Buyer and target receive 60 days to elect the success-fee safe harbor

Plain-English summary

A corporate buyer and its acquisition target paid several success-based advisory fees in a covered transaction but did not make the Revenue Procedure 2011-29 safe-harbor election on their original returns. They relied on an accounting firm for transaction-cost advice and available elections, but the firm did not address the fees or advise them to elect. A later review found that the costs had neither been reported under the safe harbor nor accounted for at all. The IRS found that the taxpayers acted reasonably and in good faith and that relief would not prejudice the government. It granted each taxpayer 60 days to amend the relevant return and elect the safe harbor, which generally treats 70 percent of a success-based fee as nonfacilitative and capitalizes the remaining 30 percent.

Ruling snapshot

• Question: May the buyer and target make late Revenue Procedure 2011-29 elections for success-based transaction fees?
• Outcome: Approved, with 60 days to amend their respective returns
• 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: 202138002                                             Third Party Communication: None
Release Date: 9/24/2021                                       Date of Communication: Not Applicable
Index Number: 263.15-03, 9100.00-00
                                                              Person To Contact:
-----------------------------------------                     -------------------, ID No. ----------------
---------------------------                                   Telephone Number:
-----------------                                             --------------------
                                                              Refer Reply To:
------------------------                                      CC:ITA:B02
        -----------------------                               PLR-100261-21
                                                              Date:
                                                              June 29, 2021




         DO: ------------------------------TY: --------

Legend

Taxpayer                   = -----------------------------------------
Year 1                     = -------
Year 2                     = -------
Owner                      = -------------------------
Target                     = --------------------------------
Advisor A                  = --------------------------------------------------
Advisor B                  = ------------------------
Advisor C                  = ----------------------
Advisor D                  = ------------------
Accounting Firm A = ------------------------
Business                   = --------------------------------------------------------------------------------------
--------------------------------------
A                          = ----------------------
Date 1                     = --------------------------
Date 2                     = --------------------------
Date 3                     = --------------------------
Date 4                     = --------------------------
$A                         = ---------------
$B                         = ------------
$C                         = -----------
$D                         = ---------------


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

This letter responds to your correspondence dated Date 4, requesting an extension of
time under §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration
Regulations for Taxpayer and Target to make the safe harbor election for success-
PLR-100261-21                               2

based fees described in Rev. Proc. 2011-29, 2011-18 I.R.B. 746. This letter ruling is
being issued electronically in accordance with Rev. Proc. 2020-29, 2020-21 I.R.B. 859.
A paper copy will not be mailed to Taxpayer.

                                        FACTS

Taxpayer is the parent of a consolidated group and is a Business. Taxpayer is owned
by funds affiliated with Owner.

Pursuant to an agreement and plan of merger executed on Date 1, Target became an
indirect, wholly-owned subsidiary of Taxpayer (“the Transaction”). The Transaction
closed on Date 2. Taxpayer represents that the Transaction is a covered transaction as
defined in § 1.263(a)-5(e)(3) of the Income Tax Regulations.

Pursuant to a consulting services agreement executed between Target, Taxpayer, and
Advisor A, Taxpayer appointed Advisor A to render various advisory and consulting
services in connection with the Transaction, as well as various advisory services to
Target following the Transaction. For its services Advisor A was entitled to receive a
non-refundable and irrevocable fee of $B, of which $A is at issue in this request.
Taxpayer represents that Taxpayer and Target are not related to Advisor A for purposes
of § 267.

In addition, Owner also engaged Advisor B and Advisor C to provide services
associated with the acquisition of Target. Under the terms of the engagement letters,
Advisor A and Advisor B would each be paid a fee of $C.

Pursuant to an engagement letter executed between Advisor D and Target, Advisor D
was engaged by Target to act as a financial advisor in connection with a possible
transaction involving Target. Advisor D was paid a fee of $D in connection with the
Transaction.

Taxpayer represents that amounts paid to Advisors A, B, C, and D ($A, $C, $C, and $D,
respectively) are success-based fees eligible for the safe harbor treatment afforded by
Rev. Proc. 2011-29.

Following the Transaction, Taxpayer maintained an engagement with
Accounting Firm A to prepare, sign as preparer, and file the tax return for Target
through the date of the Transaction and to perform the same services with respect to its
tax return for the taxable year ending Date 3. As part of the engagement with
Accounting Firm A, Target and, following the Transaction, Taxpayer, relied on
Accounting Firm A to provide tax advice on matters associated with the application of
Treasury Regulations to determine taxable income and allowable deductions, including
the rules applicable to treatment of transaction costs. Taxpayer and Target also relied
on Accounting Firm A to advise them on available and appropriate tax elections.
PLR-100261-21                                  3

There was no consideration of how to treat the costs associated with the Transaction,
and, therefore, there was no discussion of the ability to make a safe-harbor election to
allocate the success-based fees, as provided by Rev. Proc. 2011-29. Consequently,
neither Taxpayer’s nor Target’s tax returns contained any indication that they were
making the safe-harbor election.

In Year 2, A joined Target as Chief Financial Officer. While reviewing the returns filed
by Taxpayer and Target for the taxable years on which the Transaction costs would
otherwise have been reported, A noted that they had not been reported on the returns
consistent with having made a safe-harbor election or, in fact, accounted for at all.

Taxpayer requests an extension of time to make the safe harbor election under Rev.
Proc. 2011-29 to allocate success-based fees for the Transaction.

                                     LAW & ANALYSIS

Section 263(a)(1) 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, and thus must be capitalized. 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, 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 section 2.04 of Rev. Proc. 2011-29.

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).
PLR-100261-21                                 4

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 70
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. Section 4.03 states that the
election does not constitute a change in method of accounting for success-based fees
generally, and an adjustment under § 481(a) is neither permitted or 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 301-9100-1(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 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
PLR-100261-21                                 5

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).

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 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.

Taxpayer is granted an extension of 60 days from the date of this letter ruling to amend
its tax return for Year 1 to elect the safe harbor for success-based fees pursuant to Rev.
Proc. 2011-29. Also, Target is granted an extension of 60 days from the date of this
letter ruling to amend Target’s tax return for the taxable year ending on Date 2 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 or Target incurred any liability in Year 1 that
was a success-based fee; (2) the Transaction was within the scope of Rev. Proc. 2011-
PLR-100261-21                                   6

29; or (3) Taxpayer satisfied the requirements to file an amended return for Year 1 or
Target satisfied the requirements to file an amended return for the taxable year ending
on Date 2. Further, no opinion is expressed or implied concerning the applicability of
§ 267 to any payment or liability that is at issue in this letter. The relief provided in this
letter is conditioned on proper adjustments to affected returns and tax attributes for
Taxpayer and its affiliates.

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

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 that is requesting it. Section 6110(k)(3)
provides that it may not be used or cited as precedent.

In accordance with the provisions of the power of attorney currently on file with this
office, we are sending a copy of this letter ruling to your authorized representatives. We
are also sending a copy of this letter ruling to the appropriate operating division director.


                                        Sincerely,



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

Enclosure: Copy for § 6110 purposes


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