IRS grants a company 60 more days to make the 70/30 safe-harbor election for success-based fees

Plain-English summary

When a company pays fees that are contingent on closing a merger or acquisition ("success-based fees"), the tax rules presume the whole fee must be capitalized (spread out) rather than deducted, unless the company documents how much of the fee was for work that did not facilitate the deal. Revenue Procedure 2011-29 offers a shortcut: a company can simply elect to treat 70 percent of the fee as deductible and capitalize the other 30 percent, avoiding the detailed documentation. That election must be attached to the original, timely filed return for the year the fee is incurred. Here, the taxpayer was acquired in a covered transaction and wanted to make the election, but it filed its short-period return late (due to a misreading of the consolidated-return due-date rules) and was told the late filing blocked the election. It asked the IRS for relief under Treasury Regulation § 301.9100-3. The IRS found the taxpayer acted reasonably and in good faith and that relief would not prejudice the government, and granted 60 days to make the 70/30 election by amending and superseding its original return. This is a common fix for the missed success-based-fee election.

Ruling snapshot

• Question: May a taxpayer get an extension of time under § 301.9100-3 to make the Rev. Proc. 2011-29 70/30 safe-harbor election for success-based fees after filing its return late?
• Outcome: approved (60-day extension granted)
• Key authorities: IRC § 263(a); Treas. Reg. §§ 1.263(a)-5, 301.9100-1, 301.9100-3; Rev. Proc. 2011-29; INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992); Woodward v. Commissioner, 397 U.S. 572 (1970)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202150007
Person To Contact:
Release Date: 12/17/2021
--------------------, ID No. -----------------
Index Number: 263.00-00, 9100.00-00 Telephone Number:
-------------------
------------------------ Refer Reply To:
--------------------------- CC:IT&A:B1
------------------------------ PLR-107578-20
------------------------------ Date:
-------------------------------- July 28, 2021

Legend

Taxpayer: ----------------------------
Company: --------------------------------
Date 1: ---------------------
Date 2: ----------------
Date 3: ------------------
Date 4: ------------------------
X: -----
Holdings: ---------------------------------------------

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

This is in response to a letter sent on behalf of the Taxpayer dated Date 4 requesting an
extension of time under §§ 301.9100-1 and 301.9100-3 of the Procedure 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 was incorporated on Date 1 and commenced business operations on that
date upon its acquisition of X% ownership of Company. Company files as the sole
operating entity within the consolidated return filed by Taxpayer. The stock of Taxpayer
upon formation was owned by a private equity investor.

The stock of Taxpayer was acquired by Holdings in what Taxpayer represents was a
covered transaction under § 1.263(a)-5(e)(3) of the Income Tax Regulations. Taxpayer
incurred success-based fees to facilitate the transaction. Holdings elected to be taxed
as a corporation, and to file a consolidated federal income tax return with Taxpayer and
Company. Following the execution of the sales transaction Taxpayer filed a short
period return for the pre-acquisition period of Date 2, through Date 3. However, the
return was filed late due to a misinterpretation of the provisions of the consolidated
return regulations providing the due date of the short period return. Taxpayer was
aware of and intended to make the election under Rev. Proc. 2011-29, but was advised
by its advisors that the late filing precluded Taxpayer from making an election under
Rev. Proc. 2011-29, so the short period return did not reflect an election to treat the
success based as thirty percent facilitative, and seventy percent non-facilitative.

                                      LAW

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 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 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 allocation of 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., amounts 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 the taxpayer to make the 70/30 safe harbor
election with respect to success-based fees. Section 4.01(3) of Rev. Proc. 2011-29
provides that 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, stating that the
taxpayer is electing the safe harbor, identifying the transaction, and stating the success-
based fee amounts that are deducted (treated as not facilitating the transaction) and
capitalized (treated as facilitating the transaction).

Taxpayer requests permission with this ruling request to treat seventy percent of the
success based fees relating to the transaction as non-facilitative and to attach the
statement required by Section 4.01(3) of Rev. Proc. 2011-29 to its Year 1 return, by
amending its original filed return.

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 of Internal Revenue, in
exercising his discretion, may grant a reasonable extension of time under the rules set
forth in § 301.9100-3 to make a regulatory election under all subtitles of the Internal
Revenue Code except subtitles E, G, H, and I. The term "regulatory election" is defined
in § 301.9100-1(b) as an election whose due date is prescribed by a regulation
published in the Federal Register, or a revenue ruling, revenue procedure, or
announcement published in the Internal Revenue Bulletin.

Section 301.9100-3(a) provides that requests for relief subject to this section will be
granted when the taxpayer provides the evidence to establish to the satisfaction of the
Commissioner that the taxpayer acted reasonably and in good faith, and the grant of
relief will not prejudice the interests of the Government.

Section 301.9100-3(b)(1) provides that, in general, 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 IRS; (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, the taxpayer was unaware of the
necessity for the election; (iv) reasonably relied on the written advice of the IRS; or (v)
reasonably relied on a qualified tax professional, 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 is 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.

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 under § 6501(a) before the
taxpayer's receipt of a ruling granting relief under this section.

Taxpayer's election is a regulatory election, as defined under § 301.9100-1(b), because
the due date of the election is prescribed by Rev. Proc. 2011-29. In the present
situation, the requirements of §§ 301.9100-1 and 301.9100-3 of the regulations have
been satisfied.
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 §§
301.9100-1 and 301.9100-3 have been satisfied.

Taxpayer is granted an extension of 60 days from the date of this ruling to attach the
statement required by section 4.01(3) of Rev. Proc. 2011-29 to its return by amending
its original filed return for Year 1, and superseding it with a return attaching a completed
election statement with respect to the Transaction.

The rulings contained in this letter are 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 whether Taxpayer properly
included the correct costs as its success-based fees subject to the retroactive election
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.

A copy of this letter is being sent 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 § 6110.

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.

                               Sincerely,

                                /s/

                               Sean M. Dwyer
                               Senior Technical Reviewer, Branch 1
                               Associate Office of Chief Counsel
                               Income Tax & Accounting

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