IRS grants extra time to make the "success-based fee" safe-harbor election after the required statement was left off a return

Plain-English summary

When a company is bought or reorganized, fees that are contingent on the deal closing ("success-based fees") are presumed to be capital costs that must be capitalized rather than deducted, unless the taxpayer documents otherwise. Rev. Proc. 2011-29 offers a safe harbor: elect to deduct 70% of the fee and capitalize 30%, by attaching a statement to the original return. Here, a corporation sold in a private-equity merger decided to make that election and its return already reflected the 70/30 split, but the accounting firm forgot to attach the required election statement before e-filing. The company asked for "9100 relief," a discretionary extension to make the late election. The IRS granted it: the taxpayer acted reasonably and in good faith by relying on its tax professionals, and granting relief won't prejudice the government. The company gets 60 days from the ruling to file the missing statement.

Ruling snapshot

• Question: Should the taxpayer receive a § 301.9100-3 extension to make the late Rev. Proc. 2011-29 success-based-fee safe-harbor election?
• Outcome: Approved (60-day extension to file the required election statement)
• Key authorities: IRC § 263(a); Treas. Reg. §§ 1.263(a)-5(f), 301.9100-1, 301.9100-3; Rev. Proc. 2011-29; INDOPCO v. Commissioner

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202035007 Third Party Communication: None
Release Date: 8/28/2020 Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
------------------------ -------------------, ID No. -----------------
--------------------------------- Telephone Number:
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-------------------------------------- Refer Reply To:
CC:ITA:B02
Attn: ----------------------------------------------------- PLR-128438-19
------------------------------------------------------ Date:
May 29, 2020

Taxpayer = ------------------------
State1 = ------
State2 = -------------
A = -------------------------------------
B = ----------------------------------------
C = ----------------------
D = -------------------------------
E = ----------------
U = ------------------------------------
V = ------------------------------
W = ---------------------------
X = ------------------------------------
Y = ----------------------------
x = -----------
y = ---------
Business = ----------------------------------------------------
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2

Date1 = --------------------------
Date2 = -------------
Date3 = -------------------------
Date4 = --------------------------
Date5 = ---------------------
Date6 = --------------------------
Date7 = -----------------------
$a = ---------------
$b = -------------------
$c = ---------------
$d = ------------
$e = ------------

Dear -------------------,

This letter responds to a letter ruling request dated Date1, 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. 746, which requires that a statement be attached to Taxpayer's original federal
income tax return for short taxable year ending Date6.

FACTS

Taxpayer represents the following:

Taxpayer is a corporation formed in Date2 under the laws of State1. Taxpayer’s trade
or business is Business. Prior to the transaction described below, x shares of Taxpayer
were owned by C and y shares of Taxpayer were owned by D, a State1 non-profit
corporation doing business as E (together “Sellers”).

U is a disregarded entity formed under the laws of State2. U is wholly owned by V,
another disregarded entity formed under the laws of State2. V is wholly owned by W,
classified as a foreign partnership for U.S. federal income tax purposes. W is mainly
owned by entities affiliated with X, a private equity firm.

On Date4, a merger agreement was executed by Taxpayer, Sellers, and U and Y, as
buyers. The transaction closed on Date3, on which date Taxpayer merged with Y, with
Taxpayer surviving. Following the transaction, U is the owner of all the shares of
Taxpayer. The taxpayer represents that this transaction is a covered transaction under
§1.263(a)-5(e)(3) of the Income Tax Regulations.
PLR-128438-19 3

Pursuant to an engagement letter dated Date5, Taxpayer engaged A to provide
financial advisory and investment banking services in conjunction with a potential sale
or other transaction associated with any portion of the business, assets, or equity
interests of Taxpayer. Under the agreement, A would provide its services to Taxpayer
and Taxpayer would pay a flat fee of $a contingent upon the consummation of a
transaction between Taxpayer and X, or any affiliate of X. Regardless of whether any
transaction was consummated, Taxpayer would also reimburse A for its reasonable and
reasonably documented out-of-pocket expenses incurred from time to time in
connection with its services. Pursuant to the engagement, the amount of the success-
based fee payable to A at the time of closing was $a.

Taxpayer engaged B to prepare and file electronically its federal and state tax returns.
B prepared a Form 1120, U.S. Corporation Income Tax Return, for the short taxable
year ending Date6. Taxpayer also engaged B to prepare a transaction cost analysis
with respect to costs it incurred in conjunction with the transaction. B determined that $b
of fees paid by Taxpayer to A ($a flat fee plus $c in out of pocket expenses) constituted
success-based fees subject to the safe-harbor election provided for in Rev. Proc. 2011-

29. In its final report on the transaction costs, B included a draft election statement
    setting forth the total amount of the success-based fees, ($b) the portion of the fees to
    be deducted ($d), and the portion of the fees to be capitalized ($e).1 B discussed the
    safe-harbor election with Taxpayer, who agreed to make the election.

Taxpayer’s Form 1120 for the short taxable year ending Date6 reflected the amounts to
be deducted ($d) and to be capitalized ($e) as if the election had been made. However,
the statement required by Rev. Proc. 2011-29 was not included with the return when it
was provided to Taxpayer for review prior to filing. The Taxpayer’s Form 1120 for the
short taxable year ending Date6 was electronically filed, pursuant to extension on Date7
without the required statement attached.

Subsequent to the filing of the return, B noticed that the election statement required
under Rev. Proc. 2011-29 was not included with the return when it was filed. Upon
notification of the omission and receiving a recommendation that Taxpayer make this
request, Taxpayer filed this request for an extension of time to make an election
concerning the treatment of success-based fees in accordance with Rev. Proc. 2011-
29.

LAW AND ANALYSIS

Section 263(a)(1) of the Internal Revenue Code and § 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

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

have applied the percentages in Rev. Proc. 2011-29 to $a to determine the fees to be deducted and to be
capitalized.
PLR-128438-19 4

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). 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 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, 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.

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

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 in accordance with the safe harbor
election. Section 4.03 of Rev. Proc. 2011-29 provides that the election does not
constitute a change in method of accounting for success-based fees generally.
Accordingly, a § 481(a) adjustment is neither permitted nor required.

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.
PLR-128438-19 5

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.

Section 301.9100-3(a) provides that requests for extensions of time for regulatory
elections (other than automatic changes covered under § 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. 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
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: (1) 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; or (2) the taxable year in which the regulatory election should
have been made or any taxable years that would have been affected by the election
PLR-128438-19 6

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.

Section 301.9100-3(c)(2) provides special rules for accounting method regulatory
elections. Section 301.9100-3(c)(2) provides that the interests of the Government are
deemed prejudiced, except in unusual or compelling circumstances, if the accounting
method regulatory election for which relief is requested is subject to the advance
consent procedures for method changes, requires a § 481(a) adjustment, would permit
a change from an impermissible method of accounting that is an issue under
consideration by examination or any other setting, or provides a more favorable method
of accounting if the election is made by a certain date or taxable year.

Taxpayer’s election 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). 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 upon our analysis of the facts and representations provided, 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 §§ 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, for the short taxable year
ending Date6. Per Taxpayer’s representation, the amount of the success-based fee is
$a, and the percentages in Rev. Proc. 2011-29 will be applied to that amount.

CAVEATS

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.

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.
PLR-128438-19 7

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 Taxpayer’s classification of its costs as success-
based fees or whether Taxpayer’s transaction was within the scope of Rev. Proc. 2011-
29.

In accordance with the Power of Attorney on file with this office, copies of this letter are
being sent to your authorized representatives.

A copy of this ruling should be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

                                              Sincerely,


                                              _______________________________
                                              Amy S. Wei
                                              Senior Counsel, Branch 2
                                              Office of Associate Chief Counsel
                                              (Income Tax and Accounting)

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