IRS Grants Extension for Late Success-Based Fee Elections Under Rev. Proc. 2011-29

The $2M Oversight: Taxpayer’s Late Election Request Highlights Critical Compliance Gap

A publicly traded corporation faced potential disallowance of $2 million in deductions after its tax return preparer omitted a required election statement for capitalizing success-based fees under Rev. Proc. 2011-29. The IRS granted an extension under §§ 301.9100-1 and 301.9100-3, ruling that the taxpayer’s reliance on professional advice constituted reasonable cause. The case underscores the risks of delegating regulatory elections to preparers and the IRS’s willingness to grant relief when taxpayers demonstrate good faith.

The Facts: A Costly Oversight

A publicly traded corporation engaged financial consultants to assist in acquiring two subsidiaries, Subsidiary A and Subsidiary B. Each acquisition triggered success-based fees—$a for Subsidiary A and $b for Subsidiary B—paid only upon closing. The taxpayer’s tax return preparer filed the 2021 return, deducting 70% of the fees and capitalizing the remaining 30% under Rev. Proc. 2011-29’s safe-harbor election. However, the preparer failed to attach the required election statement, which must explicitly elect the 70/30 split. The omission went unnoticed until after filing, prompting the taxpayer to request a retroactive extension to submit the missing statement under §§ 301.9100-1 and 301.9100-3.

The Question: Seeking Relief for a Procedural Omission

The taxpayer filed a request under §§ 301.9100-1 and 301.9100-3 for an extension to submit the missing election statement for its 2021 tax return. The statement is required under Rev. Proc. 2011-29 to elect the safe-harbor treatment for success-based fees, allowing a 70% deduction and 30% capitalization. Without it, the IRS could disallow the deductions entirely, treating the full fees as non-deductible capital expenditures under § 263(a). The taxpayer sought relief based on the preparer’s administrative error in omitting the statement.

The Law: Why Success-Based Fees Require Careful Handling

Under § 263(a), costs that provide long-term benefits—such as fees tied to acquisitions—must generally be capitalized rather than deducted. Success-based fees, which are paid only if a deal closes, are presumed to facilitate transactions under § 1.263(a)-5(f), shifting the burden to taxpayers to justify deductions.

To provide clarity, the IRS introduced a safe-harbor election in Rev. Proc. 2011-29. Taxpayers can deduct 70% of success-based fees and capitalize the remaining 30%, but only if they attach a Required Election Statement to their original tax return. This statement must specify the transaction, total fees, and the 70/30 allocation. Missing the statement risks disallowing the deduction entirely, as the IRS treats the full fee as a capital expenditure.

The IRS’s Authority: When Can Taxpayers Get a Second Chance?

The IRS may grant extensions for regulatory elections under §§ 301.9100-1 through 301.9100-3, but only if taxpayers meet strict criteria. These regulations cover elections tied to IRS guidance (e.g., Rev. Proc. 2011-29), not statutory elections governed by the tax code.

To qualify for an extension, taxpayers must prove:

1. Reasonable and good faith action: The failure was unintentional, and relief was requested before the IRS discovered the error. Reliance on a tax professional’s mistake may qualify.
2. No prejudice to the government: Granting the extension won’t complicate audits or reduce tax liability.

The IRS denies relief if the taxpayer knew about the election requirement, used hindsight to justify the late request, or the election would only benefit them due to changed circumstances.

The Rationale: Why the IRS Said Yes

The IRS granted the extension under § 301.9100-3 because the taxpayer met all requirements for discretionary relief:

• Good faith: The taxpayer relied on a tax professional who made an administrative error. The omission was discovered and corrected promptly, before the IRS took action.
• No prejudice: The late election wouldn’t reduce the taxpayer’s tax liability or complicate audits. The statute of limitations remained open, and the taxpayer had already reported the fees correctly.
• Substantive compliance: The taxpayer’s allocations and transactions met Rev. Proc. 2011-29’s requirements. The preparer’s error, not taxpayer misconduct, justified the relief.

The Implications: Lessons from a Costly Mistake

This PLR highlights a critical lesson: election statements are not optional. Even if a taxpayer meets all substantive requirements, omitting the required statement can invalidate the election. Taxpayers must treat these statements as mandatory attachments to their returns.

Relief may still be available under § 301.9100-3 if the taxpayer can prove reasonable cause—such as a preparer’s error. However, PLRs are non-binding, so outcomes vary by case. Taxpayers should:

• Confirm with preparers that all required statements are attached.
• Maintain records of communications about deadlines and elections.
• Assume the IRS will scrutinize late filings, even if relief is granted.

Key Takeaways: Avoiding a $2M Mistake

This case offers four key lessons:

1. Follow the rules to the letter: The safe-harbor election under Rev. Proc. 2011-29 requires both a 70/30 allocation and attaching the election statement. Missing either invalidates the election.

2. Don’t assume your preparer got it right: Taxpayers are responsible for verifying that all required statements are attached. Preparer errors don’t guarantee relief.

3. Act fast if you slip up: Extensions under § 301.9100-3 are discretionary. The IRS may grant relief for inadvertent errors, but late elections face scrutiny.

4. Document everything: The IRS rewards good faith efforts. Keep records of communications with preparers and prompt corrective actions to strengthen future claims.