A company receives extra time to attach the success-based fee safe-harbor election

Plain-English summary

A company paid two financial advisers success-based fees in connection with the sale of its business. Its tax consultant recommended the Rev. Proc. 2011-29 safe harbor, and its return deducted 70 percent of the fees and capitalized the remaining 30 percent as the procedure requires. The consultant did not provide the required election statement, however, so the timely filed return omitted that attachment. The company discovered the mistake when the consultant later supplied the statement for the wrong tax year. The IRS found that the company reasonably relied on qualified tax professionals, acted in good faith, sought relief before the IRS discovered the failure, and would not gain a lower aggregate tax liability. It granted 60 days to file an amended return containing the safe-harbor election statement.

Ruling snapshot

• Question: May the company perfect its intended success-based fee safe-harbor election after timely reporting the 70/30 allocation but omitting the required statement?
• Outcome: approved (an amended return with the election statement must be filed within 60 days)
• Key authorities: IRC § 263(a); Treas. Reg. §§ 1.263(a)-5, 301.9100-1, 301.9100-3; Rev. Proc. 2011-29

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 202022001                                              Third Party Communication: None
Release Date: 5/29/2020                                        Date of Communication: Not Applicable
Index Number: 9100.00-00
                                                               Person To Contact:
                                                               -------------------, ID No. -----------------
-------------------------------------------                    Telephone Number:

-------------------------------                                --------------------
                                                               Refer Reply To:
---------------------------
                                                               CC:ITA:B03
-----------------------------------------                      PLR-110390-19
                                                               Date:
                                                               October 18, 2019
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---------------------------------


               TY: --------------------------------------------------------------------------------------

Legend:

Taxpayer                        =     ------------------------------------------
Tier Parent                     =     ----------------------
Common Parent                   =     -------------------------------------------
Financial Advisor1              =     ----------------------------
Financial Advisor2              =     --------------------------------------------------
Tax Consultant                  =     ----------------------------------------
Tax Return Preparer             =     ----------------------
Tax Manager                     =     --------------------
Taxable Year                    =     -----------------------------------------------------------------------------
                                      ------------------
Date1                           =     -------------------------
Date2                           =     ---------------------
Date3                           =     ------------------
Date4                           =     ----------------
Date5                           =     ------------------
Date6                           =     -----------------------
Date7                           =     -----------------------
Date8                           =     ---------------------
Date9                           =     ------------------
Date10                          =     --------------------------
$a                              =     --------------
$b                              =     -----------------
$c                              =     -----------------

PLR-110390-19                               2
Dear ------------:

This letter responds to your letter ruling request dated April 30, 2019, submitted by
Taxpayer. Taxpayer requests an extension of time pursuant to 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 as provided by 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 Taxable Year.

                                         FACTS

Taxpayer is a subsidiary of Tier Parent. Tier Parent is a disregarded partnership wholly
owned by Common Parent (collectively, Parent). Taxpayer is a limited liability company
engaged in the business of providing content and software tailored for educational use
in licensure-driven occupations. Taxpayer and Parent file Federal income tax returns
on a calendar year basis, and use the overall accrual method of accounting.

On Date1 and Date2, Taxpayer engaged Financial Advisor1 and Financial Advisor2,
respectively, to provide Taxpayer with financial advisory services. In that regard, both
were engaged to assist Taxpayer in the sale of its business, and would do so, primarily,
by identifying and contacting potential purchasers, preparing marketing materials,
conducting feasibility analyses, and guiding Taxpayer’s negotiation strategy. Pursuant
to its engagement agreements with Financial Advisor1 and Financial Advisor2,
Taxpayer was required to pay each firm a compensatory fee contingent upon the
successful closing of the transaction at issue (Merger Transaction). In each instance,
the amount of this fee would be calculated as a percentage of the aggregate
consideration arising from that transaction.

On Date3, Taxpayer and Parent executed an Agreement and Plan of Merger (Merger
Agreement). Merger Agreement provided that Parent would effectuate Merger
Transaction by purchasing, in substance, all of the equity interests in Taxpayer for cash
consideration of approximately $a.

On Date4, Financial Advisor1 and Financial Advisor2 invoiced Taxpayer in relation to
their work as financial advisors to the transaction at issue: Financial Advisor1 for $b,
plus costs; and Financial Advisor2 for $c, plus costs (Collectively, the success-based
fees). On Date5, in accordance with the terms of Merger Agreement, Taxpayer and
Parent consummated Merger Transaction. That same day, Taxpayer paid Financial
Advisor1 and Financial Advisor2 the success-based fees as invoiced.

On Date6, Taxpayer engaged Tax Consultant to ascertain the appropriate Federal
income tax treatment for the costs incurred by Taxpayer in connection with Merger
Transaction. Pursuant to that engagement, Tax Consultant was tasked with
determining whether Taxpayer was eligible to apply for the safe-harbor election
provided by Rev. Proc. 2011-29 (safe-harbor election), with respect to the success-
based fees arising from Merger Transaction. To that end, Tax Consultant was to

PLR-110390-19                               3
provide Taxpayer with a detailed report and all documentation germane to the making of
the safe-harbor election.

On Date7, Tax Consultant provided Taxpayer with its report and recommendations.
Tax Consultant determined that Taxpayer was eligible for the safe-harbor election, and
recommended that Taxpayer make the election. Tax Consultant informed Taxpayer
that in order to do so, Taxpayer needed to attach a statement making that election to its
Federal income tax return for Taxable Year (required election statement). Tax
Consultant failed, however, to provide Taxpayer with such a statement.

On Date 8, Taxpayer engaged Tax Return Preparer to prepare its Federal income tax
return for Taxable Year. Taxpayer directed Tax Return Preparer to prepare that return
in a manner consistent with Tax Consultant’s report and recommendations.
Accordingly, Tax Return Preparer prepared Taxpayer’s return in a manner that complied
with the substantive requirements of Rev. Proc. 2011-29 by claiming a deduction for 70
percent of the success-based fees paid to Financial Advisor1 and Financial Advisor2,
and capitalizing the remaining 30 percent.

On Date9, Taxpayer’s Tax Manager approved the return and signed it as prepared by
Tax Return Preparer, and Taxpayer timely filed its return for Taxable Year. The
required election statement, however, was not attached to that return.

On Date10, Tax Consultant provided Taxpayer with the required election statement to
attach Taxpayer’s tax return for a subsequent, incorrect tax year. It was at this time that
Taxpayer discovered that the ministerial requirement to attach the required election
statement to its return for Taxable Year had been inadvertently overlooked when
Taxpayer timely filed its return for Taxable Year.

On April 30, 2019, Taxpayer filed the present letter ruling request, seeking an extension
of time to file the required election statement for Taxable Year, pursuant to sections
301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations.

The period of limitation on assessment under section 6501(a) of the Internal Revenue
Code (Code) for Taxable Year has not expired.

                                           LAW

Section 263(a) of the Code provides generally that no deduction is allowed for any
amount paid out 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 Income Tax 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).

PLR-110390-19                               4


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 of 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;

(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.

PLR-110390-19                                5


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.

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;

PLR-110390-19                                  6
(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. 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.

                                             ANALYSIS

Taxpayer represents that for Federal income tax purposes Merger Transaction was a
taxable acquisition of an ownership interest in within the meaning of section 267(b) of
the Code, and section 1.263(a)-5(a)(2) of the Income Tax Regulations. That

PLR-110390-19                              7
transaction, then, is considered a covered transaction pursuant to section 1.263(a)-
5(c)(3), and Taxpayer qualifies to make the safe-harbor election provided by Rev. Proc.
2011-29.

As a result of Merger Transaction, Taxpayer incurred and subsequently paid an amount
of success-based fees during Taxable Year. Taxpayer complied with the substantive
requirements for making the safe-harbor election by deducting 70 percent and
capitalizing 30 percent of those success-based fees on its return for Taxable Year.
Taxpayer, however, failed perfect its safe-harbor election by inadvertently omitting the
required election statement from that return. It is with respect to that failure that
Taxpayer requests an extension of time to amend its original filed return, to supersede
that original return with one that includes the required election statement as an
attachment.

Taxpayer's request pertains to a regulatory election as defined in section 301.9100-1(b)
of the Procedure and Administration Regulations, as the due date for the making the
safe-harbor election is prescribed by section 1.263(a)-5(f) of the Income Tax
Regulations. Accordingly, the Commissioner has the authority under sections
301.9100-1 and 301.9100-3, to grant Taxpayer’s request for an extension of time to file
the safe-harbor election for Taxable Year.

The information submitted, and representations made by Taxpayer establish that
Taxpayer acted reasonably and in good faith under section 301.9100-3(b)(1) and (2).
Taxpayer requested relief before its failure to properly make the regulatory election was
discovered by the Commissioner. Additionally, despite Taxpayer’s reasonable reliance
on qualified tax professionals to properly advise it in the preparation of its Federal
income tax return for Taxable Year, the required election statement was inadvertently
omitted from Taxpayer’s return. Accordingly, Taxpayer will be considered to have acted
reasonably and in good faith.

Moreover, Taxpayer should not be deemed to have acted unreasonably or in a manner
lacking good faith. Taxpayer’s representations indicate that none of the circumstances
listed in section 301.9100-3(b)(3) apply.

Based on Taxpayer’s representation of the facts, 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 would have
resulted had Taxpayer timely made the election (taking into account the time value of
money). Further, Taxpayer has represented that the period of limitations on
assessment under section 6501(a) has not closed for Taxable Year, or for any taxable
years that would have been affected had Taxpayer timely made the election.

PLR-110390-19                                8


                                      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 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-110390-19                               9
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,



                                          Jamie J. Kim
                                          Senior Technician Reviewer, Branch 3
                                          Office of the Associate Chief Counsel
                                          (Income Tax & Accounting)


Enclosure: Copy of the letter for section 6110 purposes


cc: