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:
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Telephone Number:
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Refer Reply To:
In Re: -----------------------
CC:ITA:B02
PLR-119814-17
Date: November 27, 2017

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

TY: --------------------------------------------------------------------------------------------------------------
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LEGEND

Taxpayer: ---------------------------------------------------------------------------------------------------
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Tradename: --------------------

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

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

Entity D: --------------------------------------------------------------------------------------------------
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State A: --------------

ServicesA: ---------------------------------------------------------------------------------------------------
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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
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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
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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
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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
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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
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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.
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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-