Acquirer received 60 days to make a late success-fee safe-harbor election

Plain-English summary

A company paid a contingent transaction fee when it acquired another business. Its return treated 70 percent of the fee as nonfacilitative and capitalized the other 30 percent under the Revenue Procedure 2011-29 safe harbor, but the return preparer failed to attach the required election statement. The omission was discovered during a later accounting review, and the company extended the assessment period because it was close to expiring. The company represented that it was preserving its original return position, was not using hindsight, and would not obtain a lower tax liability than if the election had been timely. The IRS found reasonable reliance and no prejudice to the government and granted 60 days to file the missing safe-harbor statement.

Ruling snapshot

• Question: Could the acquirer make a late election for the 70/30 success-based-fee safe harbor?
• Outcome: Approved, with 60 days to file the required election statement.
• Key authorities: 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: 201743007                                              Third Party Communication: None
Release Date: 10/27/2017                                       Date of Communication: Not Applicable
Index Number: 9100.00-00
                                                               Person To Contact:
                                                               ---------------------------, ID No. ---------------
------------------------------------------------------------   -----------------
------------------                                             Telephone Number:
----------------------------------------------                 ----------------------
----------------------------                                   Refer Reply To:
------------------------                                       CC:ITA:B03
                                                               PLR-103933-17
In Re: A request for relief under § 301.9100-1 Date:
of the Federal Income Tax Regulations          July 28, 2017




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

Legend:

Date1                      = ------------------------
X                          = -------------------------------------------------
Date2                      = --------------------- --
Date3                      = ------------------------
Target                     = ---------------------------------------------------------------
$a                         = ----------------
Y                          = -----------------------------
$b                         = ---------------
Accountant1                = ----------------------------
Date4                      = --------------------
$c                         = ----------
$d                         = --------------
Date4                      = --------------------
Date5                      = -------------------
Accountant2                = ------------------------------------
Z                          = ------------------------
Date6                      = --------------------
Date7                      = --------------------

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-103933-17                                2


Facts

According to the information submitted, Taxpayer manufactures and markets branded
healthcare, pain management and fitness products. Taxpayer was formed on Date2.
On Date3, Taxpayer acquired 100% of the outstanding shares of Target. The
Agreement and Plan of Merger, dated Date3, set forth the terms of the acquisition, and
the transaction closed on Date3 for consideration of approximately $a. In a
management agreement dated Date3, Taxpayer entered into an agreement with Y for Y
to provide various services with respect to the transaction, including financial and
structural advice and analysis as well as assistance with due diligence investigations
and negotiations. The agreement provided that Y would be paid a transaction fee of $b
for the services rendered with respect to the acquisition, contingent upon successful
completion of the transaction. The transaction closed on Date3, and Y was paid upon
closing.

Accountant1 prepared Taxpayer’s tax return for the initial short year of Date2 to Date4.
On its Form 1120, Taxpayer allocated 70% of the success-based fees as deductible
amounts that did not facilitate the transaction, and capitalized the remaining 30%.
However, Accountant1 also determined that the 70% of the success-based fees that did
not facilitate the transactions were start-up costs under § 195 of the Internal Revenue
Code, and were therefore required to be amortized over 180 months. Consequently,
the amount deducted on the short year tax return was only $c, with the remaining $d to
be deducted over the remaining months of the amortization period. Despite allocating
the success based fees in accordance with the safe harbor, Accountant1 inadvertently
did not include the election required under Rev. Proc. 2011-29 with its income tax
return. This omission was not discovered until Date5, when Accountant2 performed an
audit of Taxpayer’s accounts following its acquisition by Z on Date6. Upon discovery,
Taxpayer engaged the services of Accountant2 to assist with its request to obtain relief
under Treas. Reg. § 301.9100-3. In addition, because the period of limitations under
§ 6501(a) was close to expiring, Taxpayer executed a Form 872 to extend the statute of
limitations for the tax due on its Date4 return until Date7.

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
PLR-103933-17                                 3

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
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 timely filed 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).
PLR-103933-17                                 4


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.

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, because it is not altering its return position at all; it is filing the
election that was required with its original return. 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 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.
PLR-103933-17                                 5


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
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,
whether Taxpayer’s transaction was within the scope of Rev. Proc. 2011-29, or whether
its decision to amortize start-up costs under § 195 was appropriate.

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