Corporation receives 60 days to make a late success-based fee safe-harbor election

Plain-English summary

A corporation paid a success-based advisory fee when it acquired the remaining stock of two target companies. It deducted the full fee on its return without making the Revenue Procedure 2011-29 safe-harbor election, which generally permits 70 percent of such a fee to be deducted and requires 30 percent to be capitalized. An IRS information request during examination prompted the corporation to review the transaction and discover the missed election, but the request itself did not mention the safe harbor. The IRS found that the corporation acted reasonably and in good faith and that relief would not prejudice the government. Subject to the refund-limitations rules, it granted 60 days to amend the return and make the election, with corresponding adjustments to affected returns and tax attributes.

Ruling snapshot

• Question: Could the corporation make a late Revenue Procedure 2011-29 election for success-based acquisition fees?
• Outcome: Approved, with 60 days to amend the return, subject to Section 6511 and required related adjustments.
• 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: 202132003 Third Party Communication: None
Release Date: 8/13/2021 Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
------------------------- -------------------, ID No. -----------------
------------------------------ Telephone Number:
--------------------------------------- --------------------
Refer Reply To:
CC:ITA:B01
PLR-123836-20
Date:
April 14, 2021

Legend

Taxpayer = ---------------------------------------

Year 1 = -------
Year 2 = -------
Date 1 = ---------------------------
State A = -------------
Target 1 = --------------------------------
Target 2 = -----------------------------------
Advisor = -------------------------------
$a = ---------------
Preparer = ------------------------------------------

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

This letter responds to your correspondence dated October 9, 2020, and December 21,
2020, requesting an extension of time under §§ 301.9100-1 and 301.9100-3 of the
Procedure and Administration Regulations for Taxpayer to make the safe harbor
election for success-based fees described in Rev. Proc. 2011-29, 2011-18 I.R.B. 746.

                                            FACTS

Taxpayer is a C corporation incorporated under the laws of State A and uses an accrual
method of accounting for federal income tax purposes. Taxpayer is the parent
corporation of a U.S. consolidated group, which files an annual U.S. income tax return
on a 52/53 week basis.
PLR-123836-20 2

On Date 1, Taxpayer, in a taxable acquisition, acquired all of the outstanding stock of
Target 1 and Target 2 (Transaction). Taxpayer represents that the Transaction is a
covered transaction described in § 1.263(a)-5(e)(3)(ii) of the Income Tax Regulations.
Taxpayer engaged Advisor to perform advisory services in the process of investigating
or otherwise pursuing the Transaction. Taxpayer paid $a in success-based fees to
Advisor at the time of the closing of the Transaction. Taxpayer did not conduct a
transaction cost analysis with respect to the costs it incurred in conjunction with the
Transaction. Taxpayer filed its Year 1 return without making the safe harbor election
pursuant to Rev. Proc. 2011-29 and deducted the full amount of the fee.
Taxpayer is currently under examination by the Internal Revenue Service (IRS) for Year

1. In Year 2, Taxpayer received an Information Document Request (IDR) from the IRS
   requesting information on the transaction costs associated with the Transaction but the
   IDR did not reference the safe-harbor election pursuant to Rev. Proc. 2011-29. The
   IDR prompted the Taxpayer to review the transactions that were eligible for the Rev.
   Proc. 2011-29 safe-harbor election during Year 1. During that review, Taxpayer
   discovered that it had not made the safe-harbor election on its Year 1 return for the
   Transaction.
   In preparing the Year 1 return, the Taxpayer’s tax department did not fully appreciate
   the need to conduct a transaction cost analysis for the Transaction, and therefore
   inadvertently overlooked the advisability to make the Rev. Proc. 2011-29 safe-harbor
   election for the Transaction. The Taxpayer had already owned approximately 80% of
   Target 1 and Target 2 prior to the Transaction, which resulted in the Taxpayer being the
   sole owner of Target 1 and Target 2. Since the Taxpayer already owned a majority
   interest in Target 1 and Target 2, the Transaction did not trigger the same level of
   scrutiny for the reporting of the Transaction and led to the Taxpayer’s oversight to
   identify the potential to make the safe-harbor election. Had the tax department
   recognized that a transaction cost analysis should have been conducted for the
   Transaction, like it had done for similar stock acquisition transactions in past and future
   years, the tax department would have identified the availability and advisability of
   making the safe-harbor election under Rev. Proc. 2011-29. In addition, the lack of an
   election was not identified by Preparer prior to signing the Year 1 tax return.
   In March of Year 2, Taxpayer contacted Preparer to discuss options for resolving the
   missed safe-harbor election. Pursuant to this discussion, Preparer informed Taxpayer
   that the fees are of the type contemplated by Rev. Proc. 2011-29 and that Taxpayer
   may request relief to make a late election under §§ 301.9100-1(c) and 301.9100-3, for
   Year 1. At that time, Taxpayer decided to submit this request for relief for an extension
   of time to make the safe-harbor election under Rev. Proc. 2011-29.
   PLR-123836-20 3

                               LAW & 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 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 § 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). In general, 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 the facts and circumstances. See § 1.263(a)-5(b)(1).
   Section 1.263(a)-5(f) provides that an amount paid 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. A taxpayer may rebut this presumption by
   maintaining sufficient documentation to establish that a portion of the fee is allocable to
   activities that do not facilitate the transaction.
   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).
   Section 4.01 of Rev. Proc. 2011-29, 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 satisfies three requirements. First, the taxpayer must treat
   seventy percent of the amount of the success-based fee as an amount that does not
   facilitate the transaction. Second, the taxpayer must capitalize the remaining amount of
   the success-based fee as an amount which does facilitate the transaction. Third, 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. This statement must: (a) state that the
   taxpayer is electing the safe harbor; (b) identify the transaction; and (c) state the
   success-based fee amounts deducted and capitalized. Taxpayer requests permission
   to amend its Year 1 return and attach the statement required by section 4.01(3) of Rev.
   Proc. 2011-29.
   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
   301.9100-1(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.
   PLR-123836-20 4

Section 301.9100-3(a) provides that requests for relief 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 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
(taking into account the taxpayer’s experience and the complexity of the return at issue),
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.
Section 301.9100-3(b)(3) provides that a taxpayer will not be deemed 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 § 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 an extension of time to make a regulatory
election will be granted only when the interests of the Government are not 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 (taking into account the time value of money). Section 301.9100-3(c)(1)(i).
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 under § 6501(a) before the taxpayer’s receipt of a ruling granting relief under
this section. Section 301.9100-3(c)(1)(ii).
PLR-123836-20 5

Taxpayer’s election is a regulatory election as defined in § 301.9100-1(b) because the
due date of the election is prescribed in section 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 late regulatory election.
CONCLUSION
Based solely on the information provided and representations made, we conclude that
Taxpayer acted reasonably and in good faith and granting relief will not prejudice the
interests of the Government. Accordingly, Taxpayer has met the requirements of
§§ 301.9100-1 and 301.9100-3.
Subject to the requirements of § 6511, Taxpayer is granted an extension of 60 days
from ------------------, to amend its Year 1 return to elect the safe harbor for success-
based fees pursuant to Rev. Proc. 2011-29.
CAVEATS
The ruling contained in this letter is based upon information and representations
submitted by Taxpayer and accompanied by a penalty of perjury statement executed by
an appropriate party. Although this office has not verified any of the material submitted
in support of the request for the ruling, it is subject to verification on examination.
Except as expressly set forth 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, including whether: (1) Taxpayer incurred a liability of $a, as success-based
fees in Year 1; or (2) Transaction was within the scope of Rev. Proc. 2011-29. The
relief provided in this letter is conditioned on proper adjustments to affected returns and
tax attributes for Taxpayer and its affiliates.
Enclosed is a copy of the letter ruling showing the deletions proposed to be made in the
letter when it is disclosed under § 6110 of the Code.

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 representatives.
PLR-123836-20 6

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

                                   Sincerely,



                                   Sean M. Dwyer
                                   Senior Technician Reviewer, Branch 1
                                   Office of Associate Chief Counsel
                                   (Income Tax & Accounting)

Enclosure (1)
Copy for § 6110 purposes

cc: