Corporation receives 60 days to file omitted success-fee election statement

Plain-English summary

A corporation incurred a success-based fee when it acquired another corporation. Its return treated 70 percent of the fee as non-facilitative and capitalized the remaining 30 percent under the safe harbor in Revenue Procedure 2011-29, but it omitted the required election statement. The corporation discovered the omission before the IRS did and requested relief. The IRS found that it acted reasonably and in good faith and that relief would not prejudice the government's interests. It granted 60 days to file a statement electing the safe harbor, identifying the transaction, and stating the amounts deducted and capitalized.

Ruling snapshot

• Question: May the corporation late-file the statement electing the Revenue Procedure 2011-29 safe harbor for a success-based acquisition fee?
• Outcome: Approved, with 60 days to file the required election statement.
• Key authorities: IRC §§ 263(a) and 446; Treas. Reg. §§ 1.263(a)-5, 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: 201808005 [Third Party Communication:
Release Date: 2/23/2018 Date of Communication: Month DD, YYYY]
Index Number: 9100.00-00
Person To Contact:
---------------------------------------- -----------------------, ID No. -------------------
------------------------------------------ ---------------------------------------------------
------------------------------------ Telephone Number:
------------------------------ ----------------------
Refer Reply To:
In Re: ----------------------- CC:ITA:B02
PLR-119814-17
Date: November 27, 2017

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

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

LEGEND

Taxpayer: ---------------------------------------------------------------------------------------------------
--------------

Tradename: --------------------

Entity A: ---------------------------------------------------------------------------------------------------
--

Entity B: ------------------------------------------------------

Entity C: --------------------------------------------

Entity D: --------------------------------------------------------------------------------------------------

              -------------------------

State A: --------------

ServicesA: ---------------------------------------------------------------------------------------------------
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PLR-119814-17 2

ServicesB: ---------------------------------------------------------------------------------------------------
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Date1: -------------------
Date2: -------------------

Date3: -------------------

Date4: -----------------

Date5: ----------------------------

Date6: ----------------------------

Date7: ------------------------

Date8: ---------------------------

Amount1: ------------------

Amount2: ----------------

Amount3: ------------------

Employee: ---------------------

Resident: --------------

Number1: ----

Number2: ----

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:

a. Statement of Taxpayer’s Business Purpose
PLR-119814-17 3

Taxpayer is the U.S. parent corporation of a group of U.S. corporations and foreign
entities that operate globally under the name Tradename. This group of entities
provides ServicesA. Taxpayer also provides ServicesB.

b. Transaction Giving Rise to Success-Based Fees

Taxpayer was incorporated under State A law on Date2. Taxpayer was incorporated as
the acquisition vehicle for all the outstanding shares of Entity A, a State A corporation.

Taxpayer was formed by its ultimate owner, Entity B, to wholly purchase the shares of
Entity A from Entity A’s ultimate parent, Entity C. Prior to the acquisition, Entity A was
the U.S. parent corporation of a group of U.S. corporations and foreign entities that
operated globally under the name Tradename. For tax years prior to the acquisition,
Entity A filed a consolidated Form 1120 (U.S. Corporation Income Tax Return) as the
parent corporation of the consolidated group.

On Date3, Taxpayer and Entity A entered into an exclusivity agreement with regard to
the purchase of Entity A.

In an “Advisory Agreement” dated Date4, Taxpayer entered into an agreement with
Entity B for Entity B to provide business and organizational strategy, and financial and
advisory services to the Tradename entities. Pursuant the Advisory Agreement,
Taxpayer agreed to pay Entity B Amount1 as consideration for the services Entity B
provided with respect to the acquisition of Entity A, and with respect to the financing
related to the acquisition (including, but not limited to, due diligence investigations,
financial advisory services, and corporate structure review). The payment of the
transaction fee was contingent upon the successful closing of the transaction.

On Date4, the transaction closed with Taxpayer acquiring all of the outstanding shares
of Entity A. Entity B was paid Amount1 by wire transfer upon closing of the transaction
on Date4. In connection with the above acquisition of Entity A, Taxpayer incurred
transaction costs, including a success-based fee.

For tax years after the acquisition, Taxpayer has filed a consolidated Form 1120 as the
parent corporation of the consolidated group.

Employee, the tax director of Tradename, is responsible for the preparation of
Taxpayer’s income tax provision for financial reporting purposes and for preparing and
filing Taxpayer’s income tax returns. Employee has been a Resident Certified Public
Accountant for approximately Number1 years, and has Number2 years’ experience
preparing U.S. income tax returns. Tradename relies on Employee’s knowledge and
expertise in preparing and filing its income tax returns. Employee reviewed the
transaction cost invoices and additional information in order to allocate the costs
PLR-119814-17 4

between facilitative and non-facilitative amounts as part of the preparation of the income
tax provision for the Date5 financial statements prepared for Entity D.

During this review, Employee examined the Amount1 fee paid to Entity B pursuant to
the Advisory Agreement dated Date4. Based on discussions with Entity B, it was
determined that Amount2 of this fee was paid for financing-related services and was
capitalized as debt acquisition costs. The remaining Amount3 fee was determined to be
a success-based fee for which Taxpayer would make the safe harbor election described
in §4.01 of Rev. Proc. 2011-29 in order to capitalize 30 percent of the fee and treat the
remaining 70 percent as an amount which did not facilitate the transaction. The financial
statements were prepared consistent with having made a timely election under §4.01 of
Rev. Proc. 2011-29.

In the consolidated Federal income tax return for Taxpayer and its subsidiaries, the
treatment of the Amount3 success-based fee was consistent with the safe harbor
election provided in Rev. Proc. 2011-29 (30 percent of the fee was capitalized as an
amount that facilitated the transaction and the remaining 70 percent was treated as an
amount that did not facilitate the transaction). The income tax return for Taxpayer and
its subsidiaries was filed on Date6.

On Date7, during preparation of the Date8 financial statements for Entity D, it was
discovered that the statement required by §4.03 of Rev. Proc 2011-29 to make the safe
harbor election was not included with the income tax return filed by Taxpayer and its
subsidiaries. This oversight was discovered prior to any discovery by the Service.

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).

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
PLR-119814-17 5

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 seventy
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 statement required by section 4.01(3) of Rev. Proc.
2011-29 to its return by amending its original filed return for TY to include a completed
election statement.

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
PLR-119814-17 6

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
§ 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
PLR-119814-17 7

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 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 under § 6110.
PLR-119814-17 8

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-