Corporate acquirer receives 45 days to make a late success-based-fee safe-harbor election

Plain-English summary

A corporate group acquired an engineering and design company in a taxable stock purchase and paid a contingent transaction fee to an adviser. An attorney told the foreign parent's tax director that 70 percent of the fee should be deductible under the Revenue Procedure 2011-29 safe harbor, but did not advise that an election statement had to accompany the original consolidated return. That advice was not communicated to the U.S. taxpayer or its return preparer, so the taxpayer capitalized the entire fee and omitted the election. The error was discovered while preparing the next year's return. The IRS found reasonable reliance, no hindsight, no accuracy-related-penalty return-position change, and no prejudice to the government. It granted 45 days to file the required statements identifying the transaction and the fee amounts deducted and capitalized, without deciding whether the costs or transaction otherwise qualified for the safe harbor.

Ruling snapshot

• Question: May a corporate acquirer make a late Revenue Procedure 2011-29 election to deduct 70 percent of a success-based transaction fee?
• Outcome: approved, with the election statements due within 45 days
• Key authorities: IRC § 263(a); Treas. Reg. §§ 1.263(a)-5(f), 301.9100-1, and 301.9100-3; Rev. Proc. 2011-29

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201804002                                             Third Party Communication: None
Release Date: 1/26/2018                                       Date of Communication: Not Applicable
Index Number: 9100.00-00, 263.00-00
                                                              Person To Contact:
                                                              ------------------, ID No. ------------------
-------------------------                                     Telephone Number:
------------------------------------------------
-----------------------------------------                     Refer Reply To:
                                                              CC:ITA:B01
Attn: ----------------------------                            PLR-115383-17
--------------------------------------------------------      Date:
                                                              October 19, 2017




Taxpayer       =   ---------------------------------------------------
Date1          =   ---------------------------
Date2          =   ---------------------------
Date3          =   ---------------------------
Date4          =   --------------------
Date5          =   -------------------
Date6          =   ----------------------------
Date7          =   ----------------------------
A              =   ------------------------------
B              =   -------------
C              =   --------------------------------------------------------
D              =   --------------
E              =   -----------------
F              =   -----
G              =   -------------------
H              =   ----------------------------------------------------------------------
I              =   ----------------
J              =   ------------
K              =   --------------
L              =   --------------
M              =   -------------------------
N              =   -----------------------
O              =   -----------------------------
P              =   ---------------------------------------
Q              =   -------
R              =   -------
S              =   ---------------
T              =   --------------------------

PLR-115383-17                                2

U             = -----------------------
V             = -------------------

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

This letter responds to your letter dated May 8, 2017, submitted on behalf of 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 consolidated federal income tax return for taxable year ended Date1.

                                          FACTS

Taxpayer is a D corporation. Taxpayer files its federal income tax returns on a calendar
year basis and uses an accrual method as its overall method of accounting.

C is a D corporation. C files its federal income tax returns on a calendar year basis and
uses an accrual method as its overall method of accounting.

A, a foreign corporation, is a B holding company and is the ultimate parent of all of
Taxpayer’s operating subsidiaries. Through its subsidiaries, A is a leader in global
engineering, design and consultancy. Taxpayer, a wholly-owned subsidiary of A, is a
holding company. Taxpayer is the common parent of an affiliated group of corporations
filing consolidated federal income tax returns that includes C. C, also an engineering
and design consultancy company, combines local experience with a global knowledge
base constantly striving to achieve inspiring and exacting solutions that make a genuine
difference to its customers, the environment, and society as a whole.

Taxpayer acquired C in a taxable stock purchase on Date1 (the “Transaction”). On
Date2, Taxpayer formed E to acquire F percent of the outstanding equity interest in C.
Pursuant to a merger agreement entered into by A, Taxpayer, E, and C on Date3, E
merged with and into C with C surviving the merger. As a result of the merger,
Taxpayer became the owner of all of the outstanding common and preferred shares of
C for an aggregate consideration of G, subject to certain adjustments and combined
company performance payments, and the C shareholders received cash in exchange
for their shares of C common and preferred stock. Taxpayer did not make a section
338 election.

Pursuant to an engagement letter dated Date4, A engaged H to provide assistance with
acquiring an engineering or consulting firm. H identified potential targets and assisted A
in soliciting interest in the acquisition of such companies. Under the terms of a
subsequent engagement letter between Taxpayer and H dated Date5 (“the Engagement
Letter”), Taxpayer was to pay H a I fee contingent upon the closing of a qualified
transaction as the Engagement Letter. Taxpayer was also required to pay H a non-

PLR-115383-17                                3

refundable retainer fee of J per month, which was creditable against the contingent fee.
Prior to the closing of the Transaction, Taxpayer paid H a total of K in monthly retainer
fees. Upon the closing of the Transaction, Taxpayer incurred and paid H a contingent
fee of L (I contingent fee less K retainer fees).

In Date5, M, A’s Tax Director, had an e-mail exchange with N, an attorney with the law
firm O, regarding the treatment of the contingent fee paid to H. N advised M that
Taxpayer “should be able to deduct 70 percent of the I. However, N did not advise M to
attach an election statement to Taxpayer’s timely filed consolidated income tax return
for the taxable year ended Date1 as required by section 4.01(3) of Rev. Proc. 2011-29.
Furthermore, M did not communicate the proposed tax treatment of the contingent fee
to Taxpayer or Taxpayer’s tax preparer.

Taxpayer engaged P to prepare and provide advice with respect to its Form 1120, U.S.
Corporation Income Tax Return, for the taxable year ended Date1 (the “Q Tax Return”).
At the time of filing the Q Tax Return, neither Taxpayer nor P were aware of the advice
provided by N to M regarding the treatment of the contingent fee. Taxpayer timely filed
its Q Tax Return on Date6. Taxpayer capitalized the entire contingent fee of L, and did
not attach the safe harbor election provided in Rev. Proc. 2011-29 to the Q Tax Return.

The omission of the election statement and failure to make the election for success-
based fees was discovered on Date7 in connection with the preparation of Taxpayer’s R
Tax Return. S, Finance Director at C, contacted T, Partner at U, about Taxpayers US’s
tax treatment of the success-based fees in light of the booking of the transaction costs
on Taxpayer US’s R financial statements. S forwarded an email from V, Tax Manager
at A, in which V recapped the legal advice from N to deduct 70 percent of the success-
based fees paid to H and noted that Taxpayer appeared to have missed the deduction
on its Q Tax Return. S’s email asked for T’s input on the issue. T advised that L of the I
fee qualified for the safe harbor election for success-based fees under Rev. Proc. 2011-
29, and that a statement must be attached to the Q Tax Return to make the election.

                                           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

PLR-115383-17                                 4

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 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 by treating 70 percent of the amount of the
success-based fee as an amount that does not facilitate the transaction and by
capitalizing 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.

Section 301.9100-3(b)(1) provides that a taxpayer is deemed to have acted reasonably
and in good faith if the taxpayer:

PLR-115383-17                                5


      (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
              (taking into account the taxpayer’s experience and the complexity of the
              return at issue), 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, including a tax
              professional employed by the taxpayer, 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 will not be deemed to have 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 § 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 an extension of time to make a regulatory
election will be granted only when the interests of the government are not prejudiced by
the granting of relief. The interests of the government are prejudiced if granting relief
would result in a 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 (taking into account the time value of money). Section 301.9100-3(c)(1)(i).

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
under section 6501(a) before the taxpayer’s receipt of a ruling granting relief under this
section. Section 301.9100-3(c)(1)(ii).

Section 301.9100-3(c)(2) provides special rules for accounting method regulatory
elections. The interests of the government are deemed to be prejudiced except in
unusual and compelling circumstances if the accounting method regulatory election for
which relief is requested:

PLR-115383-17                                  6

       (i)     is subject to the procedure set forth in § 1.446-1(e)(3)(i) of this chapter
               (requiring advance written consent of the Commissioner);
       (ii)    requires an adjustment under § 481(a) (or would require an adjustment
               under § 481(a) if the taxpayer changed to the method of accounting for
               which relief is requested in a taxable year subsequent to the taxable year
               in which the election should have been made);
       (iii)   would permit a change from an impermissible method of accounting that is
               an issue under consideration by examination, an appeals office, or a
               federal court and the change would provide a more favorable method or
               more favorable terms and conditions than if the change were made as part
               of an examination; or
       (iv)    provides a more favorable method of accounting or more favorable terms
               and conditions if the election is made by a certain date or taxable year.

                                        ANALYSIS

The Taxpayer’s election is a regulatory election, as defined in § 301.9100-1(b), because
the due date of the election is prescribed in the Income Tax Regulations under
§ 1.263(a)-5(f). 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.

The information provided and representations made by the Taxpayer establish that the
Taxpayer acted reasonably and in good faith. The Taxpayer reasonably relied on P, a
qualified tax professional, to prepare its Q Tax Return. The Taxpayer is not seeking to
alter a return position for which an accuracy related penalty has been or could be
imposed under § 6662 at the time relief is requested. The Taxpayer did not affirmatively
choose not to make the election after having been informed in all material respects of
the required election and related tax consequences. Rather, the Taxpayer relied on P
to advise it as to any relevant elections, which P failed to do with respect to this election.
The Taxpayer is not using hindsight in requesting relief.

Further, based on the information provided and representations made by the Taxpayer,
granting an extension will not prejudice the interests of the government. The Taxpayer
will not have a lower tax liability in the aggregate for all taxable years to which the
election applies at this time than the Taxpayer would have had if the election had been
timely made. In addition, the taxable year in which the regulatory election should have
been made and any taxable years that would have been affected by the election had it
been timely made will not be closed by the period of limitations on assessment under §
6501(a) before the Taxpayer’s receipt of the ruling granting an extension of time to
make a late election.

PLR-115383-17                                  7

                                      CONCLUSION

Based solely on the information provided and representations made, 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,

                                       /s/ Ronald J. Goldstein

                                       Ronald J. Goldstein
                                       Assistant to the Branch Chief, Branch 1
                                       Office of Associate Chief Counsel
                                       (Income Tax & Accounting)