Late relief lets a merged company make the 70/30 safe-harbor election for its deal fees

Plain-English summary

When a company pays "success-based fees" (advisory fees owed only if a deal closes) in an acquisition, the tax rules generally require it to capitalize those fees as costs of the transaction unless it documents that part of the work did not facilitate the deal. Rev. Proc. 2011-29 offers a simpler path: a taxpayer can elect a safe harbor that treats 70 percent of the fee as currently deductible and capitalizes the other 30 percent, but it must attach a specific election statement to its original tax return. Here a company that was acquired in a merger paid success-based fees to two financial advisors. Its outside preparer correctly filed the return in a way consistent with the election, deducting 70 percent and capitalizing 30 percent, but forgot to attach the required election statement. The preparer caught the omission during a later file review, and the company asked the IRS for an extension of time under the "9100 relief" regulations (Treas. Reg. § 301.9100-3). The IRS granted relief: the company acted reasonably and in good faith by relying on a qualified tax professional who failed to make the election properly, requested relief before the IRS found the error, and granting relief would not prejudice the government. The company has 60 days to file an amended return with the proper election statement. The IRS did not opine on whether the fees actually qualify or whether the transaction was within the scope of the revenue procedure.

Ruling snapshot

• Question: Should the taxpayer get an extension of time under § 301.9100-3 to make the Rev. Proc. 2011-29 safe-harbor election for success-based fees, which its preparer failed to attach to the original return?
• Outcome: Approved (60 days to file an amended return with the election statement)
• Key authorities: IRC § 263(a); 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: 201844002                                             [Third Party Communication:
Release Date: 11/2/2018                                       Date of Communication: Month DD, YYYY]
Index Number: 9100.00-00
                                                              Person To Contact:
----------------------                                        -----------------------, ID No. -------------------
-------------------------------                               ---------------------------------------------------
----------------------------------                            Telephone Number:
------------------------------                                ----------------------
-----------------------------------------                     Refer Reply To:
                                                              CC:ITA:B03
                                                              PLR-103779-18
In Re: -----------------------------------                    Date:
       ------------------------                               August 02, 2018




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

Legend:

Taxpayer                        =     ------------------------------------------------------------
Parent                          =     -------------------------------------
Purchaser                       =     ----------------------------------
Advisor 1                       =     --------------------------------------------------------------------
Advisor 2                       =     ---------------------------
Preparer                        =     -----------------------------------------
Services                        =     -----------------------------------------------------------------------------
                                      -----------------------------------------------------------------------------
                                      -----------------------------------------------------------------------------
Date 1                          =     ------------------------
Date 2                          =     --------------------------
Date 3                          =     ------------------------
Date 4                          =     -----------------------
Date 5                          =     ----------------------------
Date 6                          =     -------------------------------
A%                              =     ---------
$B                              =     ----------------
C%                              =     ---------
$D                              =     ------------------
$E                              =     ----------------

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

This letter responds to a letter dated Date 1, submitted on behalf of Taxpayer,
requesting a ruling that Taxpayer be granted an extension of time under §§ 301.9100-
PLR-103779-18                               2

1(c) and 301.9100-3 of the Procedure and Administration Regulations to make a safe
harbor election under Rev. Proc. 2011-29, 2011-1 C.B. 746, which requires that a
statement be attached to Taxpayer's original federal income tax return for the short tax
year ending on Date 2.

                                         FACTS

In the tax year at issue, Taxpayer provided Services. Before the transaction described
below, Parent was majority owner of Taxpayer. On Date 3, Taxpayer, Parent, and
Purchaser executed an Agreement and Plan of Merger by which Purchaser acquired a
majority interest in Taxpayer through a series of wholly-owned disregarded entities.

On Date 4, Taxpayer engaged Advisor 1 to provide financial advisory services in
conjunction with its potential sale. The engagement letter provided for a fee of A% of
the aggregate consideration paid for Taxpayer, payable upon up the on successful sale
of a majority interest in Taxpayer, with a minimum of $B payable upon closing. In
addition, Taxpayer engaged Advisor 2 to provide additional advisory services in
conjunction with the sale, and agreed to pay C% of the aggregate consideration paid for
Taxpayer, with no minimum payout upon closing. The transaction closed on Date 2.
The actual payments made to Advisor 1 and Advisor 2 upon closing were $D and $E,
respectively.

Taxpayer did not have its own internal tax department, and therefore engaged Preparer
to prepare and file its tax return for the short taxable year ending on Date 2. Preparer
determined that the fees paid to Advisor 1 and Advisor 2 constituted success-based
fees eligible for the safe harbor election provided in Rev. Proc. 2011-29, and prepared a
draft statement required under that Revenue Procedure to make that election. While
Preparer discussed the election with Taxpayer's Chief Financial Officer and Corporate
Controller, these executives were not aware of the requirement to file such a statement
with Taxpayer's return. Preparer timely filed Taxpayer's Form 1065 on Date 5 in a
manner consistent with having made the election, capitalizing 30% of the success-
based fees and deducting the remaining 70%. However, Preparer inadvertently failed to
attach the statement making the election to the Form 1065, as required by Rev. Proc.
2011-29. Preparer recognized this error upon reviewing Taxpayer's file on Date 6, and
Preparer and Taxpayer agreed to seek relief under Treas. Reg. §§ 301.9100-1 and
301.9100-3.

                                          LAW

Section 263(a) of the Internal Revenue Code provides generally that no deduction is
allowed for any amount paid out for new buildings or for permanent improvements or
betterments made to increase the value of any property or estate or any amount
expended in restoring property or in making good the exhaustion thereof for which an
allowance is or has been made.
PLR-103779-18                                  3


Section 1.263(a)-1(d)(3) of the Income Tax Regulations provides that no deduction is
allowed for an amount paid to acquire or create an intangible, which under §§ 1.263(a)-
4(c)(1)(i) and 1.263(a)-4(d)(2)(i)(A) includes an ownership interest in a corporation or
other entity. See also § 1.263(a)-4(a).

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. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992);
Woodward v. Commissioner, 397 U.S. 572 (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
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. Section 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) (i.e., a success-based fee) 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. This documentation must be completed on or
before the due date of the taxpayer's timely filed original federal income tax return
(including extensions) for the taxable year during which the transaction closes.

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.

The revenue procedure applies to covered transactions described in section 1.263(a)-
5(e)(3), which include --

(i) A taxable acquisition by the taxpayer of assets that constitute a trade or business;
PLR-103779-18                                  4

(ii) A taxable acquisition of an ownership interest in a business entity (whether the
taxpayer is the acquirer in the acquisition or the target of the acquisition) if, immediately
after the acquisition, the acquirer and the target are related within the meaning of
section 267(b) or section 707(b); or

(iii) A reorganization described in section 368(a)(1)(A), (B), or (C) or a reorganization
described in section 368(a)(1)(D) in which stock or securities of the corporation to which
the assets are transferred are distributed in a transaction which qualifies under section
354 or 356 (whether the taxpayer is the acquirer or the target in the reorganization).

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 extensions of time for regulatory
elections (other than automatic changes covered under section 301.9100-2) will be
granted when the taxpayer provides evidence (including affidavits described in the
regulations) 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 will be 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) inadvertently failed to make the election because of intervening events beyond the
taxpayer's control;

(iii) failed to make the election because, after exercising due diligence, the taxpayer was
unaware of the necessity for the election;

(iv) reasonably relied on the written advice of the Service; or
PLR-103779-18                                  5

(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 will not be considered to have acted
reasonably and in good faith if the taxpayer —

(i) seeks to alter a return position for which an accuracy-related penalty could be
imposed under § 6662 at the time the taxpayer requests relief and the new position
requires 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. If specific facts have changed since the original
deadline that make the election advantageous to a taxpayer, the Service will not
ordinarily grant relief.

Section 301.9100-3(c)(1) provides that the Commissioner will grant a reasonable
extension of time only when the interests of the Government will not be 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). 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.

                                         ANALYSIS

Taxpayer's election is a regulatory election, as defined under § 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 and representations made by Taxpayer establish that Taxpayer acted
reasonably and in good faith. Taxpayer has represented that it requested relief before
the failure to make the regulatory election was discovered by the Service. Taxpayer
has also represented that it reasonably relied upon the advice of Preparer, a qualified
tax professional, to prepare its federal income tax return for the short taxable year
ending on Date 2.
PLR-103779-18                                 6

Moreover, Taxpayer has represented that none of the circumstances listed in section
301.9100-3(b)(3) apply. It is not the case that Taxpayer was informed of the need to file
the election but chose not to do so. 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. Taxpayer did not affirmatively choose not to file the election
after having been informed in all material respects of the required election and related
tax consequences. Taxpayer has also represented that it is not using hindsight in
making its request for relief and that no specific facts have changed since the due date
for filing the election that make the election advantageous.

Further, based on the facts of the case provided, granting an extension will not
prejudice the interests of the Government. Taxpayer has represented that it will not
have a lower tax liability in the aggregate for all taxable years affected by the election if
given permission to make the election at this time than Taxpayer would have had if the
election had been timely made (taking into account the time value of money). Taxpayer
has also represented that the tax year at issue is not closed by the period of limitations
on assessment at the time relief would be granted. In addition, granting relief in this
instance will not affect any closed years.

                                          RULING

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 an
amended return for the short taxable year ending Date 2 including 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.

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 expressly provided herein, no opinion is expressed or implied concerning the
federal income tax consequences of any aspect of any transaction or item discussed or
referenced in this ruling including whether Taxpayer properly included the correct costs
as its success-based fees subject to the election, or whether Taxpayer's transaction
was within the scope of Rev. Proc. 2011-29.
PLR-103779-18                                  7

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 Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

A copy of this ruling should be attached to Taxpayer's federal income tax returns for the
tax years affected. Alternatively, taxpayers filing returns electronically may satisfy this
requirement by attaching a statement to their return that provides the date and control
number of this ruling.

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,



                                           Jamie J. Kim
                                           Senior Technician Reviewer, Branch 3
                                           Office of the Associate Chief Counsel
                                           (Income Tax & Accounting)


Enclosure: Copy of the letter for § 6110 purposes