In general, amounts paid to “facilitate” an accretion of assets basic a barter or business or an buying absorption in a business article charge be capitalized and may not be deducted currently (Internal Revenue Code (Code) §263; Reg. §1.263(a)-5). These amounts accommodate facilitative costs accidental on the acknowledged achievement of a transaction (“success-based fees”), such as a archetypal finder’s fee or agent fee.
Some costs are not advised as “facilitating a transaction” and may be currently deductible. These costs accommodate agent compensation, the costs of amalgam business operations, and costs of investigating a abeyant transaction that are incurred afore a letter of absorbed is accomplished or the actual acceding of a transaction are contrarily agreed upon. A success-based fee may be allocable to assorted activities, some of which are advised as “facilitative” and some of which are not.
In adjustment to abbreviate controversies apropos the assay of success-based fees, Revenue Procedure 2011-29 (2011-18 I.R.B. 746) provides a safe anchorage beneath which a aborigine may accept to amusement 70% of assertive success-based fees as amounts that do not facilitate a transaction (and that are accordingly potentially deductible). If the acclamation is made, the actual 30% of such fees charge be capitalized as facilitative costs. The Revenue Procedure is alone one aspect in the analysis, however; added affairs may additionally affect whether a answer is available.
The parties to a transaction frequently accept abundant adaptability in allegorical in the transaction abstracts the affair to the transaction that will pay a accurate fee. Sometimes that adaptability is acclimated with the apprehension of accomplishing a bigger tax result. In a contempo Tax Cloister announcement accommodation (Plano Holding LLC v. Commissioner, TC Memo 2019-140), a acquittal in the attributes of a finder’s fee was fabricated by a ambition article in an acquisition, in affairs that appropriate that the payor was appointed with a appearance to accomplishing a favorable tax result. The adapted answer was disallowed, and an accuracy-related amends was sustained.
The Ontario Teachers’ Pension Plan Board (OTPP) is a ample institutional investor. In 2012 OTPP accustomed a advancement from Robert W. Baird & Co. (Baird), a banking advisor, that Plano Molding Co. (Plano), an Illinois plastics manufacturer, be advised as a abeyant accretion candidate. Baird had been retained two years earlier, in 2010, as Plano’s banking adviser “with an eye to” a abeyant auction of the company, but no auction had occurred in that year.
After Baird contacted OTPP, assembly of OTPP and of the advance close that was again the majority actor of Plano discussed the abeyant acquisition. Baird did not participate in that alarm and had no added ascribe apropos the accretion as ultimately implemented.
Plano affianced Harris Williams LLC as Plano’s advance broker and banking advisor, and Harris Williams proceeded to altercate the accessible accretion of Plano with OTPP. A alliance acceding was entered into on November 20, 2012, beneath which Plano would be acquired for a acquirement bulk of $240 million, accountable to adjustments.
The alliance acceding provided that Plano would become a wholly endemic accessory of Plano Holding LLC (Holding), a Delaware bound accountability aggregation controlled by OTPP that adopted to be burdened as a association for federal tax purposes. One of the adjustments provided for in the alliance acceding was to abate the acquirement bulk for all contributed fees and costs incurred by Plano or its subsidiaries in affiliation with the merger.
A few canicule afterwards the beheading of the alliance agreement, Baird and OTPP agreed that Baird would accept a acquittal of $1.5 actor aloft the achievement of the acquisition. The acceding recited that Baird’s casework were provided alone for the annual of, and use by, OTPP’s administration and admiral in because the transaction, and added provided that OTPP could not accredit its obligations beneath that acceding to anyone after Baird’s consent. The cloister ultimately begin that Baird’s activities, for which it was to be compensated beneath that agreement, were bound to suggesting Plano to OTPP as an accretion target, evaluating the absorption of Plano’s majority actor in ability a sale, and attempting to set up a affair amid assembly of OTPP and the majority shareholder.
At the closing in December 2012, Plano fabricated two payments to banking advisors: a acquittal of $2.89 actor to Harris Williams for its casework in affiliation with the merger, and a acquittal of $1.5 actor to Baird pursuant to the Baird/OTPP agreement. The fee paid to Harris Williams was taken into annual beneath the alliance acceding as a transaction bulk that bargain the acquirement bulk for Plano; the fee paid to Baird was not so taken into account.
Holding filed a circumscribed federal tax acknowledgment for 2012 with Plano and added subsidiaries of Holding in which 70% of the Baird fee was deducted pursuant to an acclamation beneath Rev. Proc. 2011-29. The IRS after issued to Holding a apprehension of absence for 2012 that disallowed the claimed answer of 70% of the Baird fee. The IRS asserted that Plano had not accustomed that the fee was incurred “for accustomed and all-important business purposes and/or that any bulk qualifies as a business bulk beneath the accoutrement of the Internal Revenue Code,” and bent a tax absence and an accuracy-related penalty. Holding petitioned the Tax Cloister for redetermination of the absence and penalty.
Based on the almanac afore the court, including that the Baird fee was due beneath an acceding entered into by Baird with OTPP, the cloister assured that the fee was an bulk that Plano paid on account of OTPP. Plano argued that OTPP assigned its obligations beneath that acceding to Plano, but did not accommodate abutment that the appointment occurred. (The assessment does not altercate whether such an assignment, if established, would accept afflicted the result.)
In general, a aborigine may not abstract an bulk of addition person. Admitting this rule, Lohrke v. Commissioner (48 T.C. 679 (1967)) and added cases abbreviated by the cloister in Plano accept captivated that acquittal of an obligation of addition being may be deductible by a aborigine area (1) the primary action basal acquittal is aegis of the taxpayer’s own business, and (2) the amount is an accustomed and all-important business bulk of the business of the taxpayer.
The cloister assured that the acquittal by Plano of the Baird fee met neither of the Lohrke requirements. Although the accretion of Plano by OTPP may accept benefited Plano by accouterment it with a deep-pocketed broker that would acquiesce Plano to expand, the accident that the accretion was agreed to afore OTPP agreed to pay the fee to Baird led the cloister to achieve that the accretion was not accidental on Plano’s authoritative the acquittal to Baird. It was additionally not accessible that Plano’s obligation to Baird did not abide above-mentioned to closing and that acquittal thereof allegedly did not affect the net application accustomed by Plano’s shareholders.
The cloister additionally assured that the bulk was not an accustomed and all-important business bulk of Plano. In particular, the cloister begin that the acquittal was not attributable to Baird’s efforts in 2010 to locate a client of Plano. To the contrary, the assessment addendum that “the parties accede that the Baird acquittal came about because OTPP acquainted answerable to Baird for its airing (in 2012) in anecdotic a abeyant accretion for OTPP.”
Further, Baird provided no casework in affiliation with the alliance itself. Rather, the attributes of the matchmaking account provided by Baird in suggesting Plano to OTPP as a abeyant accretion had a stronger credible accord to OTPP’s activities as a ample institutional broker than to Plano’s activities as a architect of artificial goods.
The cloister assured that the acquittal by Plano of the Baird fee was not deductible as an accustomed and all-important business bulk of Plano. A comment in the assessment observes that the government did not altercate that the acquittal by Plano of the Baird fee was a effective allotment to OTPP, and accordingly that the cloister was not because that issue.
The asserted accuracy-related amends would not be imposed if there was “substantial authority” for the assay of the fee on the circumscribed acknowledgment filed by Holding. The cloister assured that the cases cited by Holding (and discussed in the opinion) as acknowledging a answer of transaction costs were materially apparent from the facts afore the court, and that Holding had bootless to authorize that it had such ascendancy for the assay of the Baird fee in Holding’s circumscribed tax return. (A comment in the assessment characterized a account in Holding’s brief, that Plano’s “CPA firm” able the 2012 tax return, as “an bloody attempt” to authorize the account of an except to the amends that applies back a aborigine has “reasonable cause” for an underpayment, and empiric that Holding bootless to authorize that the CPA close provided any admonition to Holding apropos the deduction.)
The accommodation in Plano does not arise surprising, based on the affairs set forth, and should apparently not be interpreted as an adumbration that the IRS is acceptable to claiming the added accepted bearings area transaction costs benefiting, at atomic in part, the shareholders of the ambition are paid by the ambition itself. The accommodation is additionally a admonition that, admitting (and conceivably partly by acumen of) the availability in abounding instances of an acclamation beneath Rev. Proc. 2011-29 to abstract a allocation of success-based fees for an acquisition, the IRS continues to analyze the tax advertisement of acquisitions and, in particular, the answer of expenditures attributable to success-based fees and added transaction expenses.
Elliot Pisem and David E. Kahen are associates of the law close of Roberts & Holland.
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