Late success-based transaction fee safe-harbor election granted

Plain-English summary

A limited liability company acquired all the stock of a target through a merger and paid a professional adviser a fee contingent on the transaction's successful closing. While preparing a late pre-transaction return, the company told its tax preparer that it had incurred no transaction costs, so the return omitted the safe-harbor election under Revenue Procedure 2011-29. The company later discovered the fee during financial statement and purchase accounting work and said it would have elected the safe harbor if it had known of the cost. The IRS found that the company acted reasonably and in good faith and that relief would not prejudice the government. It granted 60 days to file an amended return electing the safe harbor, which generally treats 70 percent of the success-based fee as nonfacilitative and requires capitalization of the remaining 30 percent. The IRS did not decide whether the identified costs were proper success-based fees or whether the transaction fell within the revenue procedure.

Ruling snapshot

• Question: May the taxpayer make a late Revenue Procedure 2011-29 election to allocate its success-based transaction fee?
• Outcome: approved
• Key authorities: IRC §§ 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: 201739003                                              Third Party Communication: None
Release Date: 9/29/2017                                        Date of Communication: Not Applicable
Index Number: 9100.00-00
                                                               Person To Contact:
-------------------------                                      -----------------------, ID No. -------------------
------------------------------------                           ---------------------------------------------------
-------------------------------                                Telephone Number:
                                                               ----------------------
EIN: ---------------                                           Refer Reply To:
                                                               CC:ITA:B02
                                                               PLR-104510-17
                                                               Date:
                                                               June 29, 2017


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

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

Taxpayer=                           -------------------------
Sponsor=                   ----------------------------------------------------------
A=                                  -------------------------------
B=                                  ----------------------
Tax Preparer=                       ----------------------------
Year1=                              -------
Year2=                              -------
Date1=                              ------------------------
Date2=                              --------------------
Date3=                              ---------------------------
Date4=                              ---------------------------
Date5=                              ------------------------
Date6=                              --------------------------
Date7=                              ------------------------
Date8                      -------------------------------
Date9=                              ---------------------------
Date10=                             --------------------
Date11=                             ------------------
Date12=                             -----------------
$a=                                 ----------------
PLR-104510-17                                2



       This is in response to a letter dated Date1, and additional information submitted
Date2, requesting an extension of time to make a safe-harbor election under Rev. Proc.
2011-29, 2011-1 C.B. 746. This election is needed 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:

Background Information

       Taxpayer was formed on Date3 as a limited liability company. Taxpayer is
majority owned by Sponsor.

The Transaction and Success-Based Fee

       On Date4 (the “Transaction Closing Date”), pursuant to a plan of merger (the
“Transaction”), Taxpayer acquired all of the stock of A through the use of a direct,
wholly-owned, transitory merger subsidiary, B. Pursuant to the Transaction, Taxpayer
caused B to merge with and into A, with A surviving the merger. As a result of the
Transaction, Taxpayer became the direct owner all of the outstanding stock 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 consulting services. Some of those costs related to
the payment by Taxpayer to a professional financial advisor (“Advisor”) due only upon
the successful closing of the Transaction (the “Success-Based Fee”). The amount of
the Success-Based Fee paid by Taxpayer to Advisor upon the successful closing of the
Transaction was $a.

       Neither Sponsor nor Taxpayer has in-house tax knowledge and expertise as it
relates to U.S. federal tax filings. In the ordinary course of business affairs, Sponsor
and Taxpayer have relied on the expertise of professional tax advisors.

Circumstances and Discovery of Missed Election

       A filed its Year1 tax return on Date6. A’s personnel understood that, subsequent
to the Transaction Closing Date, A would consent to file a consolidated tax return with
Taxpayer (of which Taxpayer would be the common parent). On Date7, Taxpayer
PLR-104510-17                                 3

requested that Tax Preparer prepare a consolidated tax return for Taxpayer and A for
the tax period from Date8 to Date9 (the “Taxpayer Group Year2 Tax Year”).

       On or about Date10, however, it was discovered that Taxpayer had not filed its
separate company pre-Transaction tax return for TY. Upon this discovery, Taxpayer
requested that Tax Preparer prepare a late Form 1120 for Taxpayer’s TY. In preparing
Taxpayer’s TY return, Tax Preparer requested financial information from Taxpayer,
including a trial balance that reported all items of income, deduction, gain, or loss
incurred by Taxpayer for TY in accordance with the accrual method of accounting as
adopted by the Taxpayer. In addition, Tax Preparer advised Taxpayer that certain
success-based acquisition-related costs incurred in the process of investigating or
otherwise pursuing the Transaction can qualify for the safe-harbor provisions of Rev.
Proc. 2011-29 and requested information regarding transaction costs that might have
been incurred by Taxpayer on or before Date4 in connection with the Transaction,
including any success-based fees. Taxpayer advised Tax Preparer that it did not incur
any items of income, deduction, gain, or loss during TY. Furthermore, Taxpayer
advised Tax Preparer – based upon the understanding of Taxpayer’s personnel at that
time – that Taxpayer did not incur any success-based fees or other transaction costs in
connection with the Transaction.

        Based on this information, Tax Preparer prepared the Taxpayer’s TY return
without taking into account any transaction related costs, without making the safe-
harbor election of Section 4 of Rev. Proc. 2011-29, and without reflecting an allocation
of any success-based fee between activities that facilitated the Transaction and
activities that did not facilitate the Transaction. Taxpayer filed its TY return on Date11.

       On Date12, Taxpayer discovered that it had, in fact, incurred certain transaction
costs, including the Success-Based Fee. Taxpayer discovered this error when it was
conducting certain activities related to financial statement reporting and purchase
accounting in connection with the Transaction. If Taxpayer had been aware that it had
incurred the Success-Based Fee at the time it filed its TY return, Taxpayer would have
made the safe-harbor election on its TY return with respect to the Success-Based Fee it
paid to Advisor.

       Subsequently, Tax Preparer advised Taxpayer to file this request.

LAW AND ANALYSIS:

       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);
PLR-104510-17                                  4

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.

       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. 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 treated as not facilitating the transaction and the success-
based fee amounts that are treated as facilitating the transaction.
PLR-104510-17                                  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. The safe harbor election under Rev. Proc.
2011-29 falls within the purview of § 301.9100-1(c).

        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.

        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.

       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.

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.
PLR-104510-17                                6

      Taxpayer is granted an extension of 60 days from the date of this ruling to file a
safe harbor election under Rev. Proc. 2011-29 for TY with respect to the Success-
Based Fee discussed herein on an amended return.

      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
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. 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.
PLR-104510-17                                7



     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

cc: