Late relief to make the Rev. Proc. 2011-29 success-based fee election omitted from a timely return

Plain-English summary

Success-based fees (advisor fees contingent on a deal closing) are presumed to be non-deductible capital costs unless the taxpayer documents otherwise, but Rev. Proc. 2011-29 offers a safe harbor: elect to deduct 70% and capitalize 30% by attaching an election statement to a timely filed return. Here, a consolidated group acquired a company through a merger and paid success-based fees. Its return was filed on time and actually reported the fees the 70/30 way, but the tax preparer failed to attach the required election statement, so no valid election was made. Once the omission was found, the group asked the IRS for an extension of time under Treas. Reg. § 301.9100-3. The IRS granted 60 days to file the election, finding the taxpayer acted reasonably and in good faith (it relied on a qualified preparer and caught the error before the IRS did) and that relief would not prejudice the government, since the return had already been prepared as if the election were made.

Ruling snapshot

• Question: May a taxpayer get a § 301.9100-3 extension to make the Rev. Proc. 2011-29 safe-harbor election for success-based fees where the return reported the fees correctly but the required election statement was not attached?
• Outcome: Approved (60 days from the letter date to file the election).
• Key authorities: IRC § 263(a); Treas. Reg. § 1.263(a)-5(f); Rev. Proc. 2011-29; Treas. Reg. § 301.9100-1 through -3.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202206007 Third Party Communication: None
Release Date: 2/11/2022 Date of Communication: Not Applicable

                                                           Person To Contact:

Index Number: 9100.00-00 ----------------, ID No. -----------------
Telephone Number:
--------------------------- -------------------
Refer Reply To:
------------------------------------------------ CC:ITA:B02
-------------------------------------- PLR-110849-21
--------------------------------------------- Date:
November 09, 2021

Legend

Taxpayer = ------------------------------------------------

Date1 = ------------------

Date2 = --------------------------

Date3 = -----------------------

Date4 = -----------------------

State1 = -------------

State2 = -------------

A = ----------------------------------

B = -------------------------

C = -----------------------------------

D = ----------------------------------------------------------------------------------------

E = ----------------------------------------

F = -----------------------------------------------------------------

G = -----------------------------------------------------------------------------------
PLR-110849-21 2

$a = ------------

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

This is a 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 as permissible under sections
7.02(2) and 9.04(3) of Rev. Proc. 2021-1, 2021-1 I.R.B. 1, 33, 48. A paper copy will not
be mailed to Taxpayer.

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 engaged in the business
of D.

On Date3, Taxpayer, A, and B entered into the transaction agreement (“Agreement”). On
Date3, pursuant to the Agreement, A was acquired by Taxpayer. The acquisition was
accomplished through a merger of A with C, (a wholly owned subsidiary of Taxpayer),
with A surviving. Upon completion of the transaction, A became a wholly owned
subsidiary of Taxpayer.

Pursuant to the terms of the Agreement, Taxpayer paid fees to B to provide transaction
services and financial services in pursuing the transaction.

The fees Taxpayer paid to B totaling $a were contingent on the successful closing of the
transaction (i.e., success-based fees). 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 paid or incurred success-based fees of $a 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).
PLR-110849-21 3

Employees for E prepared Taxpayer’s U.S. federal income tax return for the taxable year
ending Date2, and G signed the return as preparer. 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, the election statement that Rev. Proc. 2011-2 requires
be attached to the return of a taxpayer making the success-based fees election was not
attached to Taxpayer’s original federal tax return for the taxable year ending Date2, so
Taxpayer did not make a proper election. Taxpayer relied on G and E’s employees, to
properly prepare the tax return and include all appropriate elections therewith, but E’s
employees failed to attach the election statement to Taxpayer’s return, and G did not
notice the error.

On Date4, F 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 notified G
of the omission. G promptly informed Taxpayer, and Taxpayer requested that G
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.
PLR-110849-21 4

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 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
PLR-110849-21 5

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) in part provides that a taxpayer is deemed to have acted
reasonably and in good faith if the taxpayer requests relief before the failure to make the
regulatory election is discovered by the Service or 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. Taxpayer
represents that it is requesting relief before the error was discovered by the Service and
that it reasonably relied on a qualified tax professional who failed to make the election
properly.

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. Taxpayer represents that the interests of the
government will not be prejudiced by the granting of relief here because the return
reported the fees as if the election had been properly made.

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

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 (e.g., no opinion is expressed regarding the amount of success-based fees, whether
those fees are success-based fees, nor whether the transaction was a qualifying
transaction).
PLR-110849-21 6

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.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

A copy of this letter must be attached to any income tax return to which it is relevant.
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.

The rulings contained in this letter are based upon information and representations
submitted by the 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.

                                   Sincerely,

                                   Bridget E. Tombul

                                   Bridget E. Tombul
                                   Branch Chief
                                   (Income Tax & Accounting)

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