Corporation receives 60 days for late success-fee safe-harbor election

Plain-English summary

A corporation incurred success-based transaction fees when its parent was acquired and the corporation moved into the acquirer's consolidated group. Its tax adviser prepared two short-period consolidated returns using Revenue Procedure 2011-29's safe harbor, deducting 70 percent of the fees and capitalizing 30 percent. The adviser inadvertently omitted the required election statements, and the IRS discovered the omissions during examination. The corporation represented that it had relied on the adviser and did not understand the statement requirement. The IRS found reasonable and good-faith conduct and no prejudice to the government, then allowed 60 days to file an amended return containing the required statement. The ruling did not decide whether the costs were properly treated as success-based fees or whether the transaction qualified for the revenue procedure.

Ruling snapshot

• Question: Could the corporation make a late Revenue Procedure 2011-29 election for success-based transaction fees?
• 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 and 301.9100-1 through 301.9100-3; Rev. Proc. 2011-29

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202129002 [Third Party Communication:
Release Date: 7/23/2021 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-120593-20
Date:
March 16, 2021

Legend
Taxpayer = ------------------------------
Taxable Year = ----------------------------------------------------------------------------------
Fiscal Year = --------------------
Date 1 = ---------------------------
Date 2 = --------------------------
Date 3 = --------------------------
Date 4 = ---------------------
Business = -----------------------------------------
Service = -------------------------------------------------------------------------------------------------------

Parent Company = -----------------------------------
Acquirer Company = ----------------------------------------
Tax Advisor = ---------------
Financial Advisor 1 = -----------------------
Financial Advisor 2 = ---------------------
Financial Advisor 3 = --------------------
Financial Advisor 4 = ------------------------

Dear ----------------:
This letter responds to a ruling request dated Date 1, submitted on behalf of Taxpayer.
Taxpayer requests an extension of time under §§ 301.9001-1 and 301.9001-3 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 a Taxpayer’s original federal
income tax return for Taxpayer’s Taxable Years.

PLR-120593-20 2

                                    FACTS

Taxpayer makes the following representations:
Taxpayer is a Business engaged in Service. Historically, Taxpayer was included in a
Fiscal Year consolidated Form 1120, U.S. Corporation Income Tax Return, filed by
Parent Company as common parent company.
On Date 2, Acquirer Company acquired all the issued and outstanding stock of the
Taxpayer in a taxable stock acquisition transaction via acquisition of 100% the
outstanding equity of the Taxpayer’s former common parent company, Parent
Company.
As a result of the acquisition transaction, the Parent Company consolidated return
group terminated, effective Date 2, and its entities, including the Taxpayer, joined
Acquirer Company’s consolidated return group as of Date 3.
The Taxpayer’s tax advisor, Tax Advisor, determined that the consolidated return group
of Parent Company terminated, and the Taxpayer joined Acquirer Company’s initial
consolidated return group. Accordingly, the Taxpayer was included as a consolidated
subsidiary in two separate short period returns as a result of the transaction: (1) final
consolidated federal income tax return filed by Parent Company for the taxable year
ended Date 2, and (2) initial consolidated federal income tax return for Acquirer
Company for the taxable year ended Date 4.
Tax Advisor was engaged to prepare the pre-closing consolidated federal income tax
return for Parent Company (year ended Date 2) and the post-closing consolidated
federal income tax return for Acquirer Company (year ended Date 4).
In connection with preparation of the pre-closing consolidated federal income tax return
for Parent Company for the taxable year ended Date 2, which included sell-side
transaction costs incurred by the Taxpayer, Tax Advisor advised that amounts paid to
Financial Advisor 1, Financial Advisor 2, and Financial Advisor 3 qualified as success-
based fees eligible for the safe harbor treatment afforded by Rev. Proc. 2011-29.
Likewise, during preparation of the post-closing consolidated federal income tax return
for Acquirer Company for the taxable year ended Date 4, which included buy-side
transaction costs, Tax Advisor advised that amounts paid to Financial Advisor 4
qualified as success-based fees eligible for the safe harbor treatment afforded by Rev.
Proc. 2011-29. Accordingly, the returns prepared by Tax Advisor reflected deduction of
70% of the identified success-based fees and capitalization of 30% of the identified
success-based fees, consistent with the intended safe harbor elections under Rev.
Proc. 2011-29. However, Tax Advisor inadvertently failed to include the election
statements required by Section 4.01(3) of Rev. Proc. 2011-29 with the returns
presented to the Taxpayer for submission with the Internal Revenue Service.

PLR-120593-20 3

The failure to attach the election statements to the transaction year returns was
subsequently discovered during IRS examination of the consolidated federal income tax
return filed by Parent Company and Acquirer Company for the taxable years ended
Date 2 and Date 4, respectively, which included the Taxpayer as a consolidated
subsidiary. Upon discovery of the missed elections, the Taxpayer and Tax Advisor
discussed various aspects of the situation and potential avenues to rectify the problems,
including requesting administrative relief under relief for the late-filed success-based
fees elections under Treas. Reg. § 301.9100-1 and 301.9100-3.
The Taxpayer represents that it did not have knowledge or understanding of the
requirement to include a statement to make the safe harbor election under Rev. Proc.
2011-29 with respect to the success-based fees incurred by it in connection with the
transaction. The Taxpayer represents it relied upon Tax Advisor for the preparation of
the tax returns and for advice regarding the proper tax treatment of the transaction-
related items.
LAW AND ANALYSIS
Section 263(a) of the Internal Revenue Code provides generally that no deduction is
allowed for any amount paid for new buildings or for permanent improvements or
betterments made to increase the value of any property or estate or any amount
expended in restoring property or in making good the exhaustion thereof for which an
allowance is or has been made. Section 1.263(a)-1(d)(3) of the Regulations provides
that no deduction is allowed for an amount paid to acquire or create an intangible, which
under sections 1.263(a)-4(c)(1)(i) and 1.263(a)-4(d)(2)(i)(A) includes an ownership
interest in a corporation or other entity. See also section 1.263(a)-4(a).
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, 575-576 (1970).
Under section 1.263(a)-5, a taxpayer must capitalize an amount paid to facilitate a
business acquisition or reorganization transaction described in section 1.263(a)-5(a). In
general, an amount is paid to facilitate a transaction described in section 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 the facts and circumstances. Section 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 section 1.263(a)-5(a), or success-based fee, is
presumed to facilitate the transaction. 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. This documentation must be completed

PLR-120593-20 4

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.
To reduce controversy between the IRS and taxpayers over the documentation required
to allocate success-based fees between the activities that facilitate the transaction and
activities that do not facilitate the transaction, the IRS issued Rev. Proc. 2011-29.
Section 4.01 of the revenue procedure states that the IRS would not challenge a
taxpayer’s allocation of a success-based fee between activities that facilitate a
transaction described in section 1.263(a)-5(e)(3) and activities that do not facilitate the
transaction if the taxpayer—
(1) treats 70 percent of the amount of the success-based fee as an amount that does
not facilitate the transaction;
(2) capitalizes the remaining 30 percent as an amount that does facilitate the
transaction; and
(3) attaches 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.
It is the last requirement that Taxpayer requests permission to accomplish with this
ruling request. Taxpayer requests permission with this ruling request to attach the
statement required by section 4.01(3) of Rev. Proc. 2011-29 to its return, by amending
its original filed return and superseding it with a return with the proper election
statement completed and attached.
Section 3 of Rev. Proc. 2011-29 provides that the revenue procedure applies to covered
transactions described in section 1.263(a)-5(e)(3), which include—
(i) A taxable acquisition by the taxpayer of assets that constitute a trade or business;
(ii) 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 section 707(b); or
(iii) 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 which qualifies under section
354 or 356 (whether the taxpayer is the acquirer or the target in the reorganization).
Sections 301.9100-1 through 301.9100-3 of the Procedure and Administration
Regulations provide the standards the Commissioner uses to determine whether to
grant an extension of time to make a regulatory 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 section
301.9100-2.

PLR-120593-20 5

Section 301.9100-3(b) defines the term “regulatory election” as an election whose due
date is prescribed by a regulation published in the Federal Register, or a revenue ruling,
procedure, notice or announcement published in the Internal Revenue Bulletin. Section
301.9100-1(c) provides that the Commissioner may grant a reasonable extension of
time to make a regulatory election, or a statutory election (but no more than six months
except in the case of a taxpayer who is abroad) under all subtitles of the Internal
Revenue Code except subtitles E, G, H and I.
Section 301.9100-3(a) provides extension of time to make a regulatory election under
Code sections other than those for which section 301.9100-2 expressly permits
automatic extensions. Requests for extensions of time for regulatory elections 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 granting relief will not prejudice the interests of the
Government.
Section 301.9100-3(b)(1) states 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, including a tax professional
employed by the taxpayer, and the tax professional failed to make, or advise the
taxpayer to make the election.
Under section 301.9100-3(b)(3), 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 has been or
could be imposed under section 6662 at the time the taxpayer requests relief (taking
into account section 1.6664-2(c)(3)) 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
(ii) 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

PLR-120593-20 6

the granting of relief. Section 301.9100-3(c)(1)(i) provides, in part, that the interest 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 (taking into account the
time value of money). Section 301.9100-3(c)(1)(ii) provides, in part, that 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 section 6501(a) before the taxpayer’s receipt of a ruling granting
relief under this section.
Section 301.9100-3(f), Ex. 2, illustrates that where a failure to file an election is
discovered by the IRS during an examination, the taxpayer may be granted relief under
section 301.9100-3 if the taxpayer relied on a qualified tax professional to render advice
and the tax professional failed to notify the taxpayer of the requirement to file the
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.

PLR-120593-20 7

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
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

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