Corporation granted more time to make a late success-based-fee safe-harbor election

Plain-English summary

A corporation got more time to make a "success-based fee" safe-harbor election after its preparer left the required statement off the return. When a company pays fees that are contingent on closing an acquisition, those fees are presumed to be capitalized rather than deducted. Rev. Proc. 2011-29 offers a safe harbor letting a taxpayer treat 70% of such fees as deductible and 30% as capitalized, but only if it attaches an election statement to the original, timely return. Here the taxpayer's advisor prepared the statement, but the preparer inadvertently omitted it, and the omission was caught during an IRS audit. The IRS treated this as a regulatory election eligible for relief under Treas. Reg. § 301.9100-3, found the taxpayer acted reasonably and in good faith (it reasonably relied on a qualified tax professional) and that relief would not prejudice the government, and granted a 60-day extension to file an amended return with the election statement.

Ruling snapshot

• Question: May a taxpayer get an extension of time under Treas. Reg. § 301.9100-3 to make a late Rev. Proc. 2011-29 safe-harbor election for success-based fees its preparer failed to attach?
• Outcome: approved (60-day extension to file an amended return with the election statement)
• Key authorities: Treas. Reg. §§ 301.9100-1, 301.9100-3, 1.263(a)-5(f); Rev. Proc. 2011-29; IRC § 263(a)

Full text (IRS public release)

 Internal Revenue Service                                  Department of the Treasury
                                                           Washington, DC 20224

 Number: 202222005                                         Third Party Communication: None
 Release Date: 6/3/2022                                    Date of Communication: Not Applicable
 Index Number: 9100.00-00
                                                           Person To Contact:

 --------------------------                                --------------------------, ID No. ----------------
 --------------------------------                          Telephone Number:
 -----------------------------                             --------------------
                                                           Refer Reply To:
 -------------------------                                 CC:ITA:B03
 ----------------------------------------                  PLR-122537-21
                                                           Date:
 In Re:                                                    March 07, 2022
          --------------------------
           -------------------------




Legend:

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

Advisor 1 = --------------------------------------------

Advisor 2 = -------------------------------------

Preparer = -----------------------------

Tax Advisor = ----------

Target = ------------------------

State A = -------------

$A = -------------

$B = ---------------

Date 1 = -----------------

Date 2 = --------------------------

Date 3 = --------------
PLR-122537-21                                2



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

This letter responds to your correspondence dated October 28, 2021, 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. 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.


                                         FACTS

1. Taxpayer Information

Taxpayer, the common parent of an affiliated group of corporations that join in filing a
consolidated U.S. federal income tax return, is a domestic corporation incorporated
under the laws of State A. Taxpayer has a calendar year-end and uses an accrual
method of accounting.

On Date 1, Taxpayer, in a taxable acquisition, acquired all of the outstanding
membership interests and all other equity interests of Target, a State A limited liability
company regarded as a partnership for U.S. federal income tax purposes (Transaction).
Taxpayer represents that the Transaction is a covered transaction under Treas. Reg.§
1.263(a)-5(e)(3)(i).

2. Description of Success-Based Fees

Taxpayer engaged Advisor 1 and Advisor 2 as financial advisors for services performed
in the process of investigating or otherwise pursuing the Transaction. Taxpayer paid
Advisor 1 a success-based fee of $A and Advisor 2 a success-based fee of $B
(Success-Based Fees). Taxpayer represents that the Success-Based Fees were
contingent upon the successful closing of the Transaction as described under Treas.
Reg. § 1.263(a)-5(f).

Taxpayer engaged Preparer to prepare the U.S. federal income tax return for the
taxable year ended Date 2 (Election Return). The Taxpayer also engaged Tax Advisor
to analyze the proper U.S. federal income tax treatment of various costs incurred in
connection with the Transaction (Transaction Costs). Tax Advisor determined that the
Taxpayer was eligible to apply the safe harbor under Rev. Proc. 2011-29 to the
Success-Based Fees. Accordingly, Tax Advisor advised the Taxpayer that the Success-
Based Fees should be treated as 70% deductible and 30% capitalizable and prepared
the election statement for the Success Based Fees, as required by Rev. Proc. 2011-29
(Election Statement). Tax Advisor provided its conclusions regarding the proper U.S.
federal income tax treatment of the Transaction Costs to the Taxpayer in a report, which
PLR-122537-21                                3

included the calculation, the Election Statement and supporting documentation (Tax
Advisor Analysis).

The Taxpayer provided the Tax Advisor Analysis to Preparer. In preparing the Election
Return, Preparer relied on the Tax Advisor Analysis and reflected on the Election
Return the Success-Based Fees as 70% deductible and 30% capitalizable. However,
Preparer inadvertently overlooked the requirement of filing the Election Statement. As a
result, no Election Statement was attached to the Election Return. Although the
Taxpayer reviewed the Election Return and was aware that the Election Statement was
required to be attached thereto, it did not detect the missing Election Statement.

On Date 3, during the Service's audit of the Election Return, the examining agent
discovered the missing Election Statement. The examining agent issued a draft Form
5701, Notice of Proposed Adjustment, proposing the disallowance of the safe harbor
treatment to the Success-Based Fees. The Taxpayer immediately started discussions
with the examining agent, and the agent suggested the Taxpayer request relief under
Treas. Reg. §§ 301.9100-1 and 301.9100-3 for an extension of time to properly file the
Election Statement. The Taxpayer promptly informed Preparer and requested that
Preparer commence preparation of this Request.


                                   LAW & ANALYSIS

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 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.
PLR-122537-21                                 4

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.

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 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.
PLR-122537-21                                 5

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
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 time until 60
days following the date of this ruling to file an amended tax return for the taxable year
ending Date 2 to elect the safe harbor for success-based fees pursuant to Rev. Proc.
2011-29. The amended return must include an election statement stating that Taxpayer
is electing the safe harbor for success-based fees, identifying the transaction, and
stating the success-based fee amounts that are deducted and capitalized.
PLR-122537-21                                  6


                                         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 provided herein, no opinion is expressed or implied concerning the
Federal income tax consequences of any aspect of any transaction or item discussed or
referenced in this ruling under any other provision of the Code. In particular, no opinion
is expressed or implied as to whether Taxpayer properly included the correct costs as
its success-based fees subject to the election, or whether Taxpayer's transaction was
within the scope of Rev. Proc. 2011-29. The relief provided in this letter is conditioned
on proper adjustments to affected returns and tax attributes for Taxpayer and its
affiliates.

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 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 representatives.

A copy of this ruling must be attached to Taxpayer's Federal income tax returns for the
tax years affected. 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.


                                        Sincerely,



                                        BRINTON T. WARREN
                                        Chief, Branch 3
                                        (Income Tax & Accounting)

Enclosure: Copy of the letter for section 6110 purposes


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