IRS grants 60 days to perfect a success-based fee safe-harbor election

Plain-English summary

A corporate group paid success-based fees to three financial consultants in connection with an acquisition of its parent partnership. Revenue Procedure 2011-29 offers a safe harbor that treats 70 percent of qualifying success-based fees as non-facilitative and deductible and requires the remaining 30 percent to be capitalized. The taxpayer prepared the required election statement and its tax adviser prepared the timely return using that 70/30 treatment, but the statement was not attached to the return. The taxpayer discovered the omission while preparing state income tax returns and requested relief before the IRS found it. The IRS concluded that the taxpayer reasonably relied on qualified tax professionals, acted in good faith, and would not gain a lower aggregate tax liability from the late filing. It gave the taxpayer 60 days to file an amended return with the election statement identifying the transaction and the deducted and capitalized fee amounts. The IRS did not decide whether the taxpayer or fees otherwise qualified for the safe harbor or whether other Code provisions barred the claimed treatment.

Ruling snapshot

• Question: May the taxpayer late-file the election statement required for the Revenue Procedure 2011-29 success-based fee safe harbor?
• Outcome: approved (60 days to file an amended return with the required election statement)
• Key authorities: IRC § 263(a); Treas. Reg. §§ 1.263(a)-4, 1.263(a)-5, 301.9100-1, 301.9100-3; Rev. Proc. 2011-29

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 202448003                                             Third Party Communication: None
Release Date: 11/29/2024                                      Date of Communication: Not Applicable
Index Number: 9100.00-00
                                                              Person To Contact:
                                                              ------------------------, ID No. -----------------
-----------------------------------------                     Telephone Number:

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                                                              Refer Reply To:

----------------------------------                            CC:ITA:B02
                                                              PLR-104415-24
                                                              Date:
                                                              August 30, 2024

       TY: ------------------------------------------------------------------------------------------------------
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Legend:

Taxpayer                                     =      -----------------------------------------
Tier Parent                                  =      ---------------------------
Operating Entity                             =      -----------------------------
Majority Acquiror                            =      -------------------------------
Financial Consultant A                       =      ---------------------------------
Financial Consultant B                       =      ---------------------------
Financial Consultant C                       =      -----------------------------------------
$a                                           =      ---------------
$b                                           =      ---------------
$c                                           =      ---------------
$d                                           =      -----------------
Tax Advisor                                  =      ---------------------
%a                                           =      --------
Date 1                                       =      ----------------------
Date 2                                       =      ---------------------------
Date 3                                       =      --------------------------
Year 1                                       =      -------
Year 2                                       =      -------

PLR-104415-24                               2

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

This letter responds to Taxpayer’s letter ruling request dated March 7, 2024, as
supplemented by correspondence submitted on May 10, 2024, May 14, 2024, and July
26, 2024. Taxpayer requests an extension of time pursuant to sections 301.9100-1 and
301.9100-3 of the Procedure and Administration Regulations to make a late election
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 incorporated on Date 1, as a calendar-year corporation using the accrual
method of accounting. Taxpayer is a holding company that serves as the parent of an
affiliated group that files a consolidated Federal income tax return, of which Operating
Entity is a member. Operating Entity manages franchising entities under common
management control. Tier Parent, a Delaware limited partnership, wholly owned
Taxpayer.

In Year 1, Operating Entity engaged Financial Consultants A, B and C (collectively,
Financial Consultants) to assist in and facilitate the acquisition of Tier Parent, with the
objective of creating substantial value for Operating Entity through capture of additional
market share and opportunities for new service operations. Each Financial Consultant
performed a variety of distinct services in connection with the potential acquisition of
Tier Parent. For instance, Financial Consultant A provided due diligence and screening
of potential acquirors, Financial Consultant B prepared and distributed confidential
information presentations to potential acquirors, and Financial Consultant C familiarized
itself with Operating Entity’s operations and participated in meetings with potential
acquirors. Pursuant to its engagement agreements with Financial Consultants A, B and
C, Operating Entity was required to pay each firm a compensatory fee contingent upon
the successful closing of any acquisition of Tier Parent.

On Date 3, pursuant to a Partnership Interest Purchase Agreement (IPA) dated Date 2,
Majority Acquiror acquired %a of Tier Parent and, indirectly, Taxpayer and Operating
Entity (Acquisition Transaction). That same day, pursuant to and in satisfaction of the
engagement agreements, Operating Entity paid Financial Consultants A, B and C
amounts $a, $b, and $c, respectively, totaling $d of success-based fees (collectively,
Success-Based Fees).

Taxpayer engaged Tax Advisor to prepare its Federal income tax return for Year 1 in a
manner consistent with, intending to elect, the safe-harbor provided by Rev. Proc. 2011-
29 (safe-harbor election). Taxpayer prepared and provided Tax Advisor with a Rev.
Proc. 2011-29 election statement (required election statement) to attach to its timely
filed return for Year 1. Tax Advisor prepared Taxpayer’s timely filed return in a manner
that complied with the substantive requirements of Rev. Proc. 2011-29 by claiming a
deduction for 70 percent of the Success-Based Fees paid to Financial Consultants and

PLR-104415-24                               3

capitalizing the remaining 30 percent. The required election statement, however, was
not attached to that return.

While preparing its state-level income tax returns in Year 2, Taxpayer determined that
the required election statement was not included as an attachment to its timely filed
Year 1 Federal income tax return.

On March 7, 2024, Taxpayer filed the present letter ruling request, seeking an extension
of time to file the required election statement for Taxpayer’s Taxable Year 1, pursuant to
sections 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations.
Taxpayer represents that the period of limitation on assessment under section 6501(a)
of the internal Revenue Code (Code) for Taxpayer’s Taxable Year has not expired.

                                          LAW

Section 263(a)(1) 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, 575-76 (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.

PLR-104415-24                                4


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 states 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.

It is this last requirement that Taxpayer requests permission to accomplish with this
ruling request. Taxpayer requests permission with this ruling request to attach the
statement required by section 4.01(3) of Rev. Proc. 2011-29 to its return, by amending
its original filed return and superseding it with a return with the proper election
statement completed and attached.

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

PLR-104415-24                               5

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;

PLR-104415-24                                  6

(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 Acquisition Transaction was
a taxable acquisition of an ownership interest of Taxpayer within the meaning of section
267(b) of the Code, and section 1.263(a)-5(a)(3) and (e)(3)(ii) of the Income Tax
Regulations. That transaction, then, is considered a covered transaction 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 Acquisition Transaction, Taxpayer incurred and subsequently paid $d of
Success-Based Fees during Taxpayer’s taxable Year 1. Taxpayer complied with the
substantive requirements for making the safe-harbor election by deducting 70 percent
and capitalizing 30 percent of the Success-Based Fees on its original Year 1 Federal
income tax return. Taxpayer, however, failed to perfect its safe-harbor election by
inadvertently omitting the required election statement from that return. It is with respect
to that failure that Taxpayer requests an extension of time to amend its original filed
return, to supersede that original return with one that includes 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 Year 1.

PLR-104415-24                               7


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 attach the election to its electronically filed
Federal income tax return for Year 1, the required election statement was inadvertently
omitted from Taxpayer’s original 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 any taxable years that would have
been affected had Taxpayer timely made the election.

                                    CONCLUSION

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

Taxpayer is granted an extension of time until 60 days following the date of this ruling to
file an amended tax return electing safe harbor treatment of its success-based fees
under section 4.01(3) of 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.

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.

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 whether (a) Taxpayer is otherwise
eligible or otherwise qualifies to make the Rev. Proc. 2011-29 election; (b) the success-

PLR-104415-24                                            8

based fees are properly treated, in whole or part, as a deductible or capitalizable cost of
Taxpayer; (c) the success-based fees are in fact success-based fees under Rev. Proc.
2011-29; or (d) the success-based fees are subject to §§ 162(k), 195 or any other Code
provision or regulation that would preclude the deduction or capitalization thereof.
Further, no opinion is expressed as to the tax treatment of the Acquisition Transaction,
or with respect to the treatment of the tax items of Tier Parent, Majority Acquiror, or any
current or former owners of Tier Parent.

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 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.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative. 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 Heminsley
                                                   Assistant to the 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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