Nonrefundable milestone fees do not qualify as success-based.

• Author: Koppel, Michael D.

In the landmark case INDOPCO, Inc., 503 U.S. 79 (1992), the Supreme Court ruled that expenses incurred by a target company in a friendly acquisition should be capitalized. Ever since that ruling, the IRS and taxpayers have argued over what fees should be included. Largely as a result of INDOPCO, the IRS issued Regs. Sec. 1.263(a)-4(b), which indicates the following should be capitalized:

1. Amounts paid to acquire or create intangible assets.

2. Amounts paid to create or enhance separate and distinct intangible assets, i.e., property interests with ascertainable value protected under state, federal, or foreign law that are capable of being sold, transferred, or pledged, and are separate from a trade or business. (Amounts to create computer software or package design are not included.)

3. Amounts paid to create or enhance future benefits identified as intangibles requiring capitalization, based on published guidance in the Federal Register or an Internal Revenue Bulletin.

4. Amounts facilitating the acquisition or creation of intangible assets.

However, there was still much confusion as to what should be capitalized and what could be deducted as a business expense. The IRS issued Rev. Proc. 201129, which allows a business to expense 70% of "success-based fees," meaning amounts that are contingent on the successful closing of a covered...