Late safe harbor elections approved for acquisition fees

Plain-English summary

A domestic limited partnership paid success-based fees for five taxable asset acquisitions spanning two tax years. Its returns generally deducted 70 percent and capitalized 30 percent of four fees but omitted the election statements required by Revenue Procedure 2011-29, while a fifth fee was fully capitalized and another was reported in the wrong year. The partnership represented that it sought relief before the IRS discovered the failures, reasonably relied on qualified tax professionals, and would not obtain a lower aggregate tax liability than if the elections had been timely. The IRS found that the partnership acted reasonably and in good faith and that relief would not prejudice the government. It granted 60 days to amend both years' returns, make separate safe harbor elections for all five fees, and move the fee associated with the later closing to the proper year.

Ruling snapshot

• Question: May the partnership make late Revenue Procedure 2011-29 safe harbor elections for success-based fees from five acquisitions?
• Outcome: Approved, with 60 days to amend the affected returns and file the required election statements
• Key authorities: IRC §§ 263, 446; Treas. Reg. §§ 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: 202532002 Third Party Communication: None
Release Date: 8/8/2025 Date of Communication: Not Applicable

Index Number: Person To Contact:
162.00-00, 263.00-00, 9100.00-00 ------------------------, ID No.
-----------------
-------------------------------------- Telephone Number:
---------------------- ---------------------
--------------------------- Refer Reply To:
---------------------------- CC:ITA:B03
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Date:
May 08, 2025

LEGEND:

Taxpayer = -------------------------------------
Predecessor = ------------------------------
Investor = -------------------------------------
Business = ------------------------
Consultant A = --------------------------------------
Consultant B = ------------------------------------------------
Business 1 = --------------------------------------
Business 2 = ------------------------------------------
Business 3 = -------------------------
Business 4 = -------------------------------------------
Business 5 = ---------------------------------------
Amount 1 = -------------
Amount 2 = -------------
Amount 3 = -------------
Amount 4 = -------------
Amount 5 = -------------
Date = ----------------------
Date 1 = -------------------
Date 2 = ------------------
Date 3 = --------------------
Date 4 = ---------------------------
Date 5 = ----------------------
Year 1 = -------
Year 2 = -------
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Year 3 = -------

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

This letter responds to a request for a private letter ruling dated Date, submitted by
Taxpayer. In the letter ruling request and subsequent submissions, Taxpayer requests
an extension of time pursuant to §§ 301.9100-1 and 301.9100-3 of the Procedure and
Administration Regulations to make the safe harbor election provided by Rev. Proc.
2011-29, 2011-1 C.B. 746 for five transactions. Taxpayer requests relief for Year 1 for
four transactions, and Year 2 for one transaction.

                       FACTS AND REPRESENTATIONS

Taxpayer makes the following representations:

Taxpayer is a domestic limited partnership. Taxpayer employs the accrual method of
accounting on a calendar year basis.

In Year 3, Predecessor contributed its Business to Taxpayer in exchange for equity in
Taxpayer. Predecessor subsequently sold some of its equity in Taxpayer to Investor.

Overview of Acquisitions and Success-Based Fees

Taxpayer is a party to an agreement with Consultant A pursuant to which Consultant A
identified potential acquisition targets. A written agreement was originally entered into
by Predecessor and Consultant A, and Taxpayer assumed Predecessor’s rights and
responsibilities under this agreement when Predecessor contributed Business to
Taxpayer. Taxpayer is also a party to an oral agreement with Consultant B, pursuant to
which Consultant B identified a potential asset acquisition from Business 4. The oral
agreement between Taxpayer and Consultant B arose from discussions among
Taxpayer, Consultant B, and Investor in connection with this potential asset acquisition.

Pursuant to its agreements with Consultant A and Consultant B, Taxpayer was required
to pay Consultant A and Consultant B a fee contingent upon the successful closing of
certain transactions; the amount of Consultant A’s fees and Consultant B’s fees would
be calculated as a percentage of the aggregate consideration received from the
applicable transaction.

During Year 1 and Year 2, Consultant A and Consultant B provided Taxpayer with
services to investigate or otherwise pursue five different transactions with five different
entities: Business 1, Business 2, Business 3, Business 4, and Business 5.

On Date 1,Taxpayer closed a transaction in which it acquired assets constituting a trade
or business from Business 1. As a result of the successful closing of the transaction,
Taxpayer incurred and paid a success-based fee to Consultant A in the amount of
Amount 1 (“Fee 1”). Taxpayer deducted 70 percent and capitalized 30 percent of Fee 1
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on its Year 1 federal income tax return; however, Taxpayer failed to attach the required
election statement pursuant to Rev. Proc. 2011-29 to such tax return.

On Date 2, Taxpayer closed a transaction in which it acquired assets constituting a
trade or business from Business 2. As a result of the successful closing of the
transaction, Taxpayer incurred and paid a success-based fee to Consultant A in the
amount of Amount 2 (“Fee 2”). Taxpayer deducted 70 percent and capitalized 30
percent of Fee 2 on its Year 1 federal income tax return; however, Taxpayer failed to
attach the required election statement pursuant to Rev. Proc. 2011-29 to such tax
return.

On Date 3, Taxpayer closed a transaction in which it acquired assets constituting a
trade or business from Business 3. As a result of the successful closing of the
transaction, Taxpayer incurred and paid a success-based fee to Consultant A in the
amount of Amount 3 (“Fee 3”). Taxpayer deducted 70 percent and capitalized 30
percent of Fee 3 on its Year 1 federal income tax return; however, Taxpayer failed to
attach the required election statement pursuant to Rev. Proc. 2011-29 to such tax
return.

On Date 4, Taxpayer closed a transaction in which it acquired assets constituting a
trade or business from Business 4 on Date 4. As a result of the successful closing of the
acquisition of assets of Business 4, Taxpayer incurred and paid a success-based fee to
Consultant B in the amount of Amount 4 (“Fee 4”). Taxpayer capitalized 100 percent of
Fee 4 on its Year 1 federal income tax return and did not attach the required election
statement pursuant to Rev. Proc. 2011-29 to such tax return.

On Date 5, Taxpayer closed a transaction in which it acquired assets constituting a
trade or business from Business 5. As a result of the successful closing of the
transaction, Taxpayer incurred and paid a success-based fee to Consultant A in the
amount of Amount 5 (“Fee 5”). Despite the fact that this transaction closed in Year 2,
Taxpayer deducted 70 percent and capitalized 30 percent of Fee 5 on its Year 1 federal
income tax return; however, Taxpayer failed to attach the required election statement
pursuant to Rev. Proc. 2011-29 to such tax return.

Taxpayer incurred and paid Fee 1, Fee 2, Fee 3, Fee 4, and Fee 5 (collectively, the
“Success-Based Fees”) as a result of the completed acquisition of assets of Business
1, Business 2, Business 3, Business 4, and Business 5. Taxpayer represents that
(A) each of the transactions were taxable acquisitions in which Taxpayer acquired
assets that constitute a trade or business, and (B) the payments of the Success-Based
Fees were contingent upon the successful closing of these transactions.

Circumstances Surrounding Missed Elections

Taxpayer’s in-house accounting department prepared Taxpayer’s U.S. federal income
tax return for Year 1. Consistent with Taxpayer’s established procedures, the employee
responsible for preparation of Taxpayer’s return (“Employee”) relied on a summary
schedule provided by Taxpayer’s accounting department to prepare the tax return. The
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summary schedule listed various transaction-related fees but did not include supporting
invoices or indicate which of these fees, if any, were success-based.

When preparing Taxpayer’s Year 1 return, Employee recognized that the fees paid to
Consultant A were success-based fees eligible for the safe harbor election under Rev.
Proc. 2011-29, and therefore Taxpayer deducted 70 percent and capitalized 30 percent
of Fee 1, Fee 2, Fee 3, and Fee 5, consistent with Rev. Proc 2011-29. Employee,
however, failed to attach the required election statements to Taxpayer’s original federal
income tax return for Year 1 because Employee was not aware of the requirement in
Rev Proc 2011-29 to attach an election statement to the original federal income tax
return.

When preparing Taxpayer’s Year 1 return, Employee did not recognize that the fees
paid to Consultant B were success-based fees eligible for the safe harbor election under
Rev. Proc. 2011-29, and therefore Taxpayer capitalized 100 percent of Fee 4 on its
Year 1 return and did not include the election statement required by Rev. Proc. 2011-
29.

After Taxpayer filed its Year 1 return, Taxpayer’s partnership representative discovered
that Taxpayer (A) failed to include the required election statements and (B) inadvertently
capitalized 100 percent of Fee 4. In addition, after Taxpayer filed its Year 2 return,
Taxpayer determined Fee 5 was improperly accounted for in Year 1, and should be
accounted for in Year 2 because the related transaction closed in Year 2. Accordingly,
Taxpayer is seeking an extension of time to make a late election under Rev. Proc.
2011-29 with respect to the Success-Based Fees incurred in connection with the
services provided by Consultant A and Consultant B pursuant to §§ 301.9100-1 and
301.9100-3 of the Procedure and Administration Regulations

With regard to Fee 1, Fee 2, Fee 3, and Fee 4, the related transactions closed in Year
1, and therefore Taxpayer requests an extension of time to make the safe harbor
election for these fees on its Year 1 return. With regard to Fee 5, because the related
transaction closed in Year 2, Taxpayer requests an extension of time to make the safe
harbor election for Fee 5 on its Year 2 return.

Taxpayer represents that it requested relief before the failure to make the regulatory
elections were discovered by the Service and that it reasonably relied on qualified tax
professionals, and the tax professionals failed to make, or advise Taxpayer to make, the
election. Taxpayer has also represented that none of the circumstances listed in
§ 301.9100-3(b)(3) apply.

   Taxpayer has represented that, for each election, granting relief would not result

in a lower tax liability in the aggregate for all taxable years affected by each election
than Taxpayer would have had if the election had been timely made. Furthermore,
Taxpayer has represented that the taxable years in which the regulatory elections
should have been made and any taxable years that would have been affected had it
been timely made, are not closed by the period of assessment.
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                                    LAW

Section 263(a)(1) of the Code and § 1.263(a)-2(a) of the Income Tax Regulations
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, 112 S. Ct. 1039, 117 L. Ed. 2d 226 (1992);
Woodward v. Commissioner, 397 U.S. 572, 575-576, 90 S. Ct. 1302, 25 L. Ed. 2d 577
(1970).

Under § 1.263(a)-5, a taxpayer must capitalize an amount paid to facilitate the business
acquisition or reorganization transactions 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 of the facts and circumstances. See § 1.263(a)-5(b)(1).

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) (i.e., a success-based fee) is
presumed to facilitate the transaction. 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.

A taxpayer's method for determining the portion of a success-based fee that facilitates a
transaction and the portion that does not facilitate the transaction is a method of
accounting under § 446.

Because the treatment of success-based fees was a continuing subject of controversy
between taxpayers and the Service, the Service published Rev. Proc. 2011-29.
Revenue Procedure 2011-29 provides a safe harbor election for allocating success-
based fees paid in business acquisitions or reorganizations described in § 1.263(a)-
5(e)(3). In lieu of maintaining the documentation required by § 1.263(a)-5(f), this safe
harbor permits electing taxpayers to treat 70 percent of the success-based fee as an
amount that does not facilitate the transaction, meaning that amount can be deducted.
The remaining 30 percent of the fee must be capitalized as an amount that facilitates
the transaction.

Section 4.01 of Rev. Proc. 2011-29 provides that the Service will not challenge a
taxpayer's allocation of success-based fees between activities that facilitate a
transaction described in § 1.263(a)-5(e)(3) (costs that must be capitalized) and activities
that do not facilitate the transaction (costs that may be deducted) if the taxpayer: (1)
treats 70 percent of the amount of the success-based fee as an amount that does not
facilitate the transaction and thus may be deducted; (2) capitalizes the remaining
amount of the success-based fee as an amount which 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
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harbor, identifying the transaction, and stating the success-based fee amounts that are
deducted and capitalized pursuant to the safe harbor election.

The revenue procedure applies to covered transactions described in § 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 § 267(b) or § 707(b); or (iii) a reorganization described in § 368(a)(1)(A),
(B), or (C) or a reorganization described in § 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 § 354 or § 356 (whether the taxpayer is the acquirer or the target in the
reorganization).

Sections 301.9100-1 through 301.9100-3 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(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 301.9100-1(b) defines a “regulatory
election” as an election whose due date is prescribed by a regulation published in the
Federal Register, or a revenue ruling, revenue procedure, notice, or announcement
published in the Internal Revenue Bulletin.

Section 301.9100-3(a) provides that 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 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) provides that, in general, a taxpayer is 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 IRS; (2) failed to make the election
because of intervening events beyond the taxpayer's control; (3) failed to make the
election because, after exercising reasonable diligence, the taxpayer was unaware of
the necessity for the election; (4) reasonably relied on the written advice of the IRS; or
(5) reasonably relied on a qualified tax professional, and the tax professional failed to
make, or advise the taxpayer to make, the election.

Section 301.9100-3(b)(3) provides that a taxpayer is deemed to have not 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
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taxpayer requests relief 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.

Section 301.9100-3(c)(1)(i) provides 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. Section 301.9100-3(c)(1)(ii) provides 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.

                                ANALYSIS

Taxpayer’s elections are regulatory elections as defined in § 301.9100-1(b) because the
due dates of the elections are prescribed in § 1.263(a)-5(f) of the Income Tax
Regulations. The Commissioner has the authority under §§ 301.9100-1 and 301.9100-3
to grant an extension of time to file a late regulatory election.

Taxpayer represents that for federal income tax purposes, the transactions were taxable
acquisitions by Taxpayer of assets that constitute a trade or business. Thus, the
transactions qualify as covered transactions described in § 1.263(a)-5(e)(3)(i). The
information provided and representations made by Taxpayer establish that Taxpayer
acted reasonably and in good faith. Taxpayer has represented that it requested relief
before the failures to make the regulatory elections were discovered by the Service and
that it reasonably relied on a qualified tax professional, and the tax professional failed to
make, or advise Taxpayer to make, the elections. Taxpayer has also represented that
none of the circumstances listed in § 301.9100-3(b)(3) apply.

Further, based on the information provided and representations made by Taxpayer,
granting an extension will not prejudice the interests of the government under
§ 301.9100-3(c)(1). Taxpayer has represented will not have a lower tax liability in the
aggregate for all taxable years affected by each election than Taxpayer would have had
if the elections had been timely made. In addition, the taxable years in which each
regulatory election should have been made and any taxable years that would have been
affected by the election had it been timely made will not be closed by the period of
limitations on assessment under § 6501(a) before Taxpayer’s receipt of the ruling
granting an extension of time to make a late election.

                                CONCLUSION

Based solely on the facts and representations 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.
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Taxpayer is granted an extension of 60 days from the date of this ruling to file an
amended return for Year 1, electing safe harbor treatment under section 4.01(3) of Rev.
Proc. 2011-29 for Fee 1, Fee 2, Fee 3, and Fee 4 on its Year 1 tax return. The Year 1
amended return must include four election statements stating that Taxpayer is electing
the safe harbor for each of Fee 1, Fee 2, Fee 3, and Fee 4, identifying the associated
transactions, and stating the success-based fee amounts that are deducted and
capitalized pursuant to each election.

Taxpayer is also granted an extension of 60 days from the date of this ruling to (A) file
an amended return for Year 1, so that Fee 5 is no longer accounted for on its Year 1 tax
return, and (B) file an amended return for Year 2, electing safe harbor treatment under
section 4.01(3) of Rev. Proc. 2011-29 for Fee 5 on its Year 2 tax return. The Year 2
amended return must include an election statement stating that Taxpayer is electing
safe harbor treatment for Fee 5, 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 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, including whether Taxpayer properly included the correct costs as success-
based fees subject to the retroactive election, or whether Taxpayer's transactions were
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 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,

                                                          Natasha M. Mulleneaux
                                                          Senior Technician Reviewer, Branch 3
                                                          Office of the Associate Chief Counsel
                                                          (Income Tax and Accounting)

Enclosure: Copy for § 6110 purposes
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