Taxpayer received 60 days for late success-based fee election

Plain-English summary

A consolidated group's subsidiary paid a success-based financial-adviser fee in connection with acquiring one business and selling another. The taxpayer intended to elect the Revenue Procedure 2011-29 safe harbor and reported the fee consistently with that election—deducting 70 percent and capitalizing 30 percent—but failed to attach the required statement. During an IRS examination, an information request for the election statement led the tax staff to discover the omission; the assessment period remained open by consent. The IRS found that the taxpayer acted reasonably and in good faith and that relief would not prejudice the government. It granted 60 days to file the election statement identifying the transaction and the deducted and capitalized amounts. The ruling did not determine the proper fee amount or whether any appraisal-related portion was inherently facilitative.

Ruling snapshot

• Question: May the taxpayer make a late Revenue Procedure 2011-29 safe-harbor election for its success-based transaction fee?
• Outcome: approved
• Key authorities: IRC § 263(a); Treas. Reg. §§ 1.263(a)-5, 301.9100-1 and 301.9100-3; Rev. Proc. 2011-29

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202416007                                             Third Party Communication: None
 Release Date: 4/19/2024                                       Date of Communication: Not Applicable
 Index Number: 9100.00-00, 263.00-00
                                                               Person To Contact:
 ----------------------                                        ---------------------, ID No. -----------------
 ---------------------                                         Telephone Number:
 ----------------------------------------------------------    --------------------
 ---------------------------------                             Refer Reply To:
                                                               CC:ITA:B01
                                                               PLR-114517-23
                                                               Date:
                                                               January 16, 2024

 Taxpayer                    = ---------------------------------------------------------------------------------
                               ------------------------
 Date 1                      = --------------------------
 Date 2                      = ------------------
 Date 3                      = ------------------
 Date 4                      = -----------------
 Date 5                      = ---------------------------------------------------------------------------------
 Date 6                      = ---------------------------------------------------------------------------------
 Date 7                      = ----------------------------------------
 Subsidiary 1                = -------------------
 X                           = -----------------------------------
 Target                      = ---------------------------------------------
 Merger Company              = ------------------------------------
 Y                           = ------------------------
 Company A                   = ------------------------------------
 Financial Advisor           = ------------------------------------
 Amount $1                   = -------------
 Z                           = ---------------------------




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

This letter responds to a request for a private letter ruling filed by Taxpayer with the
Internal Revenue Service (Service). In the letter ruling request and subsequent
submissions, you seek an extension of time for Taxpayer to make a late safe harbor
election under Rev. Proc. 2011-29, 2011-18 I.R.B. 746, (“Election”) effective for the
taxable year that ended on Date 1. The request is made in accordance with
§§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations.
Taxpayer’s request was filed with our office on Date 2.
PLR-114517-23                                2


FACTS

Taxpayer is the parent company of a consolidated group of corporations. Subsidiary 1
is a wholly owned subsidiary of Taxpayer engaged in the X business. On Date 3,
Taxpayer acquired the X business of Target. The acquisition was accomplished
through a merger of Target with Merger Company, with Target surviving. Also, on Date
3, immediately following the acquisition of Target, Subsidiary 1’s Y business segment
was sold to Company A.

Financial Advisor was engaged, pursuant to an agreement dated Date 4 (“Agreement”),
to provide transaction and financial services in connection with the acquisition of the
Target business and the sale of the Y business segment. Taxpayer represents that
Financial Advisor was paid an Amount $1 fee (“Fee”) in conjunction with the transaction.
Taxpayer represents that the Fee, paid directly by and reported on the separate
company Date 5 tax return of Subsidiary 1 was contingent upon the completion of a
covered transaction described in section 1.263(a)-5(e)(3)(ii). The Fee was not treated
as reducing amount realized on the sale of the Y business and was not treated as
increasing the basis of any business assets acquired (no section 338 election was
made). Taxpayer represents that the Fee was paid in connection with a covered
transaction described in section 1.263(a)-5(e)(3)(ii).

As part of the services provided under the Agreement, Financial Advisor performed an
appraisal. The Agreement does not ascribe any value or charge for the appraisal.
Taxpayer treated the full Amount $1 as a success-based fee because the full amount
was contingent on the successful completion of the acquisition. Taxpayer did not treat
any portion of the Fee as capitalized under section 1.263(a)-5(f)(2)(i) as an inherently
facilitative fee.

Taxpayer employs an accrual method of accounting on a calendar year basis.
Taxpayer represents that it’s tax department intended but failed to make the safe-harbor
election for the Fee on its Date 5 income tax return. Taxpayer reported the Fee on that
return consistent with having made the Election, reporting 70 percent as deductible and
capitalizing 30 percent of the Fee. Taxpayer represents the failure to attach the
required election statement was an oversight that was in part caused by the return
being filed during the Z.

In the spring of Date 6, the IRS began auditing various consulting and professional
expenses reported on Taxpayer’s Date 5 return. On Date 7 the IRS issued an
information document request seeking a copy of the Rev. Proc. 2011-29 election
statement. Shortly thereafter, Taxpayer’s tax staff discovered that the election
statement had not been filed as intended. The period of limitations for assessment of
tax remains open pursuant to a Form 872 consent being executed by Taxpayer and the
IRS.
PLR-114517-23                                 3

LAW AND ANALYSIS

Sections 301.9100-1 through 301.9100-3 of the Procedure and Administration
Regulations 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(b) defines the term "regulatory election" as an election whose due
date is prescribed by a regulation published in the Federal Register, or a revenue ruling,
procedure, notice or announcement published in the Internal Revenue Bulletin.
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 301.9100-3(a) provides extensions of time to make a regulatory election under
Code sections other than those for which § 301.9100-2 expressly permits automatic
extensions. 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) states that a taxpayer will be deemed to have acted
reasonably and in good faith if the taxpayer: (1) requests relief before the failure to
make the regulatory election is discovered by the Service, (2) failed to make the election
because of intervening events beyond the taxpayer's control, (3) failed to make the
election because, after exercising due diligence, the taxpayer was unaware of the
necessity for the election, (4) reasonably relied on the written advice of the Service, or
(5) 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.

Under § 301.9100-3(b)(3), a taxpayer will not be considered to have acted reasonably
and in good faith if the taxpayer: (1) 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 (taking into account § 1.6664-2(c)(3)) and the new position
requires or permits a regulatory election for which relief is requested, (2) was informed
in all material respects of the required election and related tax consequences, but chose
not to file the election, or (3) uses hindsight in requesting relief. If specific facts have
changed since the original deadline that make the election advantageous to a taxpayer,
the Service will not ordinarily grant relief.

Taxpayer has represented that it is not seeking to alter a return position for which an
accuracy-related penalty has been or could be imposed under § 6662 at the time
PLR-114517-23                                 4

Taxpayer requested relief. Furthermore, Taxpayer has represented that it is not using
hindsight in requesting relief and that no specific facts have changed since the original
deadline that would make the election more advantageous to Taxpayer now than if
made timely.

Section 301.9100-3(c)(1) provides that the Commissioner will grant a reasonable
extension of time only when the interests of the Government will not be prejudiced by
the granting of relief. Section 301.9100-3(c)(1)(i) provides, in part, 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 (taking into account the
time value of money). Section 301.9100-3(c)(1)(ii) provides, in part, that 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 these criteria, the interests of the government are not prejudiced in this case.

Section 263(a)(1) 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). 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(e)(2) provides that an amount paid in the process of investigating or
otherwise pursuing a covered transaction facilitates that transaction if the amount is
inherently facilitative, regardless of whether the amount is paid for activities performed
prior to the date determined in § 1.263(a)-5(e)(1). Among other things, an amount is
inherently facilitative if the amount is paid for securing an appraisal, factual written
determination, or fairness opinion related to the transaction.

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) is presumed to facilitate the
transaction and, thus, must be capitalized. 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 and thus may be deductible. This
documentation must be completed on or before the due date of the taxpayer’s timely
PLR-114517-23                                 5

filed original federal income tax return (including extensions) for the taxable year during
which the transaction closes.

To reduce controversy between the Service and taxpayers over the documentation
required to allocate success-based fees between the activities that facilitate the
transaction and activities that do not facilitate the transaction, the Service issued Rev.
Proc. 2011-29.

Section 4.01 of Rev. Proc. 2011-29 states that the Service will not challenge a
taxpayer’s allocation of a success-based fee between activities that facilitate the
transaction described in § 1.263(a)-5(e)(3) and activities that do not facilitate the
transaction if the taxpayer: (1) treats 70 percent of the amount of the success-based fee
as an amount that does not facilitate the transaction; (2) capitalizes the remaining 30
percent as an amount that 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.

The revenue procedure applies to covered transactions described in § 1.263(a)-5(e)(3),
which includes, inter alia, a taxable acquisition by the taxpayer of assets that constitute
a trade or business and 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). See § 1.263(a)-5(e)(3)(i) and (ii).

CONCLUSION

Based on the facts and representation submitted, we conclude that Taxpayer acted
reasonably and in good faith and granting relief will not prejudice the interests of the
government. Accordingly, 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 the
statement required by section 4.01(3) of Rev. Proc. 2011-29, stating that it is electing
the success-based fee safe harbor, identifying the transaction, and stating the success-
based fee amounts that are deducted and capitalized.

The ruling letter is based upon information and representations submitted by the
taxpayer and accompanied by penalty of perjury statements executed by the
appropriate parties. This office has not verified any of the materials submitted in
support of the request for a ruling and the information materials are subject to
verification on examination.
PLR-114517-23                                            6

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 on the proper amount of the success-
based fee and on the application of section 1.263(a)-5(e)(2)(i).

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.

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 return that provides the date and control
number of the letter ruling.

                                                   Sincerely,

                                                   /s/

                                                   Sean M. Dwyer
                                                   Senior Technical Reviewer
                                                   (Income Tax & Accounting)

Enclosure (1):
Copy for § 6110 purposes

CC:
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