Grants a corporation a late safe-harbor election for success-based deal fees

Plain-English summary

A corporation that was acquired in a merger paid success-based fees to a financial
adviser and a legal adviser, fees owed only because the deal closed. Tax law
presumes such fees must be capitalized (added to the cost of the transaction rather
than deducted), but Rev. Proc. 2011-29 offers a safe harbor: a taxpayer may deduct
70 percent and capitalize 30 percent if it attaches an election statement to its
original return. The company took the 70/30 split on its return but, through an
administrative oversight by its preparer, left off the required statement, and the
omission surfaced during an IRS examination. It asked for more time under the
§ 301.9100-3 "9100 relief" rules to file the statement on an amended return. The
IRS found the company acted reasonably and in good faith (it reasonably relied on
a qualified accounting firm that failed to attach the statement) and that relief
would not prejudice the government, so it granted 60 days to file the amended return
with the election. The ruling shows that discovery of the omission during an audit
does not automatically bar 9100 relief when the taxpayer relied on a professional.
The IRS did not opine on whether the fees claimed were correct or whether the deal
fell within Rev. Proc. 2011-29.

Ruling snapshot

• Question: May the corporation get an extension of time to make a late Rev. Proc. 2011-29 safe-harbor election for its success-based fees?
• Outcome: approved (60-day extension granted)
• Key authorities: IRC § 263; Treas. Reg. § 1.263(a)-5; Rev. Proc. 2011-29; Treas. Reg. §§ 301.9100-1 and 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202006011 Third Party Communication: None
Release Date: 2/7/2020 Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
---------------------------- ID No. ---------------

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

                                                             Telephone Number:

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

                                                             Refer Reply To:

In Re Request for 9100 Relief CC:ITA:B03
PLR-114685-19
Date:
11/05/2019

LEGEND

Taxpayer = -----------------------------------
Tax Return Preparer = ----------------------------------------
Taxable Year = -------
Business 1 = --------------------------------------------------------------
Date 1 = -------------------
Date 2 = -------------------
Date 3 = --------------------------
Date 4 = ----------------------
Acquirer = ---------------------------------------------------------------------
---------------------------------------------
Merger Co. = ------------------------------------------------
Financial Adviser = ------------------------------
$a = -----------------
Legal Adviser = -----------------------------------------
$b = -----------------

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

This letter responds to a letter ruling request dated Date 1, submitted by Tax Return
Preparer on behalf of Taxpayer. Taxpayer requests an extension of time under sections
301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations to make a
late election concerning the treatment of success-based fees in accordance with Rev.
Proc 2011-29, 2011-1 C.B. 746, which requires that a statement be attached to
Taxpayer’s original federal income tax return for Taxpayer’s Taxable Year.
PLR-114685-19 2

FACTS

Taxpayer is the parent corporation of an affiliated group of companies that files Form
1120, U.S. Corporation Income Tax Return. Taxpayer is engaged in the business of
Business 1. Taxpayer uses an overall accrual method of accounting and has a calendar
year end.

On Date 2, Taxpayer entered into a merger agreement with a consortium of investors
comprised of Acquirers. The transaction closed on Date 3, on which Taxpayer became
the surviving corporation in a merger with Merger Co. Taxpayer represents that the
transaction qualifies as a covered transaction under section 1.263(a)-5(e)(3)(ii) of the
Income Tax Regulations (Regulations).

Taxpayer engaged Financial Adviser to provide financial advisory services in
conjunction with the potential sale. The amount of the success-based fee payable to
Financial Adviser, which was contingent upon the successful closing of the transaction,
was $a.

Taxpayer also engaged Legal Advisor to provide legal advice in conjunction with the
sale. The engagement letter with Legal Advisor contained terms similar to those of the
engagement letter with Financial Adviser. Pursuant to the engagement letter, the
amount of the success-based fee payable to Legal Adviser that was contingent upon
the successful closing of the transaction was $b. Both success-based fees were
incurred during the taxable year.

Tax Return Preparer prepared the Taxpayer’s Form 1120 for the Taxable Year.
Additionally, Taxpayer engaged Tax Return Preparer to provide advisory services
including preparation of the transaction cost analysis (TCA). On its timely-filed
consolidated U.S. federal income tax return for Taxable Year, Taxpayer deducted 70
percent of the total success-based fees and capitalized the remaining 30 percent
consistent with the safe harbor election in Rev. Proc. 2011-29. However, due to an
administrative oversight the election statement was not included in the Taxpayer’s
consolidated U.S. federal income tax return for Taxable Year, as required by Rev. Proc.
2011-29.

On Date 4, during an Internal Revenue Service (IRS) examination of the Taxpayer’s
Taxable Year, the Taxpayer discovered the election statement had been omitted. Upon
discovery, Tax Return Preparer, on behalf of Taxpayer, brought the matter to the
attention of the lead Revenue Agent assigned to the examination. The Taxpayer
subsequently commenced the preparation of this request.
PLR-114685-19 3

LAW

Section 263(a) of the Internal Revenue Code provides generally that no deduction is
allowed for any amount paid for new buildings or for permanent improvements or
betterments made to increase the value of any property or estate or any amount
expended in restoring property or in making good the exhaustion thereof for which an
allowance is or has been made. Section 1.263(a)-1(d)(3) of the Regulations provides
that no deduction is allowed for an amount paid to acquire or create an intangible, which
under sections 1.263(a)-4(c)(1)(i) and 1.263(a)-4(d)(2)(i)(A) includes an ownership
interest in a corporation or other entity. See also section 1.263(a)-4(a).

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. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 89-90 (1992);
Woodward v. Commissioner, 397 U.S. 572, 575-576 (1970).

Under section 1.263(a)-5, a taxpayer must capitalize an amount paid to facilitate a
business acquisition or reorganization transaction described in section 1.263(a)-5(a). In
general, an amount is paid to facilitate a transaction described in section 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. Section 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 section 1.263(a)-5(a), or success-based fee, is
presumed to facilitate the transaction. 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. 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.

To reduce controversy between the IRS 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 IRS issued Rev. Proc. 2011-29.
Section 4.01 of the revenue procedure states that the IRS would not challenge a
taxpayer's allocation of a success-based fee between activities that facilitate a
transaction described in section 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;
PLR-114685-19 4

(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.

It is this last requirement that Taxpayer requests permission to accomplish with this
ruling request. Taxpayer requests permission with this ruling request to attach the
statement required by section 4.01(3) of Rev. Proc. 2011-29 to its return, by amending
its original filed return and superseding it with a return with the proper election
statement completed and attached.

Section 3 of Rev. Proc. 2011-29 provides that the revenue procedure applies to covered
transactions described in section 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 section 267(b) or section 707(b); or

(iii) A reorganization described in section 368(a)(1)(A), (B), or (C) or a reorganization
described in section 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 section 354 or 356 (whether the taxpayer is the acquirer or the target in the
reorganization).

Sections 301.9100-1 through 301.9100-3 of the Procedure and Administration
Regulations provide the standards the Commissioner uses to determine whether to
grant an extension of time to make a regulatory 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 section
301.9100-2.

Section 301.9100-1(b) defines the term "regulatory election" as an election whose due
date is prescribed by a regulation published in the Federal Register, or a revenue ruling,
procedure, notice or announcement published in the Internal Revenue Bulletin.
Section 301.9100-1(c) provides that the Commissioner may grant a reasonable
extension of time to make a regulatory election, or a statutory election (but no more than
six months except in the case of a taxpayer who is abroad) under all subtitles of the
Internal Revenue Code except subtitles E, G, H and I.
PLR-114685-19 5

Section 301.9100-3(a) provides extensions of time to make a regulatory election under
Code sections other than those for which section 301.9100-2 expressly permits
automatic extensions. Requests for extensions of time for regulatory elections 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 granting relief will not prejudice the interests of the
Government.

Section 301.9100-3(b)(1) states that a taxpayer will be 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 due diligence, 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.

Under section 301.9100-3(b)(3), a taxpayer will not be considered 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 section 6662 at the time the taxpayer requests relief
(taking into account section 1.6664-2(c)(3)) 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.

If specific facts have changed since the original deadline that make the election
advantageous to a taxpayer, the Service will not ordinarily grant relief.
Section 301.9100-3(c)(1) provides that the Commissioner will grant a reasonable
extension of time only when the interests of the Government will not be prejudiced by
the granting of relief.
PLR-114685-19 6

Section 301.9100-3(c)(1)(i) provides, in part, 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 (taking into account the time value of money).
Section 301.9100-3(c)(1)(ii) provides, in part, that 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 section
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, the taxpayer may be granted relief under
section 301.9100-3 if the taxpayer relied on a qualified tax professional to render advice
and the tax professional failed to notify the taxpayer of the requirement to file the
election.

The information and representations submitted by Taxpayer establish that Taxpayer has
acted reasonably and in good faith under sections 301.9100-3(b)(1) and (2). Pursuant to
section 301.9100-3(b)(v), Taxpayer reasonably relied on Tax Return Preparer, a
qualified public accounting firm, to properly prepare its federal income tax return for
Taxable Year, and Tax Return Preparer inadvertently failed to attach the election
statement to the tax return. Given the Taxpayer’s reliance on the Tax Return Preparer
the fact that the Taxpayer’s Taxable Year was under review by the IRS does not result
in the Taxpayer not being able to obtain relief under section 301.9100-3.

Moreover, the information and representations submitted by Taxpayer demonstrate that
none of the circumstances listed in section 301.9100-3(b)(3) apply, and thus, Taxpayer
will not be deemed to have not acted reasonably and in good faith. Taxpayer is not
seeking to alter a return position for which an accuracy-related penalty has been or
could be imposed under section 6662 at the time of this request for relief. It is not the
case that Taxpayer was informed in all material aspects of the election and related tax
consequences but chose not to file the election. Taxpayer's decision to seek relief did
not involve hindsight, and no specific facts have changed since the due date for filing
the election that make the election advantageous to Taxpayer had the election been
timely made.

Based on the facts of the case Taxpayer provided, granting an extension of time to file
the election will not prejudice the interests of the government under section 301.9100-
3(c)(1). Taxpayer has represented that granting relief would 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 (taking into account the time value
of money). Furthermore, Taxpayer has represented that the period of limitations on
assessment under section 6501(a) has not closed for the taxable year in which the
election should have been made or any taxable years that would be affected by the
election had it been timely made.
PLR-114685-19 7

CONCLUSION

Based solely on the facts submitted and the representations made, we conclude that
Taxpayer acted reasonably and in good faith, and that granting the request will not
prejudice the interests of the government. Accordingly, the requirements of sections
301.9100-1 and 301.9100-3(b)(1) of the regulations have been satisfied.

Taxpayer is granted an extension of time until 60 days following the date of this ruling to
file an amended tax return for Taxable Year electing safe harbor treatment of its
success-based fees under section 4.01(3) of Rev. Proc. 2011-29. The amended return
must include an election statement stating 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.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by appropriate parties. While this office has not verified any of 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
federal income tax consequences of any aspect of any transaction or item discussed or
referenced in this ruling under any other provision of the Code. 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 Taxpayer's transaction was
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 ruling must be attached to Taxpayer's federal income tax returns for the
tax years affected. 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-114685-19 8

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

                                              Sincerely,



                                              Brinton Warren
                                              Branch Chief, Branch 3
                                              (Income Tax & Accounting)
                                              Office of Chief Counsel