IRS grants more time to perfect a success-based-fee safe-harbor election

Plain-English summary

When a business pays a "success-based fee" (an advisor's fee that is owed only
if a deal closes), the tax rules presume the whole fee must be capitalized
rather than deducted. Revenue Procedure 2011-29 offers a safe harbor: deduct
70%, capitalize 30%, and attach an election statement to the original return.
Here a company that buys and operates disaster-restoration businesses paid such
fees on four acquisitions, and its return preparer correctly reported the 70/30
split but forgot to attach the election statement on two years' returns. Without
that statement, the election was not valid. The company asked for relief under
the "9100" regulations, which let the IRS extend the time to make a missed
regulatory election if the taxpayer acted reasonably and in good faith and the
government is not harmed. Because the omission was an inadvertent preparer
error caught before the IRS noticed, and the years remain open, the IRS granted
a 60-day extension to file amended returns with the required election statement.
This is a routine, taxpayer-favorable fix for a paperwork slip.

Ruling snapshot

• Question: Should the taxpayer get more time to file the election statement needed to perfect its Rev. Proc. 2011-29 safe-harbor election for success-based fees?
• Outcome: Approved (60-day extension granted under Treas. Reg. §§ 301.9100-1 and 301.9100-3)
• Key authorities: Treas. Reg. §§ 301.9100-1, 301.9100-3; Rev. Proc. 2011-29; Treas. Reg. § 1.263(a)-5; IRC § 263(a); IRC § 6501(a)

Full text (IRS public release)

Internal Revenue Service                          Department of the Treasury
                                                  Washington, DC 20224

Number: 202426007                                 Third Party Communication: None
Release Date: 6/28/2024                           Date of Communication: Not Applicable
Index Number: 9100.00-00
                                                  Person To Contact:
[Taxpayer name and address redacted]                --------------
                                                  Telephone Number:
                                                    --------------
                                                  Refer Reply To:
                                                    CC:ITA:B02
                                                  PLR-118215-23
                                                  Date:
                                                  March 15, 2024

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

Legend:

Taxpayer                     = --------------
Date 1                       = --------------
Year 1                       = --------------
Financial Consultant         = --------------
Subsidiary A                 = --------------
Date 2                       = --------------
Subsidiary B                 = --------------
Date 3                       = --------------
Subsidiary C                 = --------------
Date 4                       = --------------
Subsidiary D                 = --------------
Date 5                       = --------------
$a                           = --------------
$b                           = --------------
$c                           = --------------
$d                           = --------------
Tax Return Preparer          = --------------
Year 2                       = --------------
Year 3                       = --------------

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

This letter responds to your letter ruling request dated Date 1, submitted by Taxpayer.
Taxpayer requests an extension of time pursuant to sections 301.9100-1 and 301.9100-
3 of the Procedure and Administration Regulations to make four late elections
concerning the treatment of success-based fees as provided by Rev. Proc. 2011-29,
2011-1 C.B. 746, which requires that a statement be attached to a taxpayer's original
Federal income tax return for the taxable year of election.

                                         FACTS

Taxpayer makes the following representations:

Taxpayer is a domestic limited liability company that provides environmental damage
restoration services, such as cleanup, mitigation, and restoration following a disaster
affecting residential homes and commercial buildings. Taxpayer was formed in Year 1
and is treated as a partnership for federal income tax purposes.

For Year 2 and Year 3, Financial Consultant provided Taxpayer with financial consulting
services and assistance with the acquisition of Subsidiary A, Subsidiary B, Subsidiary
C, and Subsidiary D (collectively, Subsidiaries).

Pursuant to its engagement agreement with Financial Consultant, Taxpayer was
required to pay Financial Consultant a compensatory fee contingent upon the
successful closing of any acquisition transaction; the amount of Financial Consultant's
fee would be calculated as a percentage of the aggregate consideration arising from
that transaction.

Taxpayer acquired Subsidiary A on Date 2. As a result and upon the successful closing
of the acquisition of Subsidiary A, Taxpayer incurred and paid a success-based fee to
Financial Consultant in the amount of $a (Success-Based Fee A).

Taxpayer acquired Subsidiary B on Date 3. As a result and upon the successful closing
of the acquisition of Subsidiary B, Taxpayer incurred and paid a success-based fee to
Financial Consultant in the amount of $b (Success-Based Fee B).

Taxpayer acquired Subsidiary C on Date 4. As a result and upon the successful closing
of the acquisition of Subsidiary C, Taxpayer incurred and paid a success-based fee to
Financial Consultant in the amount of $c (Success-Based Fee C).

Taxpayer acquired Subsidiary D on Date 5. As a result and upon the successful closing
of the acquisition of Subsidiary D, Taxpayer incurred and paid a success-based fee to
Financial Consultant in the amount of $d (Success-Based Fee D).

Taxpayer incurred and paid Success-Based Fee A, Success-Based Fee B, Success-
Based Fee C, and Success-Based Fee D (collectively, Success-Based Fees) as a result
of the completed acquisition of Subsidiary A, Subsidiary B, Subsidiary C, and Subsidiary
D (collectively, Acquisitions).

Taxpayer engaged Tax Return Preparer to prepare its Federal income tax returns for
tax years Year 2 and Year 3. On those returns Taxpayer claimed a deduction for 70
percent of each Success-Based Fee paid to Financial Consultant and capitalized the
remaining 30 percent. Taxpayer's return, however, failed to include any statement
indicating that Taxpayer was electing safe-harbor treatment under Rev. Proc. 2011-29
with Taxpayer's returns for Year 2 and Year 3.

Despite failing to include an election statement, Taxpayer's returns reported its
Acquisition-related Success-Based Fees in a manner consistent with the safe-harbor
election under Rev. Proc. 2011-29. Taxpayer, however, failed to make a valid election
solely because it failed to include the election statement required by section 4.01(3),
Rev. Proc. 2011-29 (Required Election Statement).

After filing Taxpayer's tax returns for Year 2 and Year 3, Tax Return Preparer
discovered that it had failed to include the Required Election Statements due to
administrative errors. Accordingly, Taxpayer filed the present letter ruling request,
seeking an extension of time to file the Required Election Statement for Taxpayer's
taxable Year 2 and Year 3, pursuant to sections 301.9100-1 and 301.9100-3 of the
Procedure and Administration Regulations.

Taxpayer represents that the periods of limitation on assessment under section 6501(a)
of the Internal Revenue Code (Code) for the years at issue have not expired.

                                          LAW

Section 263(a) of the Code provides generally that no deduction is allowed for any
amount paid out for new buildings or for permanent improvements or betterments made
to increase the value of any property or estate or any amount expended in restoring
property or in making good the exhaustion thereof for which an allowance is or has
been made.

Section 1.263(a)-1(d)(3) of the Income Tax Regulations provides that no deduction is
allowed for an amount paid to acquire or create an intangible, which under sections
1.263(a)-4(c)(1)(i) and 1.263(a)-4(d)(2)(i)(A) includes an ownership interest in a
corporation or other entity. See also section 1.263(a)-4(a).

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. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 89-90 (1992);
Woodward v. Commissioner, 397 U.S. 572, 575-576 (1970).

Under section 1.263(a)-5, a taxpayer must capitalize an amount paid to facilitate a
business acquisition or reorganization transaction described in section 1.263(a)-5(a). In
general, an amount is paid to facilitate a transaction described in section 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. Section
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 section 1.263(a)-5(a), or success-based fee, is
presumed to facilitate the transaction. 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. This documentation must be completed
on or before the due date of the taxpayer's timely filed original federal income tax return
(including extensions) for the taxable year during which the transaction closes.

To reduce controversy between the IRS 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 IRS issued Rev. Proc. 2011-29.
Section 4.01 of the revenue procedure provides a safe-harbor stating that the IRS would
not challenge a taxpayer's allocation of a success-based fee between activities that
facilitate a transaction described in section 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 (i.e., the Required Election Statement).

It is this last requirement that Taxpayer seeks to satisfy with this ruling request.
Taxpayer requests an extension of time to perfect its safe-harbor election; to amend its
original filed returns and supersede those returns with ones that include the Required
Election Statement as an attachment.

Section 3 of Rev. Proc. 2011-29 provides that the revenue procedure applies to covered
transactions described in section 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
section 267(b) or section 707(b); or

(iii) A reorganization described in section 368(a)(1)(A), (B), or (C) or a reorganization
described in section 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 section
354 or 356 (whether the taxpayer is the acquirer or the target in the reorganization).

Sections 301.9100-1 through 301.9100-3 of the Procedure and Administration
Regulations provide the standards the Commissioner uses to determine whether to
grant an extension of time to make a regulatory 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 section
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 may grant a reasonable
extension of time to make a regulatory election, or a statutory election (but no more than
six months except in the case of a taxpayer who is abroad) under all subtitles of the
Internal Revenue Code except subtitles E, G, H and I.

Section 301.9100-3(a) provides extensions of time to make a regulatory election under
Code sections other than those for which section 301.9100-2 expressly permits
automatic extensions. Requests for extensions of time for regulatory elections will be
granted when the taxpayer provides evidence (including affidavits described in the
regulations) to establish to the satisfaction of the Commissioner that the taxpayer acted
reasonably and in good faith, and 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 --

(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 due diligence, 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.

Under section 301.9100-3(b)(3), a taxpayer will not be considered 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 section 6662 at the time the taxpayer requests relief (taking
into account section 1.6664-2(c)(3)) 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.

If specific facts have changed since the original deadline that make the election
advantageous to a taxpayer, the Service will not ordinarily grant relief.

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 section 6501(a) before the taxpayer's receipt of a ruling granting
relief under this section.

                                         ANALYSIS

Taxpayer represents that for Federal income tax purposes Acquisitions were taxable
acquisitions of an ownership interest of Subsidiaries within the meaning of section
267(b) of the Code, and section 1.263(a)-5(a)(e)(3) of the Income Tax Regulations.
Those transactions, then, are considered covered transactions pursuant to section
1.263(a)-5(e)(3), and Taxpayer qualifies to make the safe-harbor election provided by
Rev. Proc. 2011-29.

As a result of the Acquisitions, Taxpayer incurred and subsequently paid an amount of
success-based fees during Year 2 and Year 3. Taxpayer complied with the substantive
requirements for making the safe-harbor election by deducting 70 percent and
capitalizing 30 percent of those success-based fees on its original Federal income tax
returns for Year 2 and Year 3. Taxpayer, however, failed perfect its safe-harbor
elections by inadvertently omitting the Required Election Statement from those returns.
It is with respect to that failure that Taxpayer requests an extension of time to file the
election; to amend its original filed returns and supersede those returns with ones that
include the Required Election Statement as an attachment.

Taxpayer's request pertains to a regulatory election as defined in section 301.9100-1(b)
of the Procedure and Administration Regulations, as the due date for the making the
safe-harbor election is prescribed by section 1.263(a)-5(f) of the Income Tax
Regulations. Accordingly, the Commissioner has the authority under sections
301.9100-1 and 301.9100-3, to grant Taxpayer's request for an extension of time to file
the safe-harbor election for Taxpayer's taxable years Year 2 and Year 3.

The information submitted, and representations made by Taxpayer establish that
Taxpayer acted reasonably and in good faith under section 301.9100-3(b)(1) and (2).
Taxpayer requested relief before its failure to properly make the regulatory election was
discovered by the Commissioner. Additionally, despite Taxpayer's reasonable reliance
on qualified tax professionals to properly advise it in the preparation of its Federal
income tax returns for Year 2 and Year 3, the required election statement was
inadvertently omitted from Taxpayer's initial return. Accordingly, Taxpayer will be
considered to have acted reasonably and in good faith.

Moreover, Taxpayer should not be deemed to have acted unreasonably or in a manner
lacking good faith. Taxpayer's representations indicate that none of the circumstances
listed in section 301.9100-3(b)(3) apply.

Based on Taxpayer's representation of the facts, granting an extension of time to file the
election will not prejudice the interests of the government under section 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 would have
resulted had Taxpayer timely made the election (taking into account the time value of
money). Further, Taxpayer has represented that the period of limitations on
assessment under section 6501(a) has not closed for Taxpayer's taxable Year 2 or Year
3.

                                      CONCLUSION

Based solely on the facts submitted and the representations made, we conclude that
Taxpayer acted reasonably and in good faith, and that granting the request will not
prejudice the interests of the government. Accordingly, the requirements of sections
301.9100-1 and 301.9100-3(b)(1) of the regulations have been satisfied.

Taxpayer is granted an extension of time until 60 days following the date of this ruling to
file amended tax returns electing safe harbor treatment of its success-based fees under
section 4.01(3) of Rev. Proc. 2011-29. The amended returns must include an election
statement stating that Taxpayer is electing the safe harbor for success-based fees,
identifying the transactions, and stating the success-based fee amounts that are
deducted and capitalized.

The rulings contained in this letter are based upon information and representations
submitted by Taxpayer and accompanied by a penalty of perjury statement executed by
appropriate parties. 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.

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.

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 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.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representatives. We are also sending a copy of this letter
to the appropriate operating division director. Enclosed is a copy of the letter ruling
showing the deletions proposed to be made in the letter when it is disclosed under
section 6110 of the Code.

                                          Sincerely,

                                          IAN D. HEMINSLEY
                                          Assistant to Branch Chief, Branch 2
                                          Office of the Associate Chief Counsel
                                          (Income Tax & Accounting)

Enclosure: Copy of the letter for section 6110 purposes

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