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was not an official pronouncement of services they perform in exchange for a In IRS Letter Ruling 201717002, the
law and is not permitted to be used, given fee, making it difficult for taxpay- taxpayer was the parent of a consolidated
cited, or relied on as such. However, ers to establish that a milestone payment group that incurred success-based fees in
it gave some taxpayers comfort that does or does not relate to inherently a transaction that cut off its tax year. The
the simplified approach of Rev. Proc. facilitative services. In essence, taxpayers taxpayer’s tax department erroneously
2011-29 could also be applied to certain analyzing milestone payments are often determined the due date of its short-
milestone payments. faced with the same absence of informa- period tax year, causing the taxpayer to
In a memorandum dated Jan. 26, tion that made analyzing success-based file late the return for the short period.
2022 (LB&I-04-0122-0002), LB&I fees so difficult before the publication of The taxpayer included the Rev. Proc.
announced the withdrawal of the 2014 the Rev. Proc. 2011-29 safe harbor. 2011-29 election statement in its late-
directive. In the memorandum, LB&I filed return and applied the safe-harbor
explained that the reason for the with- Timely filed elections allocation to the success-based fees. In
drawal was to provide for consistent As discussed above, taxpayers that do not the letter ruling, the IRS noted that Rev.
treatment of compliance issues and to apply the Rev. Proc. 2011-29 safe harbor Proc. 2011-29 requires the statement
address “egregious positions.” The with- to a success-based fee must satisfy a doc- “to be attached to the original federal
drawal of the directive was effective Jan. umentation requirement to treat any part income tax return for the taxable year
26, 2022. of a success-based fee as not facilitating a the success-based fee is paid or incurred”
Even if milestone payments are cred- transaction. The documentation support- and concluded that since the safe-harbor
itable against success-based fees, they are ing this conclusion must be completed election had been properly filed, 9100
generally required to be paid regardless “on or before the due date of the taxpay- relief was not necessary for an effec-
of whether a transaction closes. Thus, er’s timely filed original federal income tive election.
taxpayers face an uphill battle in arguing tax return (including extensions) for the Letter Ruling 201741011 also in-
that these amounts are success-based taxable year in which the transaction clos- volved a taxpayer that incurred success-
fees within the definition of Regs. Sec. es” (Regs. Sec. 1.263(a)-5(f)). Rev. Proc. based fees in a transaction that cut off
1.263(a)-5(f) (i.e., “an amount paid that 2011-29, on the other hand, provides that its tax year. This taxpayer filed its short-
is contingent on the successful closing the taxpayer must attach “a statement to period return late because its accounting
of a transaction”). Indeed, this was the its original federal income tax return for firm inadvertently failed to file an exten-
result faced by the taxpayer in Chief the taxable year the success-based fee is sion. In this letter ruling, the IRS stated
Counsel Advice (CCA) 201234027, in paid or incurred, stating that the taxpayer that because the taxpayer’s return was
which the IRS concluded that milestone is electing the safe harbor, identifying the not timely filed, “the safe harbor elec-
payments were not eligible for the safe transaction, and stating the success-based tion described in section 4 of Rev. Proc.
harbor because they were “guaranteed fee amounts that are deducted and capi- 2011-29 for success-based fees associ-
payments incurred upon the occurrence talized.” There is no explicit requirement ated with this tax return was not timely
of a specified milestone or upon some that the election statement be attached to filed.” Based on this conclusion, the IRS
other date or event.” a “timely” return, only that it be attached granted 9100 relief to the taxpayer, giv-
Without application of Rev. Proc. to an “original” return. ing the taxpayer an extension of time to
2011-29, milestone payments are sub- Based on the plain language of Rev. file the Rev. Proc. 2011-29 statement.
ject to the same regime as other costs Proc. 2011-29, some taxpayers may Given these rulings, it is difficult to
incurred in investigating a covered take the position that they can make a ascertain the IRS’s position on whether
transaction. One element of concluding safe-harbor election by attaching a state- a Rev. Proc. 2011-29 statement in
that costs are not facilitative under this ment to a late (but original) tax return. an original but not timely return can
regime is establishing that such costs are Alternatively, taxpayers that read an be effective.
not “inherently facilitative,” meaning the implicit timeliness requirement into Rev.
service provider was not paid for services Proc. 2011-29 may conclude that they Debt-issuance services
on a list of proscribed activities that need a ruling from the IRS under the The Rev. Proc. 2011-29 safe harbor only
includes securing a fairness opinion re- late-election relief provisions of Regs. applies to success-based fees for “services
lated to the transaction and negotiating Sec. 301.9100-3 to make a valid election performed in the process of investigat-
the structure of the transaction (among (9100 relief). This ambiguity is compli- ing or otherwise pursuing” a covered
many others). In practice, investment cated by a pair of 2017 IRS letter rulings transaction. It is possible, however, that a
banks often do not provide taxpayers that appear to reach contradictory con- success-based fee compensates a service
with detailed records of the various clusions on this question. provider for services outside this scope.

16 March 2023 The Tax Adviser