A corporation received 60 days to file a success-fee safe-harbor election

Plain-English summary

A corporation acquired a business in a merger intended to qualify as a tax-free reorganization and paid contingent fees that became due only when the transaction closed. It timely filed its return and intended to use the Revenue Procedure 2011-29 safe harbor, which allows 70 percent of qualifying success-based fees to be deducted and requires the balance to be capitalized. Its internal tax professionals applied the treatment but accidentally omitted the required election statement from the return. The corporation discovered the oversight before the IRS and represented that late relief would not lower aggregate tax liability or affect a closed year. The IRS granted 60 days to file the safe-harbor election.

Ruling snapshot

• Question: Could the corporation file a late Rev. Proc. 2011-29 election allocating success-based acquisition fees between deductible and capitalized amounts?
• Outcome: Approved
• Key authorities: IRC § 263(a); Treas. Reg. § 1.263(a)-5; Rev. Proc. 2011-29; Treas. Reg. §§ 301.9100-1 and 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202301006
Release Date: 1/6/2023 Third Party Communication: None
Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:

                                                           -----------------, ID No. -----------------

                                                           Telephone Number:

                                                           --------------------
                                                           Refer Reply To:

---------------------------------------------------------- CC:ITA:B02
-------------------- PLR-108460-22
Date:

In Re: --------------------------------------------------- October 14, 2022
-----
-------------------------

TY: -----------------------------------------------------

LEGEND:

Taxpayer = --------------------------------------------------------
Date1 = ------------------
Date2 = --------------------------
Date3 = ------------------
Date4 = ---------------------
State1 = -----------
State2 = ---------
A = -------------------
B = -----------------------------------
C = ---------------------------------------------------
D = ---------------------------
E = ---------------------
$a = -----------------
$b = -----------------
$c = -----------------
$d = -----------------
$e = -----------------
PLR-108460-22 2

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. 2022-1, 2022-1 I.R.B. 1, 33, 49. 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 principal

place of business in State2. Taxpayer has a calendar year end and uses an accrual
method of accounting. Taxpayer is engaged in the business of C.

    On Date3, Taxpayer, A, and B (a wholly-owned subsidiary of Taxpayer) entered

into an agreement and plan of merger, which provided that B will merge with and into A,
with A surviving. Upon completion of the transaction, A became a wholly-owned
subsidiary of Taxpayer. The merger was intended to qualify as a tax-free reorganization
within the meaning of § 368(a) of the Code.

   As part of the acquisition, Taxpayer paid $a and $b of deal-related fees to D and

E, respectively, for services performed in the process of investigating or otherwise
pursuing the transaction. Of the total deal-related fees paid, $c paid to D and $d paid to
E were contingent on the successful closing of the transaction and were paid at the time
of closing (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 total success-based fees of $e as defined by

§ 1.263(a)-5(f) of the Income Tax Regulations, and Taxpayer's transaction was a
“covered transaction” as defined by § 1.263(a)-5(e)(3).

   Taxpayer’s tax department prepared the U.S. federal income tax return for the

taxable year ending Date2. Taxpayer timely filed its return and elected to use the safe
harbor election for allocating fees paid to D and E under Rev. Proc. 2011-29. However,
Taxpayer failed to attach the required election statement to Taxpayer's original federal
tax return for the taxable year ending Date2. Taxpayer relied on its internal tax
PLR-108460-22 3

professionals to properly prepare the tax return and include all appropriate elections
therewith. By oversight, Taxpayer failed to attach the election statement.

   On Date4, Taxpayer 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. On Date1, Taxpayer submitted its request for this ruling.

                              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. Revenue Procedure 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
    PLR-108460-22 4

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 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
PLR-108460-22 5

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.

    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's election is a regulatory election, as defined under § 301.9100-1(b),

because the due date of the election is prescribed in 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.

   Taxpayer represented the transaction qualifies as a covered transaction

described in § 1.263(a)-5(e)(3)(ii).

    Taxpayer has represented that it requested relief before the failure to make the

regulatory election was discovered by the Service and that it reasonably relied on
qualified tax professionals, and the tax professionals failed to make, or advise Taxpayer
to make, the election. Thus, under §§ 301.9100-3(b)(1)(i) and (v), Taxpayer is deemed
to have acted reasonably and in good faith. Taxpayer has also represented that none
of the circumstances listed in § 301.9100-3(b)(3) apply.

    Based on the facts Taxpayer provided, granting an extension of time to file the

election will not prejudice the interests of the government under § 301.9100-3(c)(1).
Taxpayer has represented 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 has represented 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.

                                   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.
PLR-108460-22 6

  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 Date2.

   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).

  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
                                       Chief, Branch 2
                                       (Income Tax & Accounting)

Enclosure: Copy of the letter for 6110 purposes

cc: