Corporation receives 60 days to perfect a late safe-harbor election for success-based fees

Plain-English summary

A corporation paid a success-based fee when it was acquired and reported the fee using the Revenue Procedure 2011-29 safe harbor, deducting 70 percent and capitalizing 30 percent. Its return preparer omitted the required election statement from the original return and also prepared the return for the wrong consolidated tax period. The corporation sought relief before the IRS discovered the omission and had relied on qualified tax professionals. The IRS found that it acted reasonably and in good faith and that relief would not prejudice the government because the relevant assessment periods remained open. It granted 60 days to file an amended return with the required election statement.

Ruling snapshot

• Question: Could the corporation receive extra time to attach the required statement electing safe-harbor treatment for success-based transaction fees?
• Outcome: Approved, with 60 days from the ruling date to file an amended return.
• Key authorities: IRC § 263(a); 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: 202134012 Third Party Communication: None
Release Date: 8/27/2021 Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
-------------------, ID No. -----------------
-------------------------------------- Telephone Number:

------------------------------------------ --------------------
Refer Reply To:

                                                             CC:ITA:B03

------------------------------------- PLR-127056-20
Date:
May 24, 2021

             TY: ------------------------------------------------------------------------------------

Legend:

Taxpayer = --------------------------------------
Tier Parent1 = --------------------
Tier Parent2 = ----------------------
Common Parent = ----------------------------------
Financial Consultant = ------------------
Tax Consultant = ---------------
Tax Return Preparer = ------------------------
Taxpayer’s Short Taxable Year = ---------------------------------------------------------------
-----------------------------------
Tier Parent2’s Taxable Year = ---------------------------------------------------------------
-----------------------------------
Former Group Taxable Year = ---------------------------------------------------------------
-----------------------------
Date1 = ----------------------
Date2 = ----------------------
Date3 = -----------------------
Date4 = ------------------------
Date5 = --------------------------
Date6 = ----------------------
$a = ---------------

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

This letter responds to your letter ruling request dated November 23, 2020, submitted
by Taxpayer. Taxpayer requests an extension of time pursuant to sections 301.9100-1
and 301.9100-3 of the Procedure and Administration Regulations to make a late

PLR-127056-20 2

election concerning the treatment of success-based fees as provided by 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 the taxable year of election.

                                      FACTS

Taxpayer is a domestic C corporation that operates private grade schools. Prior to its
acquisition, Taxpayer served as the parent of a consolidated group of affiliated C
Corporations. Currently, Taxpayer is wholly owned by Tier Parent1, a domestic C
corporation. Tier Parent1, itself, is wholly owned by Tier Parent2, a domestic C
corporation. Tier Parent2, in turn, is wholly owned by Common Parent, a China-based
investment firm.

Taxpayer engaged Financial Consultant to assist in the sale of its business; to advise
Taxpayer with respect to the structure of that sale, and provide technical advice,
perform valuation analyses, assist with due diligence, and to eventually negotiate the
sale on behalf of Taxpayer. Pursuant to its engagement agreement with Financial
Consultant, Taxpayer was required to pay Financial Consultant a compensatory fee
contingent upon the successful closing of the sale; the amount of Financial Consultant’s
fee would be calculated as a percentage of the aggregate consideration arising from
that transaction.

On Date1, Common Parent formed Tier Parent2 and Tier Parent1 for the sole purpose
of facilitating Common Parent’s acquisition of Taxpayer. On Date2, the acquisition of
Taxpayer closed in a taxable stock acquisition, and Taxpayer became a subsidiary of
Tier Parent1 (Acquisition Transaction). As a result and upon the successful closing of
the Acquisition Transaction, Taxpayer incurred and paid a success-based fee to
Financial Consultant in the amount of $a (Success-Based Fee).

Common Parent engaged Tax Consultant to provide tax advice and due diligence with
respect to the acquisition of Taxpayer. Tax Consultant informed Common Parent that
Taxpayer’s former consolidated group terminated at the time of the Acquisition
Transaction. Accordingly, Tax Consultant advised Common Parent that (1) Taxpayer
should file a consolidated Federal income tax return for Taxpayer’s Short Taxable Year,
and (2) Tier Parent2, serving as the common parent of the post-acquisition consolidated
group, should elect to file a consolidated Federal income tax return for Tier Parent2’s
Taxable Year. (Collectively, Tax Consultant’s Initial Advice).

Taxpayer engaged Tax Return Preparer to prepare a consolidated Federal income tax
return for its affiliated group in a manner consistent with Tax Consultant’s initial advice.
Rather than preparing the short-year return necessitated by Taxpayer’s sale, Tax
Return Preparer prepared a full-year consolidated Federal income tax return for the
Taxpayer’s Former Group’s Taxable Year (Initial Return).

PLR-127056-20 3

On that initial return, Tax Return Preparer reported Taxpayer’s payment of the Success-
Based Fee in a manner comporting with having made the safe-harbor election provided
by Rev. Proc. 2011-29. Accordingly, on that initial return Taxpayer claimed a deduction
for 70 percent of the Success-Based Fees paid to Financial Consultant and capitalized
the remaining 30 percent.

On Date3, Taxpayer timely filed its initial return believing that the return was correct,
complete, accurate, and prepared in accord with Tax Consultant’s Initial Advice. The
initial return, however, inadvertently failed to include a statement indicating that
Taxpayer was electing safe-harbor treatment, as required by section 4.01(3), Rev. Proc.
2011-29 (Required Election Statement).

On Date4, Tax Consultant informed Common Parent that the initial return prepared by
Tax Return Preparer did not comport with Tax Consultant’s advice.

Accordingly, Taxpayer and Tier Parent2 retained Tax Consultant to, respectively, (1)
prepare an amended consolidated Federal income tax return for Taxpayer’s Short
Taxable Year, and (2) request the Commissioner’s permission to file a late election to
file a consolidated Federal income tax return for Tier Parent2’s Taxable Year.

On Date5, the Commissioner granted Tier Parent2’s request to file a late election to file
a consolidated Federal income tax return for Tier Parent2’s Taxable Year.

On Date6, Tax Consultant determined that Taxpayer’s initial return also failed to include
the Required Election Statement for safe-harbor treatment under Rev. Proc. 2011-19.

On November 23, 2020, Taxpayer filed the present letter ruling request, seeking an
extension of time to file the Required Election Statement for Taxpayer’s Short Taxable
Year, pursuant to sections 301.9100-1 and 301.9100-3 of the Procedure and
Administration Regulations.

Taxpayer represents that the period of limitation on assessment under section 6501(a)
of the Internal Revenue Code (Code) for Taxpayer’s Short Taxable Year has not
expired.

                                      LAW

Section 263(a) of the Code provides generally that no deduction is allowed for any
amount paid out 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 Income Tax Regulations provides that no deduction is
allowed for an amount paid to acquire or create an intangible, which under sections

PLR-127056-20 4

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 of 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
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 this last requirement that Taxpayer requests permission to accomplish with this
ruling request. Taxpayer requests permission with this ruling request to attach the

PLR-127056-20 5

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.

Section 301.9100-1(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 extensions 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 --

PLR-127056-20 6

(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

(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. Section 301.9100-3(c)(1)(i) provides, in part, 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 (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.

PLR-127056-20 7

                                    ANALYSIS

Taxpayer represents that for Federal income tax purposes Acquisition Transaction was
a taxable acquisition of an ownership interest of Taxpayer within the meaning of section
267(b) of the Code, and section 1.263(a)-5(a)(3) and (e)(3)(ii) of the Income Tax
Regulations. That transaction, then, is considered a covered transaction pursuant to
section 1.263(a)-5(e)(3), and Taxpayer qualifies to make the safe-harbor election
provided by Rev. Proc. 2011-29.

As a result of Acquisition Transaction, Taxpayer incurred and subsequently paid an
amount of success-based fees during Taxpayer’s Short Taxable Year. Taxpayer
complied with the substantive requirements for making the safe-harbor election by
deducting 70 percent and capitalizing 30 percent of those success-based fees on its
Initial Return. Taxpayer, however, failed perfect its safe-harbor election by inadvertently
omitting the Required Election Statement from that return. It is with respect to that
failure that Taxpayer requests an extension of time to amend its original filed return, to
supersede that original return with one that includes the required election statement as
an attachment.

Taxpayer's request pertains to a regulatory election as defined in section 301.9100-1(b)
of the Procedure and Administration Regulations, as the due date for the making the
safe-harbor election is prescribed by section 1.263(a)-5(f) of the Income Tax
Regulations. Accordingly, the Commissioner has the authority under sections
301.9100-1 and 301.9100-3, to grant Taxpayer’s request for an extension of time to file
the safe-harbor election for Taxpayer’s Short Taxable Year.

The information submitted, and representations made by Taxpayer establish that
Taxpayer acted reasonably and in good faith under section 301.9100-3(b)(1) and (2).
Taxpayer requested relief before its failure to properly make the regulatory election was
discovered by the Commissioner. Additionally, despite Taxpayer’s reasonable reliance
on qualified tax professionals to properly advise it in the preparation of its consolidated
Federal income tax return for Former Group’s Taxable Year, the required election
statement was inadvertently omitted from Taxpayer’s initial return. Accordingly,
Taxpayer will be considered to have acted reasonably and in good faith.

Moreover, Taxpayer should not be deemed to have acted unreasonably or in a manner
lacking good faith. Taxpayer’s representations indicate that none of the circumstances
listed in section 301.9100-3(b)(3) apply.

Based on Taxpayer’s representation of the facts, granting an extension of time to file the
election will not prejudice the interests of the government under section 301.9100-
3(c)(1). Taxpayer has represented that granting relief would not result in a lower tax
liability in the aggregate for all taxable years affected by the election than would have
resulted had Taxpayer timely made the election (taking into account the time value of
money). Further, Taxpayer has represented that the period of limitations on

PLR-127056-20 8

assessment under section 6501(a) has not closed for Taxpayer’s Short Taxable Year,
or for any taxable years that would have been affected had Taxpayer timely made 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 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 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-127056-20 9

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 the Associate Chief Counsel
                                    (Income Tax & Accounting)

Enclosure: Copy of the letter for section 6110 purposes

cc: