Taxpayer received 60 days to file an omitted success-fee safe-harbor election

Plain-English summary

A corporate group paid contingent fees for services related to a merger acquisition. Its tax return applied the Revenue Procedure 2011-29 safe harbor by deducting 70 percent of the success-based fees and capitalizing 30 percent. The accounting firm had prepared the required election statement but inadvertently left it out of the filed return. The omission was discovered during an IRS examination. The IRS concluded that the taxpayer met the standards for discretionary relief and granted 60 days to file an amended return containing the election statement, while expressing no view on whether the transaction or costs otherwise qualified for the safe harbor.

Ruling snapshot

• Question: Could the taxpayer make a late safe-harbor election for success-based acquisition fees after its prepared election statement was omitted from the return?
• Outcome: approved, with 60 days to file an amended return and election statement
• Key authorities: IRC § 263(a); Treas. Reg. §§ 1.263(a)-5, 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: 202401001                                              Third Party Communication: None
Release Date: 1/5/2024                                         Date of Communication: Not Applicable
Index Number: 9100.00-00
                                                               Person To Contact:
------------------------------------------------------------   ----------------, ID No. -----------------
------------------                                             Telephone Number:
---------------------------                                    --------------------
-------------------------                                      Refer Reply To:
                                                               CC:ITA:B02
----------------------------------------------------           PLR-107549-23
                                                               Date:
-------------------------                                      October 04, 2023




Legend

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

Date A                        = -----------------

Date B                        = --------------------------

Date C                        = --------------------------

Subsidiary A                  = --------------------------------------------------------------

$A                            = ---------

A Shares                      = ------------------

Date D                        = -----------------------

Accounting Firm               = ---------------

$B                            = -----------------

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PLR- 107549-23

 Firm A                  = ------------------------------------

 Date E                  = ----------------




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

This letter is in response to a request for a private letter ruling (“Request”) submitted Date
A by Taxpayer for an extension of time, pursuant to §§ 301.9100-1 and 301.9100-3 of the
Procedure and Administration Regulations, to make an election under § 4.01 of Rev.
Proc. 2011-29, 2011-1 C.B. 746, to allocate success-based fees incurred relative to its
acquisition of Subsidiary A for the taxable year ending on Date B. This Request is being
issued electronically in accordance with §§ 7.02(5) and 9.04(3) of Rev. Proc. 2023-1,
2023-1 I.R.B. 1, 35, 49-50.

FACTS AND REPRESENTATIONS

Taxpayer represents the following:

Taxpayer is the parent of a consolidated group that files a federal income tax return.
Taxpayer operates businesses in the hospitality services industry. Taxpayer files its
consolidated return on the basis of a calendar year and uses an overall accrual met hod
of accounting for federal income tax purposes.

On Date C, Taxpayer acquired Subsidiary A pursuant to an agreed plan of merger that
qualified as a reorganization under section 368(a)(1)(A) of the Internal Revenue Code.
Shareholders of Subsidiary A received (for each share of Subsidiary A) $A and A Shares
of stock in Taxpayer. Subsidiary A became a part of Taxpayer’s consolidated group on
Date C.

As part of the merger transaction, Taxpayer paid fees of $B to Firm A for services
performed in the process of investigating or otherwise pursuing the transaction. The fees
were contingent on the successful closing of the transaction and were paid at the time of
closing (i.e., success-based fees). No portion of the success-based fees was a
guaranteed payment incurred upon the occurrence of a specified milestone or upon some
other date or event other than the successful closing of the transaction, and no portion of
the success-based fees was related to financing costs or reimbursed expenses.
Accordingly, Taxpayer represents that the fees described above are success-based fees
as described by § 1.263(a)-5(f) of the Income Tax Regulations, and Taxpayer further
represents that the merger transaction with Subsidiary A was a “covered transaction” as
defined by § 1.263(a)-5(e)(3).

                                                  3
PLR- 107549-23


Taxpayer retained the services of Accounting Firm to prepare its consolidated income tax
return for the taxable year ending Date B. Accounting Firm advised Taxpayer that it should
make an election to apply the safe harbor under § 4.01 of Rev. Proc. 2011-29 to the
success-based fees incurred pursuant to the acquisition of Subsidiary A.

On Date D, Taxpayer filed its tax return for the tax year ending Date B, and the return
was prepared consistent with Taxpayer properly electing to use the safe harbor method
in accordance with § 4.01 of Rev. Proc. 2011-29, i.e., the return reflects 70% of the
success-based fees as deductible and 30% as capitalized. However, Accounting Firm
inadvertently failed to include with Taxpayer’s filed return the required election statement
that Accounting Firm had previously prepared. See Rev. Proc. 2011-29, § 4.01(3)
(requiring statement to be filed).

On Date E, during the IRS’s examination of Taxpayer’s return for the tax year ending Date
B, Taxpayer and Accounting Firm realized that Taxpayer inadvertently failed to properly
make the election. Taxpayer filed this request to obtain from the Commissioner an
extension of time under Treas. Reg. §§ 301.9100-1(c) and 301.9100-3 to file an election
to use the safe harbor under § 4.01 of Revenue Procedure 2011-29 to allocate success-
based fees incurred from the acquisition of Subsidiary A for the tax year ending Date B.

LAW AND ANALYSIS

Section 263(a)(1) of the Internal Revenue Code and § 1.263(a)-2(a) generally 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). 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
of the facts and circumstances. See § 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 § 1.263(a)-5(a) (“success-based fee”) is presumed to
facilitate the transaction, and, therefore, 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.

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PLR- 107549-23

Rev. Proc. 2011-29 provides a safe harbor election for allocating success-based fees
paid in business acquisitions or reorganizations described in § 1.263(a)-5(e)(3). 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, i.e., an amount that can be deducted. The remaining portion
of the fee must be capitalized as an amount that facilitates the transaction.

In particular, § 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) (costs that must be capitalized) and activities that do not
facilitate the transaction (costs that may be deducted) 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 (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.

The scope of the revenue procedure applies to covered transactions described in §
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 § 267(b) or § 707(b); or (iii) a reorganization described in §
368(a)(1)(A), (B), or (C) or a reorganization described in § 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 § 354 or § 356 (whether the taxpayer is the acquirer or
the target in the reorganization). As noted, Taxpayer has represented that its merger
transaction with Subsidiary A was a “covered transaction” as defined by § 1.263(a)-
5(e)(3).

Section 301.9100-1(c) provides that the Commissioner has the 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 regulations published in the Federal
Register, or in a revenue ruling, revenue procedure, notice, or announcement published
in the Internal Revenue Bulletin.

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

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PLR- 107549-23

Requests for relief under § 301.9100-3 will be granted when a taxpayer provides evidence
to establish to the satisfaction of the Commissioner (i) that the taxpayer acted reasonably
and in good faith and (ii) that granting relief will not prejudice the interest of the
government. See Treas. Reg. § 301.9100-3(a).

Treas. Reg. § 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 a 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, the
taxpayer was unaware of the necessity of the election;

(iv) reasonably relied on 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 is deemed not 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 and chose not to file the election; or

(iii) uses hindsight in requesting relief.

Section 301.9100-3(c)(1)(i) 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 tax years affected by the election than the taxpayer would have had if the election
had been timely made. The section also provides that, if the tax consequences of more
than one taxpayer are affected by the election, the government's interests are prejudiced
if extending the time for making the election may result in the affected taxpayers, in th e
aggregate, having a lower tax liability than if the election had been timely made.

                                                   6
PLR- 107549-23

Section 301.9100-3(c)(1)(ii) provides, in part, that the interests of the government are
ordinarily prejudiced if the tax year in which the regulatory election should have been
made, or any tax 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.

Section 301.9100-3(f), Ex. 2., illustrates that where a failure to file an election is
discovered by the IRS during an examination, a taxpayer may nevertheless be granted
relief under § 301.9100-3 if the taxpayer reasonably relied upon the advice of a tax
professional.

CONCLUSION

On the basis of Taxpayer's representations, we conclude that the requirements of
Treas. Reg. §§ 301.9100-1(c) and 301.9100-3 have been satisfied. Accordingly, we
hereby grant an extension of time until 60 days following the date of this ruling for
Taxpayer to file an amended tax return (for the tax year ending Date B) making an
election to use the safe harbor under § 4.01 of Rev. Proc. 2011-29 to allocate success-
based fees incurred from the acquisition of Subsidiary A. The amended return must
include an election statement indicating 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.

Except as expressly set forth above, we neither express nor imply any opinion
concerning the tax consequences of the facts described above under any other
provision of the Code or regulations. Specifically, we have no opinion, either expressed
or implied, concerning whether Taxpayer’s merger transaction is within the scope of
Rev. Proc. 2011-29, or whether Taxpayer properly included the correct costs as its
success-based fees subject to the election.

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. While this office has not verified any of the material submitted in
support of this Request for an extension of time to make an election to use the safe
harbor method of accounting under § 4.01 of Rev. Proc. 2011-29, all material is subject
to verification on examination.

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 on file with this office, a copy of this letter is
being sent to each of Taxpayer's authorized representatives.

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PLR- 107549-23

A copy of this ruling must be attached to Taxpayer’s federal income tax returns for the
tax years affected. Alternatively, if Taxpayer files returns electronically, Taxpayer may
satisfy this requirement by attaching a statement to the return that provides the date and
control number (PLR-107549-23) of this letter ruling.

                                              Sincerely,


                                              Robert A. Martin
                                              Senior Technician Reviewer, Branch 2
                                              (Income Tax & Accounting)


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