IRS grants more time for a corrected success-based fee election

Plain-English summary

A corporation incurred financial adviser fees while acquiring and merging with a related company. Its return preparer applied the Rev. Proc. 2011-29 safe-harbor percentages but omitted the required election statement and used a fee amount that included a separately paid, nonrefundable fairness-opinion fee. The corporation discovered the omission after an IRS examination involving the acquired company prompted a review. The IRS concluded that the corporation acted reasonably and in good faith and that relief would not prejudice the government. It granted 60 days to file the safe-harbor statement using the success-based fee after subtracting the nonrefundable fairness-opinion payment.

Ruling snapshot

• Question: Could the corporation receive more time to file a corrected election for the success-based fee safe harbor?
• Outcome: approved (the corporation received 60 days to file the election using the represented success-based fee amount)
• Key authorities: IRC §§ 263(a), 6501(a), 6662; 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: 202029004                                            Third Party Communication: None
 Release Date: 7/17/2020                                      Date of Communication: Not Applicable
 Index Number: 9100.00-00
                                                              Person To Contact:
 ------------------                                           ----------------, ID No. ----------
 -------------------------                                    Telephone Number:
 -----------------------                                      -------------------
 ---------------------------------                            Refer Reply To:
                                                              CC:ITA:B02
                                                              PLR-125232-19
                                                              Date:
                                                              April 20, 2020




Legend:

 Taxpayer                    = -------------------------------------------------------------------------
                               ------------------
 Related Company             = -----------------------------------------------------------
 Date 1                      = -----------------------
 Date 2                        ----------------------
 Date 3                      = ---------------------
 Date 4                      = ------------------
 Date 5                      = -------------------
 Date 6                      = --------------------------
 Taxable Year                = --------------------------
 Service                     = -------------------------------------------------------------------------
                               -------------------------------------------------------------------------
                               ----------------------------------------
 State                       = -------------
 Advisor 1                   = ----------------------------------
 Advisor 2                   = ------------------------------------------------
 Tax Preparer                = -----------------------
 $a                          = -----------------
 $b                          = -------------------------------------------------------------------------
 $c                          = -------------------------------------------------------------------------
 $d                          = -----------------


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

This responds to a letter ruling request dated Date 1, submitted on behalf of Taxpayer.
Taxpayer requests an extension of time under §§ 301.9100-1 and 301.9100- 3 of the
Procedure and Administration Regulations to make a late election concerning the
treatment of success-based fees in accordance with Rev. Proc. 2011-29, 2011-1 C.B.
PLR-125232-19                                2

746, which requires that a statement be attached to Taxpayer's original federal income
tax return for Taxable Year.

Facts

Taxpayer is a State corporation and the common parent of an affiliated group of
corporations filing consolidated federal income tax returns. Taxpayer provides Service.
Related Company, a State corporation, was the common parent of an affiliated group of
corporations fling consolidated federal income tax returns, prior to its acquisition by
Taxpayer on Date 4.

Taxpayer acquired Related Company on Date 4 in a non-taxable stock acquisition.
Related Company was merged into Taxpayer, with Taxpayer surviving the merger, in a
non-taxable statutory merger under Internal Revenue Code §368(a)(1)(A). Immediately
after the transaction, the legacy Taxpayer shareholders held approximately 53% of the
outstanding common shares of the Taxpayer and the legacy Related Company
shareholders held approximately 47% of the outstanding common shares of the
Taxpayer. As a result of the acquisition, Related Company was required to file a final
short period return of the period beginning Date 2 and ending Date 4 and Taxpayer was
required to include Related Company’s activity from Date 4 to the end of the Taxable
Year in its consolidated federal income tax return for Taxable Year.

Related Company engaged Advisor 2 on Date 5 to be its financial advisor in connection
with the acquisition. Related Company paid Advisor 2 $b in success-based fees.

Taxpayer engaged Advisor 1 on Date 2 to assist in connection with the acquisition.
Advisor 1 assisted with feasibility analysis, contacted potential buyers, evaluated
proposals, prepared marketing materials, and provided other advisory services. In
connection with those services, Taxpayer agreed to pay Advisor 1 a fee of $a payable
upon the successful closing of the transaction, or a fee of 10% of the fair market value
of any break-up fee should the deal not be consummated. Taxpayer also engaged
Advisor 1 to provide a fairness opinion relating to the transaction at a fee of $c. The fee
for the fairness opinion was non-refundable and due when the opinion was presented to
Taxpayer. Under the terms of the contract, Taxpayer would receive a credit of $c,
representing the amount paid for the fairness opinion, against the total fee of $a due to
Advisor 1 if the transaction successfully closed. Taxpayer paid Advisor 1 $c for a
fairness opinion, and upon the successful closing of the transaction Taxpayer paid
Advisor 1 $d in success-based fees, representing the total fee owed ($a) reduced by the
nonrefundable amount Taxpayer paid Advisor 1 for the fairness opinion ($c).

Taxpayer engaged Tax Preparer to assist in determining the appropriate U.S. federal
income tax treatment of transaction costs incurred by Taxpayer. Taxpayer intended to
elect the safe harbor provisions for Rev. Proc. 2011-29. Tax Preparer prepared, and
Taxpayer filed, the Taxpayer return consistent with the calculations provided by the Tax
PLR-125232-19                                      3

Preparer. Taxpayer deducted 70% of $a as success-based fees and capitalized the
remaining 30%.1

In Month 1, as part of the IRS’s examination of Related Company’s return for taxable
year ending Date 6, the examining agent inquired whether Related Company made a
safe harbor election for success-based fees with respect to fees incurred in connection
with a Year 1 transaction. This inquiry prompted Taxpayer to investigate whether the
safe harbor election statement was attached to the Taxpayer’s return. Upon
investigation, Taxpayer discovered the safe harbor election statement was inadvertently
omitted from Taxpayer’s return and immediately brought the omission to the attention of
Tax Preparer.

Law

Section 263(a)(1) and Treas. Reg. § 1.263(a)-2(a) 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 Treas. Reg. § 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 Treas. Reg. § 1.263(a)-5(a) if the
amount is paid in the process of investigating or otherwise pursuing the transaction.

Under Treas. Reg. § 1.263-5(e)(2), an amount paid in the process of investigating or
otherwise pursuing a covered transaction facilitates that transaction if the amount is
inherently facilitative, and an amount paid for a fairness opinion is inherently facilitative
under Treas. Reg. §1.263-5(e)(2)(i).

Treasury Regulation §1.263(a)-5(f) provides that an amount that is contingent on the
successful closing of a transaction described in Treas. Reg. § 1.263(a)-5(a) (“success-
based fee”) is presumed to 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. 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

1 Taxpayer has represented that the proper amount of success-based fees was $d, and that it should

have applied the percentages in Rev. Proc. 2011-29 to $d to determine how much of the fees could be
deducted and how much of the fees needed to be capitalized.
PLR-125232-19                                 4

or otherwise pursuing a covered transaction described in Treas. Reg. § 1.263(a)-
5(e)(3). In lieu of maintaining the documentation required by Treas. Reg. § 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.

A nonrefundable amount paid prior to the closing of a transaction is not a success-
based fee. If a nonrefundable amount paid is later is credited against the fee owed
upon the successful closing of the transaction, such credit does not convert the
nonrefundable amount into a success-based fee. Accordingly, any such credits must
first be subtracted from the fee owed at the closing of the transaction to determine how
much of the transaction fee was success-based before applying the percentage
amounts in section 4.01 of Rev. Proc. 2011-29.

Treasury Regulation §301.9100-1(c) provides that the Commissioner has discretion to
grant a reasonable extension of time under the rules set forth in Treas. Reg. §§
301.9100-2 and 301.9100-3 to make certain regulatory elections. Treasury Regulation
§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.

Treasury Regulation §§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. Treasury Regulation §301.9100-2 provides automatic extensions of time for
making certain elections. Treasury Regulation §301.9100-3 provides extensions of time
for making elections that do not meet the requirements of Treas. Reg. § 301.9100-2.

Treasury Regulation §301.9100-3(a) provides that requests for extensions of time for
regulatory elections (other than automatic changes covered under Treas. Reg.
§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.

Treasury Regulation §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;
PLR-125232-19                                 5

 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
  v.    reasonably relied on a qualified tax professional, and the tax professional failed
        to make, or advise the taxpayer to make the election.

Treasury Regulation §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.

Treasury Regulation §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. 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 Treas. Reg. § 301.9100-
1(b), because the due date of the election is prescribed in Rev. Proc. 2011-29. As
such, the Commissioner has the authority under Treas. Reg. §§ 301.9100-1 and
301.9100-3 to grant an extension of time to file a late regulatory election.

Taxpayer has represented that it acted reasonably and in good faith. Taxpayer
represents that it reasonably relied on Tax Return Preparer, a qualified tax professional,
to prepare its federal income tax return for Taxable Year. Taxpayer also represents that
it 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 also
represents that it did not affirmatively choose not to make the election after having been
informed in all material respects of the required election and related tax consequences.
Rather, Taxpayer represents that it intended to take advantage of the safe harbor
provisions in Rev. Proc. 2011-29, filed its return for Taxable Year reflecting those
PLR-125232-19                                  6

provisions, but failed to include the required election statement. Taxpayer is not using
hindsight in requesting relief.

Further, based on the facts as represented by the Taxpayer, granting an extension will
not prejudice the interests of the Government. Taxpayer 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. In addition, the taxable year in which the regulatory election should have
been made and any taxable years that would have been affected by the election had it
been timely made will not be closed by the period of limitations on assessment under
§6501(a) before Taxpayer’s receipt of the ruling granting an extension of time to make a
late election.

Ruling

Based upon our analysis of the facts as represented, we conclude that Taxpayer acted
reasonably and in good faith and granting relief will not prejudice the interests of the
government. Accordingly, the requirements of Treas. Reg. §§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 by section 4.01(3) of Rev. Proc. 2011-29, stating that it is electing
the safe harbor for success-based fees, identifying the transaction, and stating the
success-based fee amounts that are deducted and capitalized. Per Taxpayer’s
representation, the amount of the success-based fee is $d, and the percentages in Rev.
Proc. 2011-29 will be applied to that amount.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. This office has not verified any of the materials submitted in
support of the request for a ruling and the information materials are 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.

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.

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 letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
PLR-125232-19                               7

attaching a statement to their return that provides the date and control number of the
letter ruling.


                                      Sincerely,



                                      Bridget E. Tombul
                                      Chief, Branch 2
                                      (Income Tax & Accounting)




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