In an IRS chief counsel advice (CCA) memorandum (CCA 201624021
), the IRS determined that a target corporation in a deemed asset acquisition isn’t eligible to elect the safe harbor for success-based fees under Rev. Proc. 2011-29 because the target couldn’t treat the transaction as a covered transaction.
On Dec. 31, 2012, the shareholders of an S corporation (Target) sold all their outstanding stock to an acquiring corporation (Acquirer). Target and Acquirer elected to treat the transaction as a deemed taxable asset acquisition under Section 338(h)(10). In connection with the transaction, Target incurred success-based fees. On its timely filed 2012 tax return, Target deducted 70% of its success-based fees and capitalized the remaining 30% of the fees. Target attached an election statement to the return under the safe harbor allocation of Rev. Proc. 2011-29.
The IRS noted covered transactions under Treas. Reg. Sec. 1.263(a)-5(e)(3)(i) through (iii) include only the following:
- A taxable acquisition by the taxpayer of assets that constitute a trade or business
- 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 707(b)
- 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 that qualifies under Section 354 or 356 (whether the taxpayer is the acquirer or the target in the reorganization)
Regarding Treas. Reg. Sec. 1.263(a)-5(e)(3)(i), the IRS indicated the language provides that the provision applies only to the acquiring taxpayer, not to the acquired taxpayer. Thus, regarding asset acquisitions, the term “covered transaction” applies only to the acquiring taxpayer, not the acquired.
The agency also noted that the transaction didn’t qualify under any of the other covered transactions listed under Treas. Reg. 1.263(a)-5(e)(3). Specifically, Target could not demonstrate stock ownership after the acquisition, so there was no “taxable acquisition of an ownership interest in a business entity.” The transaction also didn’t qualify under the reorganization provisions listed in Treas. Reg Sec. 1.263(a)-5(e)(3)(iii). Accordingly, the IRS determined that Target wasn’t eligible to elect safe harbor treatment under Rev. Proc. 2011-29 for its success-based fees.
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