Corporate group gets 60 days to make a late success-based-fee safe-harbor election it forgot to attach, conditioned on fixing which subsidiary paid the fee

Plain-English summary

When a company pays an investment banker a fee that is contingent on closing an acquisition
(a "success-based fee"), the tax rules presume the whole fee must be capitalized unless the
company documents how much of it was for non-facilitative work. Rev. Proc. 2011-29 offers a
safe harbor: deduct 70% and capitalize 30%, but only if the taxpayer attaches an election
statement to the original return for the year the fee is paid. Here, a consolidated group meant
to make that election for a subsidiary's acquisition and even split the fee 70/30 on its return,
but it inadvertently failed to attach the required statement. A tax executive caught the omission
shortly after filing, after attending training, and the group asked for late relief under the
Section 301.9100-3 regulations. The IRS found the group acted reasonably and in good faith
and granted 60 days to file the election. The relief is conditional: the group must amend its
consolidated return to correctly show that the fee, though actually paid by a sister subsidiary
(Sub 2), was paid on behalf of the acquiring subsidiary (Sub 1), treating it as a deemed
distribution up and a capital contribution back down the ownership chain, with matching basis
and earnings-and-profits adjustments under the consolidated-return regulations. This is a
grant, in contrast to cases where the fee is a seller's capitalized cost rather than the taxpayer's
deductible expense.

Ruling snapshot

• Question: May a consolidated group get an extension of time to make a late Rev. Proc. 2011-29 safe-harbor election for a success-based fee it failed to elect on its original return?
• Outcome: approved (60-day extension, conditioned on amending the return to reflect that the fee was paid on Sub 1's behalf)
• Key authorities: IRC § 263(a); Treas. Reg. § 1.263(a)-5(f), (k); Rev. Proc. 2011-29; Treas. Reg. §§ 301.9100-1, 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202309001                                              [Third Party Communication:
 Release Date: 3/3/2023                                         Date of Communication: Month DD, YYYY]
 Index Number: 263.16-00, 9100.00-00
                                                                Person To Contact:
 ------------------------                                       ---------------------, ID No. -----------------
 ------------------------------------------------------------   Telephone Number:
 ----------------                                               -------------------
 ----------------------------------------------                 Refer Reply To:
 ------------------------------------                           CC:ITA:1
                                                                PLR-100240-22
                                                                Date:
                                                                November 30, 2022


In re: ----------------------------------------------------
---------------------------

Legend


 Taxpayer                 =    ---------------------------------------------------
 Sub 1                    =    ----------------------------
 Sub 2                    =    -----------------------------------------------
 Entity 1                 =    -----------------------
 Entity 2                 =    ---------------------------------------------
 Financial Advisor        =    --------------------------------
 Tax Executive            =    ------------------------
 Date 1                   =    -------------------------
 Date 2                   =    --------------------------
 Date 3                   =    -----------------------
 Tax Year                 =    -------
 Amount 1                 =    ---------------


Dear ---------------------

This letter responds to your letter ruling request dated Date 1 and supplemental
correspondence submitted by Taxpayer for relief under Treas. Reg. §§ 301.9100-1 and
301.9100-3 of the Procedure and Administration Regulations to make a late election
with respect to specified success-based fees described under Rev. Proc. 2011-29,
2011-1 C.B. 746, for taxable year ended Date 2.

Facts

Taxpayer is the parent company of group of an affiliated group of corporations that files
a consolidated federal income tax return. Taxpayer indirectly owns Sub 1 through a
wholly owned first-tier subsidiary and directly owns Sub 2. Both Sub1 and Sub2 are
members of Taxpayer's consolidated group.

On Date 3, Sub 1 acquired all the outstanding stock of Entity 1 and all of the issued and
outstanding membership interests and other equity interests in Entity 2 (collectively
Targets). Taxpayer represents that a § 338(h)(10) election was made to treat the
acquisition as an asset purchase for Federal income tax purposes, and that the
transaction is a covered transaction described in § 1.263(a)-5(e)(3).

Sub 1 engaged Financial Advisor to perform advisory services in the process of
pursuing the acquisition of Targets. In connection with those services, Sub1 agreed to
pay Financial Advisor a fee that was contingent upon the consummation of the
acquisition. Taxpayer represents that the Amount 1 fee is a success-based fee
described in § 1.263(a)-5(f). Taxpayer represents that the Amount 1 fee was paid by
Sub 2, a sister corporation of Sub 1, on behalf of Sub 1 in accordance with § 1.263(a)-
5(k).

The Amount 1 fee was reported on Taxpayer's Tax Year consolidated return as a
success-based fee described in Rev. Proc. 2011-29 in that 70% of Amount 1 was
deducted and the remaining 30% was capitalized. However, instead of accounting for
the amounts as a cost paid or incurred by Sub 1 in computing its separate taxable
income, the amounts were accounted for as a cost paid or incurred by Sub 2 in
computing its separate taxable income. Sub 1 was not obligated to and did not
reimburse Sub 2 for the Amount 1 fee paid by Sub 2.

As part of its request for an extension of time to file the election statement, Taxpayer
submitted detailed affidavits from individuals having knowledge or information about the
events that led to the failure to attach the required election statement to Taxpayer's tax
return, as well as regarding the discovery of that failure. Taxpayer represents that it
intended to file an election statement with its Tax Year return, but it inadvertently failed
to do so as required by Rev. Proc. 2011-29. The failure to file the timely election
statement was discovered by Tax Executive shortly after the return was filed, after
attending training on the treatment of acquisition expenses. Shortly after determining
that Taxpayer had failed to include the election statement, Taxpayer filed a request for
relief to make a late election under Rev. Proc. 2011-29.

Taxpayer represents that as a condition of being granted additional time to make the
late election under Rev. Proc. 2011-29, Taxpayer will amend its consolidated return,
including required statements and schedules, so as to properly reflect that the Amount 1
payment was paid by Sub 2 on behalf of Sub 1. Thus, Taxpayer will treat the Amount 1
payment as giving rise to a deemed distribution by Sub 2 to Taxpayer and then as a
deemed contribution of capital from Taxpayer down the chain of ownership to Sub 1 to
reflect the proper treatment of the Amount 1 payment as being a 70% deductible
expense and 30% capitalizable cost of Sub 1. In addition, Taxpayer will make all
necessary adjustments on its books and records to basis under § 1.1502-32 and
earnings and profits (E&P) under § 1.1502-33 to reflect the proper treatment of the
deemed distribution and capital contribution, as well as the deductible expense.
Taxpayer represents that it will amend its consolidated return as described above within
the same timeframe permitted by this letter for making the late election.

Law & Analysis

Section 263(a)(1) of the Internal Revenue Code and § 1.263(a)-2(a) of the Income Tax
Regulations provide 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.
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) 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. 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.

Section 1.263(a)-5(k) states that, for purposes of § 1.263(a)-5, references to an amount
paid to or by a party include an amount paid on behalf of that party.

To reduce controversy between the Internal Revenue Service (the "Service") 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 Service issued Rev. Proc. 2011-29.

Section 4.01 of Rev. Proc. 2011-29 states that the Service will not challenge a
taxpayer's allocation of a success-based fee between activities that facilitate the
transaction described in § 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.

The revenue procedure applies to covered transactions described in § 1.263(a)-5(e)(3),
which includes, inter alia, a taxable acquisition by the taxpayer of assets that constitute
a trade or business and 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 § 267(b) or § 707(b). See § 1.263(a)-5(e)(3)(i) and (ii).

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.

Section 301.9100-1(c) provides that the Commissioner, in exercising his discretion, may
grant a reasonable extension of time under the rules set forth in § 301.9100-3 to make a
regulatory election under all subtitles of the Internal Revenue Code except subtitles E,
G, H, and I.

Section 301.9100-2 provides automatic extensions of time for making certain elections.
Section 301.9100-3 sets forth extensions of time for making elections that do not meet
the requirements of § 301.9100-2.

Section 301.9100-3(a) provides that requests for relief under this section 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 that granting relief will not prejudice the interests of the
Government.

Section 301.9100-3(b)(1) provides, in general, 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 be 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 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). 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.

The election Taxpayer seeks to make is a regulatory election, as defined in § 301.9100-
1(b), because the due date of the election is prescribed by 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 upon our analysis of the facts as represented, we conclude that Taxpayer acted
reasonably and in good faith and granting relief will not prejudice the interests of the
government. Accordingly, the requirements of §§ 301.9100-1 and 301.9100-3 have
been met.

Taxpayer is granted an extension of 60 days from the date of this ruling to file the
statement required by section 4.01(3) of Rev. Proc. 2011-29, stating that it is electing
the safe harbor for the Amount 1 success-based fees, identifying the transaction, and
stating the success-based fee amounts that are deducted and capitalized. This
extension of time is conditioned on Taxpayer (i) amending its consolidated return with
revised attachments under § 1.1502-75(j) so as to properly reflect that the Amount 1
payment was paid by Sub 2 on behalf of Sub 1 and (ii) making corresponding
adjustments on its books and records to basis and E&P.

The ruling contained in this letter is based upon information and representations
submitted by the taxpayer and accompanied by penalty of perjury statements executed
by the appropriate parties. This office has not verified any of the materials submitted in
support of the request for a ruling and the information materials are subject to
verification on examination.

Except as expressly provided 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 other than conditionally granting an extension of time to make a late election
under Rev. Proc. 2011-29 for the Amount 1 fee. In particular, no opinion is expressed
or implied as to the treatment of any other fees paid or incurred by Taxpayer or its
consolidated return members or by Entity 1 or Entity 2. Further, except as expressed
herein, no opinion is expressed on the treatment of the Amount 1 capitalized portion of
the fees pursuant to the late election.

Enclosed is a copy of the letter ruling showing the deletions proposed to be made in the
letter when it is disclosed under § 6110.

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 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.

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.


                                           Sincerely,



                                           Norma Rotunno
                                           Branch Chief, Branch 1
                                           (Income Tax & Accounting)

cc:

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