9100 relief to file a late statement electing the 70/30 success-based-fee safe harbor under Rev. Proc. 2011-29

Plain-English summary

This letter grants a company extra time to file a tax election it meant to make but accidentally left off its return. When a business pays fees that are contingent on closing an acquisition ("success-based fees"), tax law presumes the whole fee must be capitalized (spread over time) rather than deducted, unless the taxpayer documents an allocation. Rev. Proc. 2011-29 offers a safe harbor: treat 70% of the fee as deductible and capitalize the other 30%, as long as the taxpayer attaches a statement making the election to the return for the year the fee was paid. Here, a subsidiary in a corporate group paid success-based fees on a stock acquisition, and the group's return correctly deducted 70% and capitalized 30%, but the required election statement was inadvertently omitted. Because the taxpayer relied on its tax preparer, was not under examination, and the IRS had not discovered the omission, the IRS found the taxpayer acted reasonably and in good faith and that relief would not prejudice the government. It granted 60 days under Treas. Reg. § 301.9100-3 to file the missing statement.

Ruling snapshot

• Question: May the taxpayer get an extension of time to attach the Rev. Proc. 2011-29 success-based-fee safe-harbor election statement that was inadvertently omitted from its timely return?
• Outcome: approved (60-day extension granted)
• Key authorities: Treas. Reg. §§ 301.9100-1, -3; IRC § 263(a); Treas. Reg. § 1.263(a)-5; Rev. Proc. 2011-29

Full text (IRS public release)

 Internal Revenue Service                                   Department of the Treasury
                                                            Washington, DC 20224

 Number: 202502001                                          [Third Party Communication: None
 Release Date: 1/10/2025                                    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
                                                            PLR-107563-24
                                                            Date:
                                                            October 16, 2024




TY:-------

LEGEND:


 Taxpayer                  = ------------------------------------
                             -----
 Subsidiary                = ----------------------------

 Tax Firm                  = -----------------------------------

 Holdings                  = --------------------------------

 Company                   = ----------------------

 Investment Bank           = ----------------

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

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

 $C                        = ---------------

 $D                        = ---------------

 Year 1                    = -------

 Year 2                    = -------

 Date 1                    = ------------------

 Date 2                    = --------------------------
PLR-107563-24                                            2

 Date 3                      = ---------------------------

 Date 4                      = ----------------------

 Date 5                      = --------------------

 Widgets                     = ------------------------------------
                               ---------




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

This letter responds to your letter ruling request dated Date 1, submitted on behalf of
Taxpayer. Taxpayer requests a ruling under § 301.9100-3 of the Procedure and
Administration Regulations to grant it an extension of time to make a late election with
respect to success-based fees described under 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 the election.

                                                      Facts

Subsidiary is a US Corporation and wholly owned subsidiary and member of Taxpayer,
primarily operates a chain of retail stores that sell Widgets.

On Date 2, Subsidiary acquired all issued and outstanding shares of common stock of
Holdings in a taxable stock acquisition (“Transaction”), making the parties related within
the meaning of § 267(b) of the Internal Revenue Code, a covered transaction as
described in § 1.263(a)-5(e)(3)(ii) of the Income Tax Regulations.

Subsidiary hired Company and Investment Bank to facilitate the Transaction and paid
$A in fees with respect to the Transaction. Taxpayer engaged Tax Firm to prepare and
provide tax advice with respect to Taxpayer's Form 1120-S for the taxable year
beginning Date 4 and ending Date 2. Taxpayer also engaged Tax Firm to provide
transaction cost recovery services with respect to certain costs incurred in connection
with the Transaction.

Transaction cost recovery services primarily consisted of analyzing external transaction
costs (e.g., accounting, investment banking, legal fees) incurred in connection with the
Transaction to determine what portion of the external transaction costs paid could
properly be considered success-based fees. Tax Firm determined that $B of the
external transaction costs constituted success-based fees.

Tax Firm was tasked with making the proper regulatory safe harbor election under
section 4.01 of Rev. Proc. 2011-29 (“Success-based Fees Safe Harbor Election”), which
PLR-107563-24                                 3

would permit Taxpayer to treat 70% of Buyer’s success-based fees paid as an amount
that did not facilitate the Transaction and capitalize the remaining 30% as an amount
that did facilitate the Transaction. The Success-based Fees Safe Harbor Election
required Taxpayer to account for the success-based fees accordingly and attach a
statement to its original U.S. federal income tax return for the taxable year in which the
success-based fees were paid or incurred. The purpose of the statement is to state that
Taxpayer is making the safe harbor election, to identify the Transaction, and to identify
the portion of the success-based fees that were to be deducted and the portion that was
to be capitalized.

Tax Firm prepared and Taxpayer timely filed its Year 2 Form 1120-S (“Year 2 return”)
on Date 3, which complied with the substantive requirements of the Success-based
Fees Safe Harbor Election by deducting 70% of the success-based fees ($C) as an
amount that did not facilitate the Transaction and capitalizing 30% of the success-based
fees ($D) as an amount that facilitated the Transaction in accordance with sections
4.01(1) and (2) of Rev. Proc. 2011-29. Tax Firm prepared the statement required by
section 4.01(3) of Rev. Proc. 2011-29. However, the statement was inadvertently
omitted from Taxpayer’s timely filed Year 2 return, the taxable year in which the
success-based fees were paid or incurred.

Tax Firm discovered the inadvertent omission of the statement when it reviewed the
filed version of the Year 2 return sometime in late Year 1, and Taxpayer was notified in
Date 5 of the omission, and was advised that the required action to correct the
inadvertent omission is to file for relief under § 301.9100-3.

                                     Law & 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. Comm’r, 503 U.S. 79, 89-90 (1992); Woodward
v. Comm’r, 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
PLR-107563-24                                 4

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 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.

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
PLR-107563-24                                 5

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.

Taxpayer is requesting permission with this ruling request to attach the election
statement to its Year 2 tax return, by amending its original filed return and superseding
it with a return containing the proper election statement completed and attached.
Taxpayer represents that it intended to take advantage of the safe harbor provisions of
Rev. Proc. 2011-29, filed its return for Year 2 reflecting those provisions, but failed to
include the required election statement. Taxpayer is not using hindsight in requesting
relief.

Taxpayer represents that the return for the taxable year is not under examination and
that the failure to file the election statement was not discovered by the Service. Thus,
under § 301.9100-3(b)(1)(i), Taxpayer will be deemed to have acted reasonably and in
good faith.

Section 2.04 of Rev. Proc. 2011-29 provides that a taxpayer’s method for determining
the portion of a success-based fee that facilitates a transaction and the portion that
does not facilitate a transaction is a method of accounting under § 446. Regulatory
elections, relating to methods of accounting, are subject to special rules. § 301.9100-
3(c)(2). However, Taxpayer is not seeking to change its method of accounting for the
PLR-107563-24                                 6

success-based fees, only to file the election statement required by section 4.01(3) of
Rev. Proc. 2011-29.

Further, based on the facts represented by Taxpayer, granting an extension will not
prejudice the interests of the Government.

                                        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 Treas. Reg. §§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. Taxpayer must state that it
is electing the safe harbor for success-based fees, identify the transaction, and state the
success-based fee amounts that are deducted and capitalized.

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. 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 the Transaction is 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 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.
PLR-107563-24                                             7

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,

                                                    /s/

                                                   Sean M. Dwyer
                                                   Senior Technician Reviewer, Branch 1
                                                   Office of Associate Chief Counsel
                                                   (Income Tax & Accounting)


 cc:     -----------------------
       ------------------------------------------------------
       ------------------------
       ----------------------------

       -----------------------------------------