IRS grants 60 days for a late success-based-fee safe-harbor election

Plain-English summary

A corporate group paid contingent financial-adviser fees in connection with a taxable stock acquisition. Its timely return treated 70 percent of the fees as nonfacilitative and deductible, consistently with the safe harbor in Rev. Proc. 2011-29, but an internal oversight caused the required election statement to be omitted. The omission was discovered during the next annual financial-statement audit, and the company promptly sought relief. The IRS concluded that the company acted reasonably and in good faith and that relief would not prejudice the government's interests. It granted 60 days to file the safe-harbor election. The ruling did not decide whether the costs were properly classified as success-based fees or whether the acquisition qualified as a covered transaction under the revenue procedure.

Ruling snapshot

• Question: Could the taxpayer make a late Rev. Proc. 2011-29 safe-harbor election for success-based acquisition fees?
• Outcome: approved (the taxpayer received 60 days to file the omitted election)
• Key authorities: IRC §§ 263(a), 267(b), 446, 481(a), 1001; Treas. Reg. § 1.263(a)-5; 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: 202037004                                              Third Party Communication: None
 Release Date: 9/11/2020                                        Date of Communication: Not Applicable
 Index Number: 9100.00-00
                                                                Person To Contact:
 -------------------------                                      ------------------------, ID No. -----------------
 -------------------------                                      Telephone Number:
 ------------------------                                       --------------------
                                                                Refer Reply To:
 -------------------------                                      CC:ITA:B02
 ------------------------------------------                     PLR-101512-20
                                                                Date:
                                                                June 05, 2020


          Legend:

 Taxpayer         =   -------------------------
 Date1            =   --------------------------
 Date2            =   --------------------------
 Date3            =   ---------------------------
 Date4            =   --------------------------
 Date5            =   --------------------
 A                =   ---------------------------------------
 B                =   ------------------------
 C                =   -----------------------------------
 D                =   --------------------------
 E                =   -----------------
 F                =   --------------------------
 G                =   --------------------------------------------------------------------------------------
 State1           =   -------------
 State2           =   --------
 $a               =   ----------------
 $b               =   ---------------

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

This is in response to a letter ruling request dated Date1, requesting an extension of
time to file a safe-harbor election under Rev. Proc. 2011-29, 2011-1 C.B. 746, to
allocate success-based fees for the taxable year ending Date2. This request is made in
accordance with §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration
Regulations. This letter ruling is being issued electronically in accordance with Rev.
Proc. 2020-29, 2020-21 I.R.B. 859. A paper copy will not be mailed to Taxpayer.
PLR-101512-20                                2


FACTS AND REPRESENTATIONS

Taxpayer represents the following:

Taxpayer is a corporation organized under the laws of State1 with its headquarters
located in State2. Taxpayer is the common parent of an affiliated group of corporations
that join in filing a consolidated U.S. federal income tax return. Taxpayer has a calendar
year end and uses an accrual method of accounting. Taxpayer is in the business of G.

On Date3, Taxpayer, A, and B (a wholly-owned subsidiary of Taxpayer) entered into the
transaction agreement (“Agreement”). On Date4, pursuant to the Agreement, B
acquired all of the issued and outstanding common shares of A. B then underwent an
amalgamation with A, with A being the survivor. Upon completion of the transaction, A
became a wholly-owned subsidiary of Taxpayer and is treated as a controlled foreign
corporation for U.S. federal income tax purposes. Taxpayer represents that immediately
after the transaction, Taxpayer directly owned 100% of the stock of A and Taxpayer and
A were related within the meaning of § 267(b). The Agreement consideration was
approximately $a cash. For U.S. federal income tax purposes, Taxpayer treated the
transaction as a taxable stock purchase under § 1001 of the Internal Revenue Code.

Taxpayer paid fees to both C and D to serve as financial advisors in the process of
investigating or otherwise pursuing the transaction. The fees paid to C and D, totaling
$b, are the fees that Taxpayer treats as success-based fees for purposes of this
request. The fees were contingent on the successful closing of the transaction and were
paid at the time of closing. 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.

Taxpayer represents that Taxpayer paid or incurred success-based fees of $b as
defined by § 1.263(a)-5(f) of the Income Tax Regulations, and that Taxpayer’s
transaction was a “covered transaction” as defined by § 1.263(a)-5(e)(3).

Taxpayer prepared the U.S. federal income tax return for the taxable year ending
Date2. The tax return was filed timely and treated the success-based fees consistently
with the making of an election under Rev. Proc. 2011-29, with 70 percent of the
success-based fees treated as amounts that did not facilitate the transaction. However,
Taxpayer failed to attach the required election statement to Taxpayer’s original federal
tax return for the taxable year ending Date2. Taxpayer relied on E, the former Tax
Director of Taxpayer, to properly prepare the tax return and include all appropriate
elections therewith, but by mere oversight, Taxpayer failed to attach the election
statement.
PLR-101512-20                                3

In Date5, Taxpayer was finalizing its tax calculations as part of its annual financial
statement audit. At that time, F, Taxpayer’s financial statement auditor, discovered that
the required election statement under Rev. Proc. 2011-29 was not attached to
Taxpayer’s tax return for the taxable year ending Date2. F promptly informed Taxpayer
and Taxpayer requested that F commence preparation of this request.

LAW AND ANALYSIS:

Sections 263(a)(1) 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.

A taxpayer's method for determining the portion of a success-based fee that facilitates a
transaction and the portion that does not facilitate the transaction is a method of
accounting under § 446.

Because the treatment of success-based fees was a continuing subject of controversy
between taxpayers and the Service, the Service published Rev. Proc. 2011-29. 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.

Section 4.01 of Rev. Proc. 2011-29 allows a 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
PLR-101512-20                                 4

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. Section
4.03 of Rev. Proc. 2011-29 provides that the election does not constitute a change in
method of accounting for success-based fees generally. Accordingly, a § 481(a)
adjustment is neither permitted nor required.

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).

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 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 301.9100-3(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(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
PLR-101512-20                                5



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.

CONCLUSION:

Based upon our 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 for success-based fees under Rev. Proc. 2011-29 for its taxable year
ending Date2.

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 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
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.

In accordance with the provisions of the power of attorney currently on file with this
office, copies of this letter are being sent to your authorized representatives. We are
also sending a copy of this letter to the appropriate operating division director.
PLR-101512-20                                 6


This letter 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.


                                       Sincerely,



                                       _________________________
                                       Amy S. Wei
                                       Senior Counsel, Branch 2
                                       (Income Tax & Accounting)
                                       Office of Associate Chief Counsel



Enclosure:    Copy for § 6110 purposes



cc: