IRS grants 60 more days to file a missed safe-harbor election for success-based deal fees

Plain-English summary

A corporation that heads a consolidated group made an acquisition and paid an
adviser "success-based fees," fees owed only if the deal closed. Tax rules
presume such fees must be capitalized (spread out) rather than deducted, but a
long-standing IRS safe harbor (Rev. Proc. 2011-29) lets a company simply deduct
70 percent and capitalize 30 percent if it attaches an election statement to its
return. The company's accounting firm actually computed the tax that way, but
forgot to attach the required election statement, so no valid election was made.
The firm discovered the slip only after the IRS inquired about the election
statement. The company asked for "9100 relief," a discretionary extension under
Treas. Reg. § 301.9100-3. The IRS granted 60 days to file the statement. The
company had acted reasonably and in good faith by relying on a qualified tax
professional, and because it had already calculated its tax using the safe
harbor and the affected years were still open (the company had signed a Form 872
consent extending the assessment period), granting relief would not lower its
overall tax or prejudice the government. (This ruling, PLR-117042-22, closely
tracks the companion PLR 202322008.)

Ruling snapshot

• Question: May the taxpayer get a late extension under Treas. Reg.
  § 301.9100-3 to file the Rev. Proc. 2011-29 safe-harbor election for
  success-based fees, when the return already used the safe harbor but the
  election statement was never attached?
• Outcome: Approved. 60-day extension granted.
• Key authorities: IRC § 263(a); Treas. Reg. § 1.263(a)-5(f);
  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: 202322007 Third Party Communication: None
Release Date: 6/2/2023 Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
-------------------- --------------, ID No. -----------------
------------------------------------------ Telephone Number:
-------------------------------------- --------------------
Refer Reply To:
Attn: ------------------- CC:ITA:B2
-------------------------- PLR-117042-22
Date:
March 06, 2023

                                               LEGEND

Taxpayer = -------------------------------------------------
Taxable Year = --------------------------------------------------------------
Accounting Firm = -------------------------------
Adviser = --------------------------------------
State = ------------------
Business = --------------------------------
Acquisition = ------------------------------------------------------------------------------------

Date 1 = -------------------------------
Date 2 = ---------------------------------
Date 3 = ---------------------------
Date 4 = ----------------------------
$X = ---------------------

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

This letter is in response to a letter ruling request dated Date 1, requesting an extension
of time to file the statement to elect the safe harbor provided in Rev. Proc. 2011-29,
2011-1 C.B. 746, to allocate success-based fees for Taxable Year (Request). This
request is made in accordance with §§ 301.9100-1 and 301.9100-3 of the Procedure
and Administration Regulations. This ruling letter is being issued electronically as
permissible under sections 7.02(2) and 9.04(3) of Rev. Proc. 2022-1, 2022-1 I.R.B. 1,
33, 49.

                       FACTS AND REPRESENTATIONS

Taxpayer represents the following:

Taxpayer is a corporation organized under the laws of State. Taxpayer is the common
parent of an affiliated group of corporations (Group) that files a consolidated U.S.
federal income tax return. Taxpayer has a calendar year end and uses an overall
accrual method of accounting. Taxpayer is engaged in Business.

On Date 2, Taxpayer entered into an agreement to engage in Acquisition, which was
completed on Date 3. In connection with Acquisition, Taxpayer incurred $X of success-
based fees for services performed by Adviser in the process of investigating or
otherwise pursing the transaction.

Acquisition was a covered transaction under § 1.263(a)-5(e)(3)(iii) of the Income Tax
Regulations. The $X paid to Adviser was for success-based fees as defined in
§ 1.263(a)-5(f), and the payment of the fees was contingent upon the successful closing
of the transaction.

Accounting Firm was engaged to advise Taxpayer on the proper tax treatment of the
success-based fees and to prepare its U.S. federal income tax return for Taxable Year.
While the prepared return complied with the substantive requirements of Rev. Proc.
2011-29 by deducting 70 percent of the success-based fees and capitalizing the
remaining 30 percent, the Rev. Proc. 2011-29 safe harbor election statement was
inadvertently not filed with the return. Thus, Taxpayer had not made a proper election
for success-based fees under Rev. Proc. 2011-29 for Taxable Year.

On Date 4, as a result of an inquiry from the Internal Revenue Service (Service)
regarding the election statement, the inadvertent failure to file the election statement
with its return was discovered by Accounting Firm. Accounting Firm immediately
notified Taxpayer that it must seek relief for an extension to file the election statement,
and Taxpayer asked Accounting Firm to prepare this Request.

                              LAW AND ANALYSIS

Section 263(a)(1) and § 1.263(a)-2(a) 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 § 1.263(a)-5(a). 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. Section 1.263(a)-5(b)(1).
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).

Under § 1.263(a)-5(f) an amount 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 the 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.

Rev. Proc. 2011-29 provides a safe harbor method of accounting for allocating success-
based fees paid in business acquisitions or reorganizations described in § 1.263(a)-
5(e)(3) (covered transactions), including a taxable acquisition by the taxpayer of assets
that constitute a trade or business. In lieu of maintaining the documentation required by
§ 1.263(a)-5(f), this safe harbor permits electing taxpayers to treat 70 percent of the
success-based fee as an amount that does not facilitate the transaction, meaning that
amount can be deducted. The remaining 30 percent of the fee must be capitalized as
an amount that facilitates the transaction.

Section 4.01 of Rev. Proc. 2011-29 allows the taxpayer to make a safe harbor election
with respect to success-based fees. Section 4.01 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) (costs that must be capitalized) and
activities that do not facilitate the transaction (costs that may be deductible) if the
taxpayer: (1) treats 70 percent of the amount of the success-based fee as an amount
that does not facilitate the transaction and thus may be deducted; (2) capitalizes the
remaining amount of the success-based fee as an amount which does facilitate the
transaction and thus must be capitalized; 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 pursuant to
the safe harbor election.

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
301.9100-2 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 § 301.9100-2.

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 with a due date that 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 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 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. 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.

                                       ANALYSIS

The Commissioner has the authority to grant an extension of time to file a late
regulatory election under §§ 301.9100-1 and 301.9100-3. Taxpayer's election is a
regulatory election under § 301.9100-1(b) because it is prescribed under Rev. Proc.
2011-29.

Taxpayer represents that it is eligible for an extension of time to file the regulatory
election to be granted because Acquisition was a covered transaction under § 1.263(a)-
5(e)(3) and the $X paid to Adviser were success-based fees as defined in § 1.263(a)-
5(f). The payment of the fees was contingent upon the successful closing of the
transaction.

The information provided and representations made by Taxpayer establish that the
Taxpayer acted reasonably and in good faith. Taxpayer filed its federal income tax
return and calculated its tax liability for Taxable Year pursuant to the safe harbor but
Accounting Firm failed to attach the required election statement. Taxpayer reasonably
relied on Accounting Firm, a qualified tax professional, to file its return accurately.
Therefore, Taxpayer acted reasonably and in good faith under § 301.9100-3(b)(1)(v).

Based on the information provided and representations made by Taxpayer, granting
relief will not prejudice the interests of the government. Because Taxpayer calculated
its tax liability pursuant to the safe harbor, granting relief to attach the required election
statement will not result in a lower tax liability in the aggregate for all taxable years
affected by the election than Taxpayer would have had if the election had been timely
made. Furthermore, Taxpayer represents that the Taxable Year in which the regulatory
election should have been made was not closed at the time Request was submitted,
and any taxable years that would have been affected had it been timely made, are not
closed by the period of assessment.1 Therefore, granting an extension of time to file the
election will not prejudice the interests of the government under § 301.9100-3(c)(1).

                                     CONCLUSION

Based upon an analysis of the facts and representations provided, Taxpayer acted
reasonably and in good faith, and granting relief will not prejudice the interests of the
Government. Therefore, 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 a safe
harbor election statement for success-based fees under Rev. Proc. 2011-29 for Taxable
Year.

1 Taxpayer signed Form 872, Consent to Extend Time to Assess Tax, for Taxable Year.

The ruling contained in this letter is based on information and representations submitted
by Taxpayer and accompanied by a penalty of perjury statement executed by an
appropriate party. While this office has not verified 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
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter. In particular, no opinion is expressed as to Taxpayer's classification of its
costs as success-based fees or whether Taxpayer's transaction is within the scope of
Rev. Proc. 2011-29.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, a taxpayer filing its return electronically may satisfy this requirement by
attaching a statement to its return that provides the date and control number of the letter
ruling.

This ruling is directed only to Taxpayer. Section 6110(k)(3) provides that it may not be
used or cited as precedent.

In accordance with the power of attorney, a copy of this letter ruling is being sent
electronically to each of Taxpayer's authorized representatives. A copy is also being
sent to the appropriate operating division.

                                               Sincerely yours,




                                               Ronald J. Goldstein
                                               Senior Technician Reviewer, Branch 2
                                               Office of Associate Chief Counsel
                                               (Income Tax & Accounting)

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