Acquirer receives more time for success-based fee election

Plain-English summary

A corporation paid a fee contingent on completing an acquisition treated as a statutory merger. Its advisers prepared the Revenue Procedure 2011-29 safe harbor statement, and the filed return used the safe harbor treatment, but the statement was lost during a change in return-preparation firms and was not attached. The taxpayer sought relief after discovering the omission. The IRS found that it reasonably relied on a qualified tax professional, acted in good faith, and would not gain an aggregate tax advantage from late relief. It granted 60 days from the ruling date to file the statement identifying the transaction and the success-based fee amounts deducted and capitalized. The ruling did not decide whether the fee or acquisition actually fell within the revenue procedure.

Ruling snapshot

• Question: May an acquiring corporation file a late Revenue Procedure 2011-29 election statement for success-based transaction fees?
• Outcome: Approved. The taxpayer has 60 days from the ruling date to file the required statement.
• 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: 202124005 Third Party Communication: None
Release Date: 6/18/2021 Date of Communication: Not Applicable
Index Number: 263.00-00, 9100.00-00
Person To Contact:
--------------------------- --------------------------, ID No. ----------------
---------------------- -----------------
---------------------------------------- Telephone Number:
--------------------
------------------------------- Refer Reply To:
CC:ITA:B03
In Re: ---------------------------- PLR-121378-20
Date:
March 22, 2021

Legend

Date 1 = -------------------
Taxable Year = --------
State = --------------
Target = --------------------------
Parent = -------------------------
Merger Sub = --------------------------------
Corporation = ------------------------------
Managing Member = --------------------------
Advisor = -------------------------------
$a = ---------------
Accounting Firm 1 = --------------------------
Accounting Firm 2 = ------------------------
Accounting Firm 3 = ----------------------------------------------------
Accounting Firm 4 = ----------------------------------------------------------
Date 2 = -----------------------

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

This letter responds to a letter ruling request dated September 25, 2020, requesting an
extension of time to make a late safe harbor election under Rev. Proc. 2011-29, 2011-
18 I.R.B. 746. Taxpayer failed to attach the required election statement to its originally
filed federal income tax return for Taxable Year in order to make the safe harbor
election to allocate success-based fees between facilitative and non-facilitative
amounts. Therefore, Taxpayer requests an extension of time under §§ 301.9100-1 and
301.9100-3 of the Procedure and Administration Regulations to attach the required
election statement to its Taxable Year return.
PLR-121378-20 2

                                    FACTS

Taxpayer, a State corporation, which, directly and through its subsidiaries, designs,
sources, and sells branded kitchenware, tableware, and other products used in the
home. Taxpayer uses an overall accrual method of accounting and has a calendar year
end.

Taxpayer was interested in acquiring Target, a limited liability company formed under
the laws of State. Target operated as a holding company for its subsidiaries that
primarily designed, marketed, and distributed consumer and food service precision
measurement products, wine accessories, kitchen tools, select outdoor, and other
related products. Target is classified as an association taxable as a corporation for
federal income tax purposes and was the common parent of an affiliated group of
corporations filing a consolidated federal income tax return. The membership interests
of Target were held by Parent, a limited liability company formed under the laws of
State.

The acquisition of the Target by the Taxpayer was completed pursuant to an Agreement
and Plan of Merger (“Agreement”) by and among the Taxpayer, Merger Sub,
Corporation, Parent, and Managing Member of the Target. Under the Agreement, two
successive mergers were completed. In the first merger, Merger Sub merged with and
into the Target, with the Target surviving. In the second merger, the Target merged with
and into Corporation, with the Corporation surviving. Corporation is disregarded an
entity separate from its owner for federal income tax purposes. As a result, Taxpayer is
deemed to have acquired all of the assets of the Target pursuant to a statutory merger
under Treas. Reg. § 1.368-2(b)(1)(ii). Consistent with Rev. Rul. 2001-46, the
transaction was properly treated as a reorganization under IRC § 368(a)(1)(A), pursuant
to which the Target was deemed to have merged directly into the Taxpayer.

Taxpayer incurred a success-based fee in connection with its acquisition of the Target.
This fee was paid to Advisor for services performed in the process of investigating or
otherwise pursuing the acquisition completed pursuant to the Agreement. Taxpayer
successfully acquired the Target on Date 1. Pursuant to Taxpayer’s agreements with
Advisor, Taxpayer paid success-based fees of $a after successful closing of the
acquisition. The fee was contingent upon the successful closing of the acquisition as
described in Treas. Reg. § 1.263(a)-5(f).

Under the terms of the acquisition, Taxpayer was responsible for filing all income tax
returns for Target and its subsidiaries for all periods ending on or prior to the closing
date, if such returns were required to be filed after the closing date. Taxpayer engaged
Accounting Firm 1 to analyze the proper federal income tax treatment of the transaction
costs incurred by the Taxpayer and the Target. Accounting Firm 1 provided a summary
of the costs that could be deducted, costs that were required to be capitalized and
amortized, or were required to be capitalized without amortization. Accounting Firm 1
PLR-121378-20 3

identified success-based fees in its analysis of the relevant transaction costs for both
entities and prepared the safe harbor election statements in accordance with Rev. Proc.
2011-29.

Taxpayer’s federal income tax returns had previously been prepared by Accounting
Firm 2. Target’s tax return preparation had been historically handled by Accounting
Firm 3. Accounting Firm 1 provided a copy of its analysis and the election statements to
Accounting Firm 2 and Accounting Firm 3. Eventually, Taxpayer decided to change its
tax return preparation firm to Accounting Firm 4 for preparation of Tax Year. Accounting
Firm 4 requested all tax return files from Accounting Firm 2, but the safe harbor
elections drafted by Accounting Firm 1 were not included in the information Accounting
Firm 2 provided. Accordingly, it became evident that Taxpayer’s federal income tax
return was timely filed on Date 2, but the return failed to include the safe harbor election
statement. Although the election statement was not attached to the return, Taxpayer
capitalized the transaction costs in accordance with § 263 of the Internal Revenue Code
and §§ 1.263(a)-2 and 1.263(a)-5 of the Income Tax Regulations, and in a manner
consistent with the safe harbor election outlined in Rev. Proc. 2011-29.

Taxpayer discovered the election statement pursuant to Rev. Proc. 2011-29 had
inadvertently been omitted from its return for Taxable Year. Taxpayer obtained advice
from Accounting Firm 4 for advice regarding the omitted election. Taxpayer files this
request for relief under Treas. Reg. §§ 301.9100-1 and 301.9100-3.

Taxpayer represents that the transactions completed in the acquisition of Target
constituted a “covered transaction” within the meaning of Treas. Reg. § 1.263(a)-5(f). It
further represents that Advisor’s fees paid in connection with the transaction constitute
amounts contingent on the successful closing of a covered transaction within the
meaning of Treas. Reg. § 1.263(a)-5(f). The Taxpayer is not seeking to alter a return
position for which an accuracy related penalty has been or could be imposed under IRC
§ 6662 as of the date of the request. The Taxpayer relied on Accounting Firm 4 to
make the required election under Rev. Proc. 2011-29 and has not used hindsight in
requesting relief to make the late election. Thus, Taxpayer promptly requested an
extension of time to allow Taxpayer to attach to the required statement regarding the
election to use the safe harbor method for allocating success-based fees to its federal
income tax return for Taxable Year.

                                      LAW

Section 263(a)(1) of the Internal Revenue Code and § 1.263(a)-2(a) of the Income Tax
Regulations 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).
PLR-121378-20 4

Under § 1.263(a)-5, a taxpayer must capitalize an amount paid to facilitate a business
acquisition or reorganization transaction described § 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. Section 1.263(a)-5(b)(1).
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).

Under § 1.263(a)-5(f) 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 thus 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, and thus may be deductible.

Rev. Proc. 2011-29 provides a safe harbor method of accounting for allocating success-
based fees paid in business acquisitions or reorganizations described in § 1.263(a)-
5(e)(3) (covered transactions), including a taxable acquisition by the taxpayer of assets
that constitute a trade or business. 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, meaning that
amount that can be deducted. The remaining portion (30 percent) of the fee must be
capitalized as an amount that facilitates the transaction.

Section 4.01 of Rev. Proc. 2011-29 allows the 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
activities that do not facilitate the transaction (costs that may be deductible) 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 thus must be capitalized; 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.

Sections 301.9100-1 through 301.9100-3 provide the standards that 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.
PLR-121378-20 5

Section 301.9100-1(c) provides that the Commissioner has discretion to grant a
reasonable extension of time under the rules set forth §§ 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(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 or 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)(2) provides that a taxpayer will not be considered to have
reasonably relied on a qualified tax professional if the taxpayer knew or should have
known that the professional was not:

(i) Competent to render advice on the regulatory election; or
(ii) Aware of all relevant facts.

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.
PLR-121378-20 6

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
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.

                                  ANALYSIS

The Commissioner has the authority to grant an extension of time to file a later
regulatory election under §§ 301.9100-1 and 301.9100-3. Taxpayer’s election is a
regulatory election under §301.9100-1(b) because it is prescribed under Rev. Proc.
2011-29.

Taxpayer represents that its acquisition of Target was a covered transaction under
§1.263(a)-5(e)(3) and that fees $a paid to Advisor were success-based fees as defined
in §1.263(a)-5(f). The payment of the fees was contingent upon the successful closing
of the transaction.

Taxpayer represents that Accounting Firm 4, although identifying the safe harbor
provision of Rev. Proc. 2011-29 and preparing the federal income tax return for Taxable
Year as though the safe harbor had been elected, failed to provide to the taxpayer the
requisite statement that is needed as an attachment for returns that elect the safe
harbor provisions of Rev. Proc. 2011-29. attach the required statement to Taxpayer’s
federal income tax return for Taxable Year because it was not included in the materials
received from Accounting Firm 2. Taxpayer further represents that its own failure to
detect the omitted election statement was inadvertent. Based on these representations,
Taxpayer reasonably relied on a qualified tax professional and, under § 301.9100-
3(b)(1)(v), is deemed to have acted reasonably and in good faith.

Taxpayer represents 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 represents that the Taxable Year in which the regulatory
election should have been made and any taxable years that would have been affected
had it been timely made, are not closed by the period of assessment. Based on these
representations, granting an extension of time to file the election will not prejudice the
interests of the government under § 301.9100-3(c)(1).

                                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
PLR-121378-20 7

met.

Taxpayer is granted an extension of 60 days from the date of this ruling to file the
election statement required by Section 4.01(3) of Rev. Proc. 2011-29, stating that it is
electing the safe harbor for success-based fees for Taxable Year, identifying the
covered transaction, and stating the success-based fee amounts that are deducted and
capitalized, in accordance with Taxpayer’s representations.

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
fees as success-based fees or whether Taxpayer’s acquisition of Target 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.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides
that it may not be used or cited as precedent.

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 representative. We are also
sending a copy of this letter to the appropriate operating division director.

                                 Sincerely,

                                 BRINTON T. WARREN
                                 Chief, Branch 3
                                 Office of Associate Chief Counsel
                                 (Income Tax and Accounting)

Enclosure: Copy for § 6110 purposes