Corporation granted 60 more days to make a late success-based-fee safe-harbor election its preparer omitted

Plain-English summary

A corporation acquired another company through a merger and paid its advisor a fee that was contingent on the deal closing, a "success-based fee." Under Rev. Proc. 2011-29, a taxpayer can elect a safe harbor to treat 70 percent of such a fee as deductible (not facilitating the deal) and capitalize the other 30 percent, but only by attaching an election statement to a timely filed return. Here the taxpayer's accountants prepared the statement and the return reflected the 70/30 split, yet the preparer inadvertently failed to attach the statement to the filed return. The taxpayer blamed high turnover in its tax department and the addition of hundreds of new entities that year, and asked for an extension of time under Treas. Reg. § 301.9100-3. The IRS concluded the taxpayer acted reasonably and in good faith (it reasonably relied on a tax professional who failed to make the election) and that relief would not prejudice the government. It granted a 60-day extension to amend the return and attach the election statement. This is a routine "9100 relief" ruling: it shows that an inadvertent, professional-caused omission of an election statement can usually be fixed, so long as the taxpayer moves before the IRS catches it and does not use hindsight. (This letter also replaces an earlier one, dated September 3, 2021, that contained an error.)

Ruling snapshot

• Question: May a corporation 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 when its preparer omitted the required statement?
• Outcome: approved (60-day extension to amend the return and attach the election statement, subject to § 6511)
• Key authorities: Treas. Reg. §§ 301.9100-1, 301.9100-3, 1.263(a)-5(f); Rev. Proc. 2011-29; IRC §§ 263(a), 6511

Full text (IRS public release)

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Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202231003 [Third Party Communication:
Release Date: 8/5/2022 Date of Communication: Month DD, YYYY]
Index Number: 263.00-00, 263.15-03,
9100.00-00 Person To Contact:
-------------------, ID No. -----------------
----------- Telephone Number:
---------------------------------- --------------------
------------- Refer Reply To:
------------------------------------ CC:ITA:B01
PLR-105240-21
Attn: ----------------------- Date:
--------------------------------- April 19, 2022

In Re: -----------
------------------------

LEGEND:

Taxpayer = ----------------------------------------------------------------
State A = -------------
Merger Sub I = -----------------------------------------------------
Merger Sub II = ------------------------------------------------------
X = -----------------------------------------------
Y = ----------------------------------------------
Advisor = ---------------------------------------------------------
Accounting Firm A = -----------------------
Accounting Firm B = -------------------
Year 1 = -----------------------------------------------------
Date 1 = --------------------------
Date 2 = ----------------------
Date 3 = -----------------------
Date 4 = -------------------
Date 5 = ----------------
Date 6 = -----------------------
Date 7 = -------------------
Date 8 = -----------------------
Date 9 = ------------------
Date 10 = -------------------
$a = -----------------
PLR-105240-21 2

$b = ---------------

$c = -----------------
a% = -----

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

   This letter responds to your correspondence of Date 1, received by the Internal

Revenue Service on Date 2. This letter replaces a letter dated September 3, 2021 that
contained an error. Your correspondence requests 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 in connection with Taxpayer’s acquisition of X on
Date 3 (the Transaction).

                                            FACTS

   Taxpayer is an C corporation, incorporated under the laws of State A, and the

parent of an affiliated group of corporations that file consolidated federal income tax
returns. Taxpayer employs an overall accrual method of accounting and has a fiscal
taxable year ending on Date 4. Presently, Taxpayer’s consolidated federal income tax
return for Year 1 is under examination by the Internal Revenue Service.

  On Date 5, Taxpayer formed Merger Sub I and Merger Sub II as limited liability

companies under the laws of State A for the sole purpose of effecting the
Transaction.

   On Date 6, Taxpayer effectuated two mergers that Taxpayer represents

qualified as a nontaxable acquisition of stock under § 368 (a)(1)(A) of the Internal
Revenue Code. First, Merger Sub I merged with and into X (the "Merger").
Following the Merger, the separate existence of Merger Sub I ceased, and X
continued as the surviving corporation and became a direct, wholly owned
subsidiary of Taxpayer. Second, X then merged with, and into, Merger Sub II (the
"Second Merger"). Following the Second Merger, the separate existence of X
ceased, and Merger Sub II continued as the surviving corporation and as a directly
and wholly owned subsidiary of Taxpayer.

   On Date 7, in furtherance of the Transaction, Taxpayer engaged Advisor to

assist Taxpayer with feasibility analysis, to evaluate financial strategies, and to provide
related services. Taxpayer agreed to compensate Advisor $a for such services
rendered upon the successful closing of the Transaction less a credit for fees paid by
Taxpayer to Advisor in connection with the financing of the Transaction equal to the
lesser of $b or a%. On Date 8, Taxpayer paid Advisor $c for the services ($c is net of
PLR-105240-21 3

the finance fee and represents the amount that was contingent on the successful
closing of the Transaction). The Transaction occurred during Taxpayer’s Year 1 taxable
year.

   Taxpayer engaged Accounting Firm A to prepare a transaction cost analysis to

determine the federal income tax treatment of the transaction costs incurred by
Taxpayer and X with respect to the Transaction. Accounting Firm A advised them to
make the safe harbor election provided by Rev. Proc. 2011-29 and treat 70 percent of
the success-based fees incurred and paid to Advisor in connection with the Transaction
as an amount that does not facilitate the Transaction and capitalize the remaining 30
percent as an amount that does facilitate the Transaction. Accounting Firm A prepared
the election statements and advised Taxpayer to attach its election statement to its
consolidated federal income tax return for Year 1 as required by Section 4.01 of Rev.
Proc. 2011-29.

    Taxpayer engaged Accounting Firm B to review and sign Taxpayer’s

consolidated federal income tax return for Year 1 that was assembled by Y consistent
with the safe harbor election, i.e., Taxpayer deducted 70 percent of the success-based
fees paid to Advisor and capitalized the remainder. However, Y failed to include with
the return the statement required to make the safe harbor election. Taxpayer and
Accounting Firm B reviewed and signed the return, and Taxpayer timely filed it on Date
9, prior to Date 10, the return’s extended due date. Nonetheless, Taxpayer
inadvertently failed to include the election statement with its timely filed return.

   Taxpayer represents that it failed to make the safe harbor election under Rev.

Proc. 2011-29, in part, due to high turnover of professional personnel in its tax
department and to the addition of hundreds of new entities to its tax structure in Year 1.

                                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).
PLR-105240-21 4

    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

incurring 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 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;

PLR-105240-21 5

   (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 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.
    PLR-105240-21 6

                                  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 60
    days from the date of this letter ruling to amend its consolidated federal income tax
    return for Year 1 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 $c, as a
    success-based fee in the Return Year; (2) the Transaction was within the scope of Rev.
    Proc. 2011-29; or (3) Taxpayer satisfied the requirements to file an amended
    consolidated federal income tax 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-105240-21 7

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 representatives.
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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