Tax News Update    Email this document    Print this document  

October 2, 2023

IRS continues to focus on the proper entity to take into account sell-side transaction costs in a ruling granting target's request to make a late success-based fee election

  • The IRS continues to review the location of transaction costs in granting taxpayer an extension of time to make a safe harbor election for a success-based fee.
  • The IRS granted an extension of time to a taxpayer to elect the safe harbor under Revenue Procedure 2011-29.
  • The IRS is continuing to look closely at who the proper party is for taking into account costs paid to facilitate the sale of property for US federal income tax purposes.

In PLR 202335013, the IRS granted a privately held corporation an extension of time to make the safe harbor election described in Revenue Procedure 2011-29 for a success-based fee paid on the completion of a reverse merger transaction.

This Tax Alert is one in a series discussing recent IRS rulings involving the proper entity to take transaction costs into account. You can read the previous Tax Alerts here and here.


Taxpayer submitted a request under Treas. Reg. Sections 301.9100-1 and -3 for an extension of time to make a safe harbor election (Election) under Revenue Procedure 2011-29. The safe harbor election generally allows eligible taxpayers to treat 70% of a success-based fee as non-facilitative of a transaction (i.e., deductible) and the remaining 30% as facilitative of a transaction (i.e., capitalizable).

The transaction

Taxpayer was a privately held corporation that uses an accrual method of accounting on a calendar year basis. Taxpayer and Buyer entered into an agreement (Merger Agreement) whereby Taxpayer was acquired in a reverse merger by a domestic corporation (Merger Sub), a wholly owned subsidiary of Buyer (Transaction). Taxpayer survived the merger and became a wholly owned subsidiary of Buyer. The Transaction was treated as a taxable acquisition of stock for US federal income tax purposes. No selling shareholder (Sellers) had a controlling interest in the Taxpayer before the Transaction.

Merger Sub did not engage in any activity other than to effectuate the Transaction and did not issue debt to effectuate the merger. Further, Taxpayer's funds were not used to acquire Taxpayer's stock; Taxpayer did not assume Merger Sub or Buyer's debt; and Taxpayer did not incur debt related to the Transaction.

Engagement with financial advisor

Before the Transaction, Taxpayer hired a financial advisor (Financial Advisor) to perform several services on Taxpayer's behalf in relation to a possible transaction. In exchange for the services, Taxpayer agreed to pay the Financial Advisor a contingent fee equal to a percentage of the aggregate value of the Transaction at close out of sales proceeds as mandated by the Merger Agreement (Success Fee). Upon close of the Transaction, the Success Fee was paid to the Financial Advisor out of sales proceeds which, according to Taxpayer, is appropriately viewed as received by the Sellers and then contributed down to Taxpayer as a capital contribution.

Historic tax advisor and missed election

Taxpayer hired its previous advisor (Historic Advisor) to prepare its pre-close return, but Historic Advisor was unaware of the Success Fee and, therefore, did not inform Taxpayer about possibly making the Election under Revenue Procedure 2011-29. As a result, the Taxpayer did not treat 70% of the Success Fee as non-facilitative of the Transaction, nor did it make the safe harbor election under Revenue Procedure 2011-29.


The IRS granted the Taxpayer's request to make a late election under Revenue Procedure 2011-29 after reviewing the requirements under the 301.9100 regulations and location of the Success Fee.

Please refer to our previous Alerts in the series for the statutory requirements of 9100 relief.

The IRS considered the rules around Treas. Reg. Section 1.263(a)-1(e)(1). Treas. Reg. Section 1.263(a)-1(e)(1) requires commissions and other transaction costs paid to facilitate the sale of property to be capitalized and used to reduce the amount realized in the tax year in which the sale occurs. They are not currently deductible under IRC Section 162 or IRC Section 212.

Further, the IRS considered the application of the "direct and proximate benefit" test. Particularly, the IRS noted that for a taxpayer to deduct a cost under IRC Section 162, the expense must be "directly connected with" or have "proximately resulted from" a taxpayer's business activity. Citing to Deputy v. du Pont, the IRS provided that, in related party scenarios, courts generally focus on the connection of the expense to the respective business of the parties when determining which party should take the cost into account.1The IRS noted that increased scrutiny is given to whether an expense is that of a corporation or a controlling shareholder, but acknowledged that expenses can be properly taken into account by the target corporation based on the language in Treas. Reg. Section 1.263(a)-5. Treas. Reg. Section 1.263(a)-5 only applies to costs paid or incurred by a target corporation (i.e., it's not automatically the case that the IRS will treat transaction expenses incurred by the target corporation as providing a direct and proximate benefit to the shareholder(s)). Citing to INDOPCO, Inc. v. Commissioner, the IRS remarked that it has not generally asserted that costs directly paid by a non-majority controlled public target corporation must be treated as the costs of selling shareholders and not as the costs of target corporation.2

After review of the facts and representations made by the Taxpayer, the IRS ruled Taxpayer acted reasonably and in good faith and met the requirements for 9100 relief. The IRS granted Taxpayer a 60-day extension from the date of the ruling to elect the safe harbor for the Success Fee.


Like PLR 202308010 and PLR 202324001, this ruling demonstrates the IRS's continued scrutiny on the location of transaction costs, particularly on the sell side.

Although the IRS did not explicitly say the Success Fee was properly taken into account by the Taxpayer, it implicitly agreed by granting the 9100 relief. Significantly, the IRS remarked in a footnote that none of the Sellers were considered to be a controlling shareholder. This would seem to imply that an important factor in the IRS's evaluation of whether costs should be located at the selling shareholder is whether the selling shareholder has significant control over the target. This follows the conclusion reached in PLR 202308010 where 9100 relief for a missed Revenue Procedure 2011-29 election was denied due to, in the IRS's view, the success fee benefitting the controlling private equity seller rather than the target.

Some may not agree that the "direct and proximate benefit" test is the standard to determine whether the Success Fee is properly taken into account by Taxpayer. The direct and proximate benefit authorities represent an exception to the general rule that a taxpayer may not deduct expenses that are incurred on behalf of another taxpayer as a trade or business expense.3 Pursuant to the general rule, a shareholder and a corporation are treated as separate and distinct from one another, regardless of the level of affiliation,4 and, thus, a payment by shareholder to cover an expense of a corporation is related to the business of the corporation and represents a capital contribution by the shareholder to the corporation rather than expense incurred by the shareholder.5 Under the "direct and proximate benefit" exception, however, if a shareholder pays a corporation's expenses and provides demonstrable proof that the underlying service/activity directly benefited the shareholder's business operations, a deduction may be allowed.6 The better test to determine the location of transaction costs is a facts and circumstances analysis including (i) whether the taxpayer had a legal obligation to incur the expense; (ii) whether the taxpayer bore the economic burden of the expense; and (iii) whether the taxpayer benefitted from the expense.

As the IRS continues to focus on this issue, taxpayers should carefully examine their specific facts and circumstances when determining which party to a transaction is the appropriate entity to take transaction costs into account. Most importantly, this determination is critical to making a valid safe harbor election under Revenue Procedure 2011-29 for success-based fees. Further, timely filing of the safe harbor election under Revenue Procedure 2011-29 is critical as seeking relief under the 301.9100 regulations provides the IRS an opportunity to challenge the location of transaction costs.


Contact Information
For additional information concerning this Alert, please contact:
National Tax – Accounting Periods, Methods, and Credits
   • Allison Somphou (
   • Susan Grais (
International Tax and Transaction Services
   • Amy Sargent (
   • Brian Peabody (

Published by NTD’s Tax Technical Knowledge Services group; Jennifer A Brittenham, legal editor


1 308 U.S. 488, (1940).

2 INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992).

3 Deputy v. du Pont, 308 US 488, (1940).

4 Rink v. Comm'r, 51 T.C. 746, 751 (1969) (referencing du Pont, supra, in stating that "[u]nder the general rule [prohibiting a deduction for paying the expenses of another], not even a majority shareholder is entitled to deduct payments of the corporation's expenses").

5 See Interstate Transit Lines v. Comm'r, 319 US 590 (1943), reh'g denied, 320 US 809 (1943), aff'g 130 F.2d 136 (1942), aff'g 44 B.T.A. 957 (1941).

6 See, e.g., Young & Rubicam v. Comm'r, 410 F.2d 1233 (Ct. Cl. 1969).