Corporate group receives 60 days to file safe-harbor elections for two acquisition fees

Plain-English summary

A consolidated corporate group paid success-based advisory fees in two acquisitions, one treated as an asset acquisition through a section 338(h)(10) election and one structured as an asset sale. The group's accounting firm prepared the Revenue Procedure 2011-29 election statements and the return deducted 70 percent of each fee while capitalizing 30 percent. The firm inadvertently omitted both statements from the timely filed return, and a due-diligence review later found the error before the IRS did. The IRS concluded that the group acted reasonably and in good faith and that relief would not prejudice the government. It granted 60 days from the ruling date to amend the return and attach statements identifying each transaction and the amounts deducted and capitalized. The IRS did not decide whether the costs or transactions qualified for the safe harbor.

Ruling snapshot

• Question: May the corporate group attach late Revenue Procedure 2011-29 election statements for success-based fees paid in two acquisitions?
• Outcome: approved, with 60 days from the ruling date to amend the return
• Key authorities: IRC §§ 263(a), 338(h)(10), 446, and 481; 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: 201945010                                              Third Party Communication: None
Release Date: 11/8/2019                                        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
                                                               PLR-101788-19
                                                               Date:
                                                               August 09, 2019




Legend

Taxpayer                   =        ------------------------------
Taxable Year               =        ---------------------------------------------------------------------------------
A                          =        ----------------------------------
B                          =        ------------------------------------
C                          =        ---------------------------------
Accounting Firm 1          =        ----------------------------
Accounting Firm 2          =        ---------------------------
$a                         =        --------------
$b                         =        ----------------
Date 1                     =        -----------------
Date 2                     =        --------------------
Date 3                     =        ------------------------
Date 4                     =        --------------------------
State 1                    =        -------------------
State 2                    =        -----------

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

This letter responds to your correspondence dated January 10, 2019, requesting an
extension of time to make the safe harbor election for success-based fees described in
Rev. Proc. 2011-29, 2011-18 I.R.B. 746, as well as a supplemental affidavit dated June
28, 2019. Taxpayer failed to attach the required election statement to its previously filed
return in order to make the safe harbor election to allocate success-based fees between
facilitative and non-facilitative amounts. Therefore, Taxpayer requests an extension of
time under §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration
Regulations to attach the required election statement to its return for the Taxable Year.
PLR-101788-19                                2



                                         FACTS

Taxpayer is a domestic corporation that is the common parent of an affiliated group that
elects to file a consolidated return for U.S. federal income tax purposes (Taxpayer
group). Taxpayer group has a calendar year tax year and uses an accrual method as
its overall method of accounting.

On Date 1, Taxpayer group acquired all of the outstanding stock of A, a State 1
corporation, in a transaction that was treated as an acquisition of assets for federal
income tax purposes by virtue of a joint election under § 338(h)(10) of the Internal
Revenue Code (A transaction). In the process of investigating or otherwise pursuing
the A transaction, Taxpayer group incurred certain transaction costs for professional
services. Taxpayer group incurred $a in success-based fees paid to a financial advisor
which were only due upon the successful closing of the A transaction.

On Date 2, B, a wholly-owned subsidiary of Taxpayer and a member of Taxpayer group,
acquired all outstanding membership units of C, a State 2 limited liability company that
had elected to be treated as a partnership for federal income tax purposes (C
transaction). The C transaction was treated as an asset sale to Taxpayer group. In the
process of investigating or otherwise pursuing the C transaction, Taxpayer group
incurred certain transaction costs including payments for professional services.
Taxpayer group incurred $b in success-based fees paid to financial advisors which were
only due upon the successful closing of C transaction.

Taxpayer group does not have in-house tax knowledge and expertise in federal tax
filings, and has historically engaged professional tax advisors in the ordinary course of
its business to prepare all required federal tax return filings. Taxpayer group engaged
Accounting Firm 1 to prepare Taxpayer group’s consolidated federal income tax return
for the Taxable Year. Accounting Firm 1 analyzed the tax treatment of the success-
based fees and determined that the success-based fees paid by Taxpayer group met
the requirements of Rev. Proc. 2011-29 and that both the A transaction and the C
transaction met the requirements of § 1.263(a)-5(e)(3) of the Income Tax Regulations.

Taxpayer group intended to make the safe harbor election and in its timely filed federal
income tax return for the Taxable Year, Taxpayer group capitalized thirty percent of the
success-based fees and deducted the remaining seventy percent of the success-based
fees as set out in Section 4.01 of Rev. Proc. 2011-29.

Accounting Firm 1 prepared the safe harbor election statements for both the A and C
transactions as required by Section 4.01(3) of Rev. Proc. 2011-29 to make the election
(election statements). However, Accounting Firm 1 inadvertently failed to attach the
election statements to Taxpayer group’s federal income tax return for the Taxable Year.
PLR-101788-19                                 3

Taxpayer group was unaware that Accounting Firm 1 had failed to attach the election
statement to its tax return. Taxpayer group timely filed its federal income tax return for
the Taxable Year on Date 3.

On Date 4 in preparation for a sale of Taxpayer, Accounting Firm 2 who served as tax
due diligence advisors, advised employees of Taxpayer, representatives of Accounting
Firm 1, and other related parties that copies of the election statements were not
included in Taxpayer group’s federal tax return for the Taxable Year. Accounting Firm 1
confirmed that the election statements were not attached to Taxpayer group’s federal
income tax return for the Taxable Year, and advised Taxpayer to submit a private letter
ruling requesting an extension of time to attach the required election statements. Under
the procedures set out in §§ 301.9100-1 and 301.9100-3, Taxpayer filed this private
letter ruling requesting an extension of time to attach the required election statements to
Taxpayer group’s federal income tax return for the Taxable Year.

                                    LAW & ANALYSIS

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 (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). 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. 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) (“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.

A taxpayer’s method for determining the portion of a success-based fee that facilitates a
transaction and the portion that does not facilitate a transaction is a method of
accounting under § 446. See section 2.04 of Rev. Proc. 2011-29.

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
PLR-101788-19                                4

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), this safe harbor permits electing
taxpayers to treat seventy percent of the success-based fee as an amount that does not
facilitate the transaction, and may be deducted, and the remaining portion of the fee
must be capitalized as an amount that facilitates the transaction.

Section 4.01 of Rev. Proc. 2011-29 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 satisfies three requirements. 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 must : (a) state that the
taxpayer is electing the safe harbor; (b) identify the transaction; and (c) state the
success-based fee amounts deducted and capitalized. It is the third requirement that
Taxpayer requests permission to accomplish with this ruling request. Taxpayer
requests permission to amend Taxpayer group’s return by attaching to it the completed
statement required by § 4.01(3) of Rev. Proc. 2011-29.

Sections 301.9100-1 through 301.9100-3 of the Procedure and Administration
Regulations provide the standards the Commissioner will use to determine whether to
grant an extension of time to make an election. 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 301.9100-2 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:

      (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;
PLR-101788-19                                 5

       (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:

       (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);
PLR-101788-19                                  6

       (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.

The election Taxpayer wants to make 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 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, Taxpayer has met the requirements of
§§ 301.9100-1 and 301.9100-3.

Taxpayer is granted an extension of sixty days from the date of this ruling to amend its
return for the Taxable Year to attach the statement required under section 4.01(3) of
Rev. Proc. 2011-29. The statement must set forth that Taxpayer group is electing the
safe harbor treatment for success-based fees, identify the transaction, and set forth the
amount of the success-based fees that are deducted and capitalized for Taxable Year.

The ruling contained in this letter is based upon information and representations
submitted by Taxpayer and accompanied by a penalty of perjury statement executed by
an appropriate party. Although this office has not verified any of the material submitted
in support of the request for the ruling, it is subject to verification on examination.

Except as expressly set forth 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 group properly included the correct costs as
success-based fees subject to the retroactive election, or whether Taxpayer group’s
transactions were within the scope of Rev. Proc. 2011-29.

A copy of this ruling should be attached to the 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 returns that provides the date and control
number of the letter ruling.

Enclosed is a copy of the letter ruling showing the deletions proposed to be made in the
letter when it is disclosed under § 6110 of the Code.
PLR-101788-19                                 7


This ruling is directed only to the taxpayer that is requesting it. Section 6110(k)(3) of the
Code provides that it may not be used or cited as precedent.

In accordance with the provisions of the power of attorney currently on file with this
office, we are sending a copy of this letter ruling to your two authorized representatives.
We are also sending a copy of this letter to the appropriate operating division director.


                                       Sincerely,



                                       Norma C. Rotunno
                                       Branch Chief, Branch 1
                                       Office of Associate Chief Counsel
                                       (Income Tax & Accounting)

Enclosure:
Copy for § 6110 purposes


cc: