Taxpayer receives 45 days to complete a success-fee safe-harbor election

Plain-English summary

A company paid a financial adviser a success-based fee when it was acquired in a merger. Its return preparer applied Revenue Procedure 2011-29 by deducting 70 percent of the fee and capitalizing 30 percent, but failed to attach the required election statements to the timely filed return. 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 electing the safe harbor, identifying the transaction, and reporting the deducted and capitalized amounts.

Ruling snapshot

• Question: Could the taxpayer file the required statements late for the success-based-fee safe harbor?
• Outcome: approved, with a 45-day extension
• Key authorities: IRC § 263(a); Treas. Reg. §§ 1.263(a)-5 and 301.9100-3; Rev. Proc. 2011-29 § 4.01

Full text (IRS public release)

Internal Revenue Service                                        Department of the Treasury
                                                                Washington, DC 20224

Number: 201718019                                               Third Party Communication:
Release Date: 5/5/2017                                          Date of Communication: Not Applicable
Index Number: 9100.00-00
                                                                Person To Contact:
--------------------                                            --------------------ID No. ----------------
---------------------                                           Telephone Number:
--------------------------------------------                    ----------------------
----------------------------------                              Refer Reply To:
                                                                CC:ITA:B01
                                                                PLR-126685-16
                                                                Date:
                                                                February 3, 2017




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Taxpayer       =   ------------------------------------------
Date1          =   --------------------
Date2          =   -----------------
A              =   --------------------
B              =   ------------------------------
C              =   ----------------------------------
D              =   ----------------
E              =   ------------------------

Dear                           :

       This letter responds to your letter dated August 8, 2016, submitted by 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 wholly-owned subsidiary of A and has a principal place of business
in B. Taxpayer is engaged in the business of operating a website that provides articles,
links, and directories for individuals and professionals in the eldercare industry.
Taxpayer uses an accrual method of accounting.

       Taxpayer was a standalone corporation that was wholly acquired on Date2 by A
(the “Transaction”). Pursuant to the Transaction, C, a wholly-owned subsidiary of A,
PLR-126685-16                                 2

merged into Taxpayer, with Taxpayer continuing as the surviving corporation and as a
direct, wholly-owned subsidiary of A.

       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 D upon closing of the
Transaction.

       Taxpayer engaged E to prepare Taxpayer’s federal income tax return for the
short taxable year ended Date1. Taxpayer relied upon E to prepare its U.S. federal
income tax returns and to advise it as to all statements and other information that
should be included in its U.S. federal income tax returns. E 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 timely filed federal
income tax return for the taxable year ended Date1 prepared by E, 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 E, 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
PLR-126685-16                                 3

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 allocate a success-based fee between activities that facilitate the
transaction and activities that do not facilitate the transaction provided the taxpayer
treats 70 percent of the amount of the success-based fee as an amount that does not
facilitate the transaction and capitalizes 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
PLR-126685-16                                  4

       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 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,

                                           TaJuana Nelson Hyde

                                           TaJuana Nelson Hyde
                                           Senior Technician Reviewer, Branch 1
                                           Office of Associate Chief Counsel
                                           (Income Tax and Accounting)