Parent receives 60 days for late success-fee safe-harbor election

Plain-English summary

A financial-services parent paid success-based investment-banking and legal fees in a tax-free acquisition. Its preparer deducted 70 percent of the bank fee and capitalized 30 percent, but omitted the Revenue Procedure 2011-29 election statement and initially capitalized the entire legal fee because its status was not yet clear. The company later determined that the legal fee also was success-based and requested relief for both fees. The IRS found reasonable reliance on the tax professional, no prohibited hindsight, no examination, and no prejudice to the government. It granted 60 days to file the safe-harbor election identifying the transaction and the deducted and capitalized amounts, without deciding whether either fee or the transaction substantively qualified.

Ruling snapshot

• Question: Could the parent make a late Revenue Procedure 2011-29 election for success-based bank and legal fees?
• Outcome: approved
• Key authorities: Treas. Reg. §§ 1.263(a)-5 and 301.9100-3; Rev. Proc. 2011-29 § 4

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201728001 Third Party Communication: None
Release Date: 7/14/2017 Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
------------------------------------------------------------ ---------------------------, ID No. ---------------
------- -----------------
------------------------------------------------------------ Telephone Number:
-------- ----------------------
---------------------------- Refer Reply To:
---------------------------- CC:ITA:B03
---------------------------- PLR-105934-17
Date:
March 28, 2017

In Re: A request for relief under § 301.9100-1
of the Federal Income Tax Regulations

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

Legend:

Date1 = --------------------------
X = ----------------------------------
Date2 = ------------------
Y = -----------------------------
Bank = -------------------------------------------
$a = --------------
$b = --------------
$c = --------------
LawFirm = -----------------------------------------------------
CPAFirm = -----------------------
Date3 = -----------------------
Date4 = ----------------------
Date5 = --------------------

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.
PLR-105934-17 2

Facts

According to the information submitted, Taxpayer is the common parent of an affiliated
group of corporations that provide financial services. On Date2, Y acquired the stock of
Taxpayer in a tax free reorganization in which Taxpayer ultimately merged with and into
a wholly owned limited liability company of Y that is a disregarded entity for federal
income tax purposes. Taxpayer engaged the services of Bank in anticipation of a
transaction to provide advisory services, in exchange for a total fee of $a, including
success-based fee in the amount of $b. Taxpayer also engaged LawFirm to provide
legal advisory services in connection with the proposed transaction, in exchange for a
success-based fee of $c.

Taxpayer engaged CPAFirm to prepare the short-year tax return for Taxpayer for the
tax period Date3 to Date2. The return was timely filed on Date4. CPAFirm discussed
the proper treatment of the fees with Taxpayer, and agreed to make use of the safe
harbor in Rev. Proc. 2011-29 for the fee paid to Bank. However, Taxpayer did not have
enough information at the time for CPAFirm to determine whether the fee paid to
LawFirm was success-based. Accordingly, CPAFirm prepared the return deducting
70% of the $b fee as an amount which does not facilitate the transaction, capitalizing
the remaining 30%, and capitalizing the entire $c fee paid to LawFirm. However,
CPAFirm inadvertently omitted the election statement required by Rev. Proc. 2011-29.
This mistake was discovered by CPAFirm in Date 5. In addition, Taxpayer has since
determined that the fee paid to LawFirm was success-based. Taxpayer then applied for
relief under Treas. Reg. § 301.9100-3, requesting an extension of time to make the safe
harbor election with respect to both fees.

Taxpayer asserts that no return that would be affected by this ruling is under
examination, before appeals, or before a Federal Court.

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)(2) includes an
acquisition of an ownership interest in a business entity 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, exclusivity agreement, or similar written communication
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
PLR-105934-17 3

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.

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 original federal income tax 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.
PLR-105934-17 4

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
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, and that it
reasonably relied upon the advice of a tax professional. 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. 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 make the
safe harbor election for allocating success based fees and 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
PLR-105934-17 5

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.

In accordance with the provisions of a power of attorney currently on file, a copy of this
letter is being sent to your authorized representatives. We are also 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