, 2011-1 C.B. 746, to allocate success-based fees between facilitative and non-
facilitative amounts for Taxpayer’s transaction during the short taxable year ending
Date2. This request is made in accordance with §§ 301.9100-1 and 301.9100-3 of the
Procedure and Administration Regulations.

FACTS AND REPRESENTATIONS

Taxpayer represents the following:

     Taxpayer was a ----------------------------------------- prior to merging out of existence

in conjunction with the transaction described below. Taxpayer’s main operating
subsidiary was A (now known as B), which provides -----------------------------------------------
------------------------------------------------------------------------------------------------------------.

    On Date 2, Taxpayer and its subsidiaries were purchased by C (the Transaction).

In conjunction with the Transaction, Taxpayer and three of its subsidiaries, D, E, and A,
converted from state-law corporations to limited liability companies. Taxpayer merged
with its subsidiary, F, with F surviving. F then merged with its subsidiary G, with G
surviving.

   Taxpayer engaged Financial Advisor to provide it with financial advisory services

with respect to the Transaction. These services included general business and financial
analyses, transaction feasibility analysis, company valuation, and advice on
opportunities to sell the company. Taxpayer paid Financial Advisor $a for the services,
payment of which was contingent upon the closing of the transaction.

   Following the Transaction’s closing, First Tax Advisor prepared a transaction

costs analysis of the various fees and services associated with C’s purchase of
Taxpayer. First Tax Advisor identified the fees paid to Financial Advisor as
success-based fees qualifying for safe harbor treatment for allocating success-based
fees under Rev. Proc. 2011-29.

   In addition, First Tax Advisor prepared a Summary Report summarizing the

income tax treatment of various transaction costs incurred by Taxpayer. The Summary
Report included the $a in fees paid to Financial Advisor and broke them down into
deductible and capitalizable portions. The amounts reflected under each portion
corresponded to 70 percent and 30 percent of the total fees paid to Financial Advisor,
thus reflecting application of the safe harbor treatment under Rev. Proc. 2011-29.
However, the Summary Report did not specifically identify these fees as success-based
fees qualifying for treatment under Rev. Proc. 2011-29 and did not mention the election
under the revenue procedure.
PLR-122450-16 3

    A performed all tax-related tasks for the entities in the Taxpayer consolidated

group. A also engaged Second Tax Advisor to prepare the Taxpayer consolidated
group’s Form 1120, U.S. Corporation Income Tax Return, for the Year1 taxable year, as
well as for the short taxable year ending Date2, the date the Transaction closed. During
the course of preparing the return, Second Tax Advisor was provided with the Summary
Report prepared by First Tax Advisor, but did not receive the full transactions costs
analysis prepared by First Tax Advisor. The Summary Report included all transaction
costs incurred by Taxpayer, not just those paid to Financial Advisor. As noted above,
the Summary Report did not specifically identify the fees as success-based fees or
reference the safe-harbor election provided by Rev. Proc. 2011-29 despite the fact that
the fees paid to Financial Advisor were allocated between deductible and capitalizable
amounts, reflecting 70 percent and 30 percent, as provided under section 4.01 of the
revenue procedure. Because Second Tax Advisor was not provided with a copy of the
full transaction costs analysis report prepared by First Tax Advisor, Second Tax Advisor
did not identify the fees paid to Financial Advisor as success-based fees qualifying for
treatment under Rev. Proc. 2011-29.

    The Form 1120 for the short taxable year ending Date2 was prepared by Second

Tax Advisor and incorporated the information provided by Taxpayer in the Summary
Report prepared by First Tax Advisor. Several drafts of the return were provided to the
Senior Tax Manager at A, and the other members of the tax team, for review. The issue
of the treatment of the success-based fees paid to Financial Advisor did not arise during
the course of the return preparation and review process. Although the Form 1120 filed
for the short taxable year ending Date2 allocated the success-based fees as permitted
under Rev. Proc. 2011-29, the election statement required by section 4.01(3) of the
revenue procedure to make the election was not included with the return.

   During the review of Taxpayer’s financial statements for the short taxable year

ended Date2, its auditors at Financial Auditor inquired about the election for success-
based fees under Rev. Proc. 2011-29. The auditor at Financial Auditor raised the issue
with the Senior Tax Manager at A, noting that no election statement was included with
the return. The Senior Tax Manager at A then contacted Partner at Second Tax
Advisor, on Date3, to discuss whether relief was available to file the required election
statement. Upon being advised that such relief was available, it was determined to
submit the instant request under Treas. Reg. §§ 301.9100-1 and 301.9100-3.

   The Form 1120 of Taxpayer, for the short taxable year ending Date2, was

electronically filed, pursuant to extension, on Date4. The Form 1120 for that year is not
currently under examination by the Internal Revenue Service (Service). Taxpayer has
not received any other notification from the Service indicating that the Service
discovered that Taxpayer did not make the election relating to the success-based fees
discussed herein on its federal income tax return for the short taxable year ending
Date2.

LAW
PLR-122450-16 4

   Section 263(a)(1) of the Internal Revenue Code and § 1.263(a)-2(a) of the

Income Tax Regulations generally 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 § 1.263(a)-5, 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. 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 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 a success-based fee that

facilitates a transaction and the portion that does not facilitate the transaction is a
method of accounting under § 446. See section 2.04 of Rev. Proc. 2011-29.

     Because the treatment of success-based fees was a continuing subject of

controversy between taxpayers and the Service, the Service published Rev. Proc. 2011-

29. Rev. Proc. 2011-29 provides a safe harbor method of accounting for allocating
    success-based fees paid in business acquisitions or reorganizations described in
    § 1.263(a)-5(e)(3). In lieu of maintaining the documentation required by § 1.263(a)-5(f),
    this safe harbor permits electing taxpayers to treat 70 percent of the success-based fee
    as an amount that does not facilitate the transaction, i.e., an amount that can be
    deducted. The remaining portion of the fee must be capitalized as an amount that
    facilitates the transaction.

     Section 4.01 of Rev. Proc. 2011-29 allows a taxpayer to make a safe harbor
    

    election with respect to success-based fees. Section 4.01 provides that the Service will
    not challenge a taxpayer's allocation of success-based fees between activities that
    facilitate a transaction described in § 1.263(a)-5(e)(3) and activities that do not facilitate
    the transaction if the taxpayer does three things. First, the taxpayer must treat seventy
    percent of the amount of the success-based fee as an amount that does not facilitate
    the transaction. Second, the taxpayer must capitalize the remaining amount of the
    PLR-122450-16 5

success-based fee as an amount which does facilitate the transaction. Third, 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. This statement should: state that the
taxpayer is electing the safe harbor; identify the transaction; and state the success-
based fee amounts that are deducted and capitalized. It is this third requirement that
Taxpayer requests permission to accomplish with this ruling request. Taxpayer
requests permission to attach the statement required by section 4.01(3) of Rev. Proc.
2011-29 to its return by amending its original filed return for the short taxable year
ending Date2 and superseding it with a return attaching a completed election statement.

   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 301.9100-1(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.

   Section 301.9100-3(a) provides that requests for extensions of time for regulatory

elections 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.

    Section 301.9100-3(b)(1) provides that, in general, a taxpayer is 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 reasonable 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.

   Section 301.9100-3(b)(3) provides that a taxpayer is deemed to have not 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 and the new position requires or permits a regulatory
election for which relief is requested; (ii) was informed in all material respects of the
PLR-122450-16 6

required election and related tax consequences but chose not to file the election; or (iii)
uses hindsight in requesting relief.

    Section 301.9100-3(c)(1) provides 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. 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
§ 6501(a) before the taxpayer’s receipt of a ruling granting relief under this section.

   Section 301.9100-3(c)(2) provides special rules for accounting method regulatory

elections. Section 301.9100-3(c)(2) provides that the interests of the Government are
deemed prejudiced, except in unusual or compelling circumstances, if the accounting
method regulatory election for which relief is requested is subject to the advance
consent procedures for method changes, requires a § 481(a) adjustment, would permit
a change from an impermissible method of accounting that is an issue under
consideration by examination or any other setting, or provides a more favorable method
of accounting if the election is made by a certain date or taxable year.

   Taxpayer’s election is a regulatory election as defined in § 301.9100-1(b)

because the due date of the election is prescribed in § 1.263(a)-5(f) of the Income Tax
Regulations. The Commissioner has the authority under §§ 301.9100-1 and 301.9100-
3 to grant an extension of time to file a late regulatory election.

CONCLUSION:

   Based upon our analysis of the facts and representations provided, Taxpayer

acted reasonably and in good faith, and granting relief will not prejudice the interests of
the Government. Therefore, the requirements of §§ 301.9100-1 and 301.9100-3 have
been met.

   Taxpayer is granted an extension of 60 days from the date of this ruling to file

the statement required under section 4.01(3) of Rev. Proc. 2011-29 stating that it is
electing the safe harbor treatment for success-based fees, identifying the transaction,
and stating the success-based fee amounts that are deducted and capitalized for the
short taxable year ending Date2.

CAVEATS

  The rulings contained in this letter are based on information and representations

submitted by Taxpayer and accompanied by a penalty of perjury statement executed by
PLR-122450-16 7

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 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. In particular, no opinion is expressed as to whether Taxpayer
properly included the correct costs as its success-based fees subject to the retroactive
election, or whether Taxpayer's Transaction is within the scope of Rev. Proc. 2011-29.

   A copy of this letter must be attached to any income tax return to which it is

relevant. Alternatively, a taxpayer filing its return electronically may satisfy this
requirement by attaching a statement to its 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. We are
also sending a copy of this 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.

  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.

                                             Sincerely yours,



                                             _______________________________
                                             NORMA ROTUNNO
                                             Senior Technician Reviewer, Branch 2
                                             Office of Associate Chief Counsel
                                             (Income Tax & Accounting)

Enclosure:

Copy for § 6110 purposes