Merged corporation receives late success-fee safe-harbor election

Plain-English summary

A corporation merged into a related company and needed to file a final short-period return. It intended to extend that return but failed to file Form 7004 before the deadline, so the return could no longer qualify as timely filed. A financial adviser had analyzed the merger costs, concluded that success-based fees qualified for Revenue Procedure 2011-29's safe harbor, and drafted the required election statement. Because that statement ordinarily must accompany a timely return, the corporation requested regulatory relief before the IRS discovered the missed election. The IRS found reasonable and good-faith conduct and no prejudice to the government, then allowed 60 days to file an amended return with the election statement. It did not decide whether the identified costs or transaction actually qualified for the safe harbor.

Ruling snapshot

• Question: Could the corporation make a late safe-harbor election for success-based merger fees after missing its return-extension deadline?
• Outcome: Approved; the corporation received 60 days to file an amended return with the election statement.
• Key authorities: IRC § 263(a); Treas. Reg. § 1.263(a)-5; Treas. Reg. §§ 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: 202128004 [Third Party Communication:
Release Date: 7/16/2021 Date of Communication: Month DD, YYYY]
Index Number: 9100.00-00
Person To Contact:
----------------------- ------------------------, ID No. -----------------
--------------------- Telephone Number:
-------------- --------------------
---------------------------- Refer Reply To:
CC:ITA:B03
PLR-125354-20
Date:
April 22, 2021

Legend

Taxpayer = -----------------------
Taxable Year = --------------------------------------------------
Date 1 = -----------------------
Date 2 = -----------------------
Date 3 = ----------------------
Date 4 = ------------------
Date 5 = ------------------
Business 1 = ---------------------------------------------------------------------------------------------------

Business 2 = -------------------------------------------------------------------------------
Service 1 = -----------------------------------------------------------------------------------------------------

Service 2 = -----------------------------------------------------------------------------------------------------

Related Company = -----------------------
Financial Advisor = ----------------------------------------
A = --------

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

This letter responds to a ruling request dated Date 1, requesting that Taxpayer be
granted an extension of time under §§ 301.9100-1 and 301.9100-3 of the Procedure
and Administration Regulations to make an election to use the safe harbor method of
accounting under § 4.01 of Rev. Proc. 2011-29, 2011-18 I.R.B. 746, to allocate
success-based fees between facilitative and non-facilitative amounts with respect to the
covered transaction on Date 2.

                                     FACTS

Taxpayer makes the following representations:

PLR-125354-20 2

Taxpayer is a Business 1 engaged in Service 1. Related Company is a Business 2
engaged in Service 2.

On Date 2, pursuant to an Agreement and Plan of Merger, dated as of Date 3, by and
between Taxpayer and Related Company, Taxpayer merged with and into Related
Company with Related Company surviving the merger. Pursuant to the Agreement,
each share of Taxpayer’s common stock issued and outstanding immediately prior to
the merger owned by the reporting person converted into the right to receive A of a
validly issued, fully-paid and nonassessable share of Related Party’s common stock,
with cash in lieu of any fractional shares.

After the transaction, Taxpayer was required to file a final short-period Form 1120 for
Taxable Year. This tax return was due on Date 4. Taxpayer intended to file Form 7004,
Application for Automatic Extension of Time to File Corporation Income Tax Return, to
extend the due date of the tax return, however, for various reasons, the Form was not
filed before the deadline on Date 4. Thus, the Form 1120 is not eligible for timely filing.
The filing error was realized on Date 5.

In connection with the transaction, Taxpayer had engaged Financial Advisor to act as a
transaction advisor. As part of its services, Financial Advisor completed a transaction
cost analysis to determine the tax treatment of the transaction costs incurred in
connection with the transaction. Financial Advisor concluded that the transaction was a
business acquisition which was a covered transaction eligible for a safe harbor election
and drafted a copy of the proposed election statement. Rev. Rul. 2011-29 requires the
election statement to be included with a timely-filed return. Because the return may not
be timely filed, the safe harbor election is not automatically available.

Taxpayer represents that none of the identified parties have been notified that the
failure to file the safe harbor election was discovered by the Internal Revenue Service.
None of the parties identified herein seek to alter a return position for which an
accuracy-related penalty has been or could be imposed under section 6662.

                             LAW AND ANALYSIS

Section 263(a)(1) of the Internal Revenue Code generally provides 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. See INDOPCO, Inc. v. Commissioner, 503 U.S.
79, 89-90 (1992); Woodward v. Commissioner, 397 U.S. 572, 575-76 (1970).

Under § 1.263(a)-5 of the Income Tax Regulations, 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

PLR-125354-20 3

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.

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 § 2.04 of Rev. Proc. 2011-29.

Because the treatment of success-based fees was a continuing subject of controversy
between taxpayers and the Service, the Service published Rev. Proc. 2011-29. Rev.
Proc. 2011-29 provides a safe harbor method of accounting for allocating success-
based fees paid in business acquisitions or reorganizations 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 70 percent of the success-based fees as an
amount that does not facilitate the transaction, i.e., an amount that can be deducted
currently. The remaining portion of the fees must be capitalized.

Section 4.01 of Rev. Proc. 2011-29 allows a taxpayer to make a safe harbor election
with respect to success-based fees. Section 4.01 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 does three things. First, the taxpayer must treat 70 percent of
the success-based fees as amounts that do not facilitate the transaction. Second, the
taxpayer must capitalize the remaining success-based fees as amounts that do facilitate
the transaction. Third, the taxpayer must attach a statement to its original federal
income tax return for the taxable year the success-based fees are paid or incurred. This
statement should: (i) state that the taxpayer is electing the safe harbor; (ii) identify the
transaction; and (iii) state the amount of the success-based fees that are deducted and
capitalized.

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.

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

PLR-125354-20 4

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 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, in general, 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; (iii) failed to make the
election because, after exercising reasonable 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 is deemed to have not 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 the interests of the Government are prejudiced if
granting relief would result in the 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.

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

PLR-125354-20 5

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 § 4.01(3) of Rev. Proc. 2011-29. The
Commissioner has the authority under §§ 301.9100-1 and 301.9100-3 to grant an
extension of time to file a regulatory election.

                                  CONCLUSION

Based solely on the facts submitted and the representations made, we conclude that
Taxpayer acted reasonably and in good faith, and that granting the request will not
prejudice the interests of the government. Accordingly, the requirements of sections
301.9100-1 and 301.9100-3(b)(1) of the regulations have been satisfied.

Taxpayer is granted an extension of time until 60 days following the date of this ruling to
file an amended tax return for Taxable Year electing safe harbor treatment of its
success-based fees under section 4.01(3) of Rev. Proc. 2011-29. The amended return
must include an election statement stating that Taxpayer is electing the safe harbor for
success-based fees, identifying the transaction, and stating the success-based fee
amounts that are deducted and capitalized.

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 appropriate parties. While this office has not verified any of the material submitted in
support of the request for rulings, it is subject to verification on examination.

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 under any other provision of the Code. In particular, no opinion
is expressed or implied as to whether Taxpayer properly included the correct costs as
its success-based fees subject to the election, or whether Taxpayer’s transaction was
within the scope of Rev. Proc. 2011-29.

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.

A copy of this ruling must be attached to Taxpayer’s federal income tax returns for the
tax years affected. Alternatively, taxpayers filing their returns electronically may satisfy
this requirement by attaching a statement to their return that provides the date and
control number of the letter ruling.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representatives. We are also sending a copy of this letter
to the appropriate operating division director. Enclosed is a copy of the letter ruling

PLR-125354-20 6

showing the deletions proposed to be made in the letter when it is disclosed under
section 6110 of the Code.

                                Sincerely,



                                Brinton T. Warren
                                Chief, Branch 3
                                Office of Associate Chief Counsel
                                (Income Tax & Accounting)

Enclosure: Copy for § 6110 purposes

cc: