Taxpayer gets 45 days to make a late success-based-fee election

Plain-English summary

A U.S. holding company incurred a success-based advisory fee when it acquired stock in a taxable transaction. Its newly formed, high-turnover tax department was unaware of the fee and did not elect the safe harbor in Revenue Procedure 2011-29 on the original return. Years later, accounting firms identified the fee and explained that the taxpayer could request late-election relief while the return remained open for assessment. The safe harbor permits 70 percent of a qualifying success-based fee to be treated as nonfacilitative and deductible while the remaining 30 percent is capitalized. The IRS found that the taxpayer acted reasonably and in good faith and that relief would not prejudice the government. Subject to the refund-limitation rules, it granted 45 days to amend the return and make the election, while leaving the fee amount, transaction eligibility, and amended-return requirements unresolved.

Ruling snapshot

• Question: May the taxpayer make a late safe-harbor election for success-based acquisition fees?
• Outcome: Approved: the taxpayer received 45 days to amend its return and elect the safe harbor.
• Key authorities: IRC § 263; Treas. Reg. §§ 1.263(a)-5 and 301.9100-3; Rev. Proc. 2011-29; IRC § 6511

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202121001 Third Party Communication: None
Release Date: 5/28/2021 Date of Communication: Not Applicable
Index Number: 263.15-03, 9100.00-00 Person To Contact:
-------------------
-------------------------------------------------- ID No. -----------------
---------------------- Telephone Number:
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------------------------------------- Refer Reply To:
CC:IT&A:01
--------------------------------- PLR-114120-20
------------------------------------------- Date:
February 18, 2021
In Re: --------------------------------------------------------

Legend

Taxpayer = --------------------------------------------------
Year 1 = -------
Year 2 = -------
Year 3 = -------
Year 4 = -------
Year 5 = -------
Country A = ---------------------
State A = -------------
Advisors = ---------------------------------------------------------------------
------------------------------------------
Parent = -----------------------------------------------
Target = --------------------------------
Accounting Firm A = ------------------
Accounting Firm B = ---------------
Date 1 = -------------------
Date 2 = -------------------------
Date 3 = -------------------
$a = -----------------
a% = --------

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

This letter responds to your correspondence dated June 11, 2020, and January 6, 2021,
requesting an extension of time under §§ 301.9100-1 and 301.9100-3 of the Procedure
PLR-114120-20 2

and Administration Regulations for Taxpayer to make the safe harbor election for
success-based fees described in Rev. Proc. 2011-29, 2011-18 I.R.B. 746.

                                   FACTS

Taxpayer is a C corporation incorporated on Date 1 under the laws of State A and
uses an accrual method of accounting for federal income tax purposes and has a
calendar tax year. Taxpayer is a holding company for Parent’s U.S. operations.
Parent is a Country A corporation. Taxpayer’s EIN is ----------------.
On Date 2, Taxpayer, in a taxable acquisition, acquired a% of the stock of Target
(Transaction). Taxpayer represents that the Transaction is a covered transaction
described in § 1.263(a)-5(e)(ii) of the Income Tax Regulations.
Parent engaged Advisors to perform advisory services in the process of investigating
or otherwise pursuing the Transaction. Parent paid $a in success-based fees to
Advisors at the time of the closing of the Transaction. Taxpayer’s tax department was
newly formed and subject to high turnover among its leadership and was thus unaware
of the success-based fee relating to Taxpayer’s acquisition of Target and filed its Year
1 return without making the safe harbor election pursuant to Rev. Proc. 2011-29.
In Year 2, the financial department of Parent desired to reach a final position
regarding the financial reporting of the Transaction. Parent determined that the costs
of the Transaction, including its transaction costs, should be borne by the acquiring
entity, i.e., Taxpayer. Taxpayer represents that it incurred a liability of $a for success-
based fees in Year 1.
Taxpayer represents that it failed to make the safe harbor election under Rev. Proc.
2011-29, in part, because of limited staff and high turnover in its tax department during
the relevant years. Taxpayer represents that in Year 1, it was not aware of the
availability or the need to make an election under Rev. Proc. 2011-29.
During the 4th quarter of Year 4, Accounting Firm A informed Taxpayer of the
availability of the election for success-based fees under Rev. Proc. 2011-29.
In Year 3, the Internal Revenue Service began an examination of Taxpayer’s Year 1
return. Taxpayer agreed to extend the period of assessment for its Year 1 return to Date

3. Thus, Taxpayer’s Year 1 return is not barred by the statute of limitation. Taxpayer’s
   Year 2 return is presently under examination. Taxpayer also agreed to extend the
   period of assessment for its Year 2 return.
   In Year 5, Taxpayer hired Accounting Firm B and asked them to determine whether
   the success-based fees incurred by Taxpayer in the Transaction are the type of fees
   contemplated by Rev. Proc. 2011-29. Accounting Firm B informed Taxpayer that the
   fees are of the type contemplated by Rev. Proc. 2011-29 and that Taxpayer may
   request relief to make a late election under §§ 301.9100-1(c) and 301.9100-3, for Year
4. Taxpayer filed this request to make a late election of the safe harbor under Rev.
   Proc. 2011-29, by filing an amended return for Year 1 treating 70 percent of the
   PLR-114120-20 3

success-based fees as deductible nonfacilitative costs and the remainder as
capitalizable facilitative costs and attaching the required election statement to the
return.
LAW & ANALYSIS
Section 263(a)(1) of the Internal Revenue Code and § 1.263(a)-2(a) provide that no
deduction shall be allowed for any amount paid 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). 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) (“success-based fee”) is
presumed to facilitate the transaction. A taxpayer may rebut this presumption by
maintaining sufficient documentation to establish that a portion of the fee is allocable
to activities that do not facilitate the transaction.
Rev. Proc. 2011-29, provides a safe harbor election for taxpayers that pay or incur
success-based fees for services performed in the process of investigating or
otherwise pursuing a covered transaction described in § 1.263(a)-5(e)(3).
Section 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) and activities that do not facilitate the
transaction if the taxpayer satisfies three requirements. First, the taxpayer must treat
seventy percent of the amount of the success-based fee as an amount that does not
facilitate the transaction. Second, the taxpayer must capitalize the remaining amount
of the success-based fee as an amount which does facilitate the transaction. Third,
the taxpayer must attach a statement to its original federal income tax return for the
taxable year the success-based fee is paid or incurred. This statement must: (a) state
that the taxpayer is electing the safe harbor; (b) identify the transaction; and (c) state
the success-based fee amounts deducted and capitalized. Taxpayer requests
permission to amend its Year 1 return and attach the statement required by section
4.01(3) of Rev. Proc. 2011-29.
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
PLR-114120-20 4

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(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 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 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 not be deemed 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, but chose not to file the election; or
(iii) uses hindsight in requesting relief.
Section 301.9100-3(c)(1) provides that an extension of time to make a regulatory
election will be granted only when the interests of the Government are not prejudiced
by the granting of relief. 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). Section
301.9100-3(c)(1)(i).

The interests of the Government are ordinarily prejudiced if the taxable year in which
PLR-114120-20 5

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 under § 6501(a) before the taxpayer’s receipt of a ruling granting relief
under this section. Section 301.9100-3(c)(1)(ii).
Taxpayer’s election is a regulatory election as defined in § 301.9100-1(b) because
the due date of the election is prescribed in section 4.01(3) of 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.
CONCLUSION
Based solely on the information provided and representations made, we conclude that
Taxpayer acted reasonably and in good faith and granting relief will not prejudice the
interests of the Government. Accordingly, Taxpayer has met the requirements of
§§ 301.9100-1 and 301.9100-3.
Subject to the requirements of § 6511, Taxpayer is granted an extension of 45 days
from the date of this letter ruling to amend its Year 1 return to elect the safe harbor
for success-based fees pursuant to Rev. Proc. 2011-29.
CAVEATS
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. Although this office has not verified any of the material
submitted in support of the request for the ruling, it is subject to verification on
examination.
Except as expressly set forth 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, including whether: (1) Taxpayer incurred a liability of $a, as success-based
fees in Year 1; (2) Transaction was within the scope of Rev. Proc. 2011-29; or (3)
Taxpayer satisfied the requirements to file an amended return for Year 1. The relief
provided in this letter is conditioned on proper adjustments to affected returns and tax
attributes for Taxpayer and its affiliates.
A copy of this ruling should be attached to Taxpayer’s Federal tax returns for the tax
years affected. Alternatively, taxpayers filing their returns electronically may satisfy this
requirement by attaching a statement to their returns that provides the date and control
number of the letter ruling.

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

This ruling is directed only to Taxpayer that is requesting it. Section 6110(k)(3) provides
that it may not be used or cited as precedent.
PLR-114120-20 6

In accordance with the provisions of the power of attorney currently on file with this
office, we are sending a copy of this letter ruling to your authorized representative. We
are also sending a copy of this letter ruling to the appropriate operating division
director.

                                                      Sincerely,

                                                          /s/

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

Enclosure:
Copy § 6110 purposes

cc:

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