Acquisition-fee safe-harbor statement could be filed late

Plain-English summary

A corporate group paid success-based advisory fees in a business combination that ended the group's consolidated-return existence. Its tax adviser applied the Revenue Procedure 2011-29 safe harbor on the final return by deducting 70 percent and capitalizing 30 percent, but inadvertently omitted the required election statement. The omission was discovered while the taxpayer and adviser were reviewing the transaction-cost report. The IRS found that the taxpayer acted reasonably and in good faith and that late filing would not prejudice the government's interests, including the special rules for accounting-method elections. It granted 60 days to file the statement identifying the transaction and the amounts deducted and capitalized.

Ruling snapshot

• Question: May the taxpayer file a late election statement for the success-based-fee safe harbor after using the intended allocation on its return?
• Outcome: approved, with 60 days to file the statement
• Key authorities: IRC §§ 162, 263(a), 446; Treas. Reg. §§ 1.263(a)-5, 301.9100-1, 301.9100-3; Rev. Proc. 2011-29

Full text (IRS public release)

 Internal Revenue Service                                     Department of the Treasury
                                                              Washington, DC 20224

 Number: 201732024                                            [Third Party Communication:
 Release Date: 8/11/2017                                      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-138278-16
                                                              Date:
                                                              May 10, 2017
 EIN: -----------------




Dear -------------------


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

 Taxpayer=                                  ------------------------------------
 A=                                         ----------------------------------------------------------
 B=                                         ------------------------
 C=                                         -----------------------------------------
 D=                                         -------------------------------
 State=                                     --------------
 Acquisition Advisor=                       -----------------------------
 Financial Advisor=                         --------------------------------------
 Tax Advisor=                               ---------------------------
 Date1=                                     --------------------------
 Date2=                                     ----------------------
 Date3=                                     --------------------
 Date4=                                     ----------------------------
 Date5=                                     ----------------------------
 Date6=                                     ----------------------
 $a=                                        ------------------
 $b=                                        ----------------
 $c=                                        ------------------
 $d=                                        ------------------
 w%=                                        --------
 x%=                                        ------
 y%=                                        ------
 z%=                                        ---------
PLR-138278-16                                   2

ww%=                                ---------
xx%=                                ---------


         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 TY. 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 organized on Date6, under the laws of State. During TY, Taxpayer
was the common parent of an affiliated group of corporations (Taxpayer Group) that
joined in filing consolidated U.S. federal income tax returns. Taxpayer had a calendar
year end and used the accrual method of accounting.

Description of Taxpayer’s Business Operations

       During TY, Taxpayer operated as a holding company. Taxpayer, through its
operating subsidiaries, including A, owned and operated short-stay ambulatory facilities
across the United States. Immediately prior to the Acquisition (discussed below),
Taxpayer was owned by B.

Facts Relating to the Acquisition

       On Date2, C, an unrelated corporation, Taxpayer, and B entered into an
agreement to undertake a business combination of Taxpayer and certain subsidiaries of
C (the “C Contributed Entities”). This business combination was to be effected through
an acquisition of Taxpayer and the C Contributed Entities by D (i.e., the Acquisition).
On Date3, the following steps were consummated to effect the Acquisition:

Taxpayer Contribution. B transferred w% of their equity interests in Taxpayer to D
in exchange for x% of the sole issued and outstanding class of D stock (the “Taxpayer
Contribution”);

C Contribution. C transferred all of the outstanding equity interests in the C
Contributed Entities to D in exchange for y% of the sole issued and outstanding class of
D stock (the “C Contribution”); and

D Share Transfer. B collectively sold z% of D stock to C in exchange for cash.
PLR-138278-16                                3


       Upon completion of the Acquisition, ww% of D stock was held by C and xx% of D
stock was held by B. Due to the Acquisition, Taxpayer Group terminated on Date 3,
and the Taxpayer Group’s tax return for TY represents Taxpayer Group’s final return.
Thereafter, Taxpayer operated as a subsidiary of D.

The Success-Based Fees Paid by Taxpayer

       With respect to the Acquisition, Taxpayer paid Acquisition Advisor and Financial
Advisor success-based fees of $a and $b, respectively, (the “success-based fees”) for
financial advisory services performed in the process of investigating or otherwise
pursuing the Acquisition. Thus, Taxpayer paid amounts for success-based fees totaling
$c during TY (and this amount was properly accruable for TY).

The Missed Election and Discovery of the Missed Election

       Tax Advisor advised Taxpayer as to the proper U.S. federal income tax treatment
of the success-based fees and prepared Taxpayer’s consolidated U.S. federal income
tax return for TY (i.e., the Election Return). In preparing such return, Tax Advisor
complied with the substantive requirements of Rev. Proc. 2011-29 (described in detail
below) by deducting 70% of the success-based fees under section 162 and capitalizing
30% of the success-based fees based upon a transaction cost study performed by Tax
Advisor. For TY, the Taxpayer deducted $d (i.e., 70% of $c) of success-based fees on
the Election Return filed Date4. However, Taxpayer inadvertently failed to attach the
required election statement (the “Rev. Proc. 2011-29 Election Statement”).

        On Date5, while discussing with Tax Advisor its report concerning the success-
based fees, Taxpayer inquired as to whether the Rev. Proc. 2011-29 Election Statement
had been included with the Election Return. It was determined upon a review of the
Election Return that the Rev. Proc. 2011-29 Election Statement had not been filed
therewith. Tax Advisor immediately discussed with Taxpayer the ability of Taxpayer to
request an extension of time pursuant to Treas. Reg. §§ 301.9100-1 and 301.9100-3 to
file the Rev. Proc. 2011-29 Election Statement.

LAW

       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).
PLR-138278-16                                  4

       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 70
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
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 election statement required by section 4.01(3) of Rev.
Proc. 2011-29 to its return by amending its original filed return for TY and attaching a
completed election statement to it.
PLR-138278-16                                  5


       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
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
PLR-138278-16                                 6

§ 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 TY.

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
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 the Acquisition 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
PLR-138278-16                                7

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,



                                                 _______________________________
                                                 BRIDGET TOMBUL
                                                 Chief, Branch 2
                                                 Office of Associate Chief Counsel
                                                 (Income Tax & Accounting)



Enclosure:

 Copy for § 6110 purposes