Success-based fees: IRS Revenue Procedure & Directive offer favorable taxpayer developments.

• Author: Hurok, Jeffrey M.
• Position: IRS NEWS

revenue Procedure 2011-29, released by 1 he IRS April 8, addresses the federal income tax treatment of success-based fees incurred in connection with certain acquisitive transactions for fees incurred within taxable years ending on or after April 8, 201 I.

Rev. Proc. 201 1-29 provides a safe harbor that may simplify the analysis of and potentially results in favorable treatment for fees within its scope1. However, one must keep in mind that it does not address the treatment of all acquisition cost issues. Also, a taxpayer may be entitled to more favorable treatment than the revenue procedure provides.

Accordingly Rev. Proc. 201 1-29 complements, rather than replaces, an analysis of acquisition-related costs.

Soon after it issued Rev. Proc. 2011-29. the IRS directed the Large Business & International (LB&I) examiners July 28 not to challenge a taxpayer's treatment of success-based fees paid or incurred in connection with transactions described within Rev; Proc. 2011-29 for fees incurred in taxable years ended before April 8, 2011--provided that the taxpayer's original return position to capitalize such fees consistent with the safe harbor amount described in Rev. Proc. 2011-29.

Tax Treatment of Transaction Related Costs

Treasury Regulation Sec. 1.263(a)-5 (the Transaction Cost Regulations), generally required a taxpayer to capitalize costs incurred to investigate or otherwise pursue a variety of corporate transactions, including certain stock acquisitions, asset acquisitions, reorganizations, IPOs and borrowings.

One exception: A taxpayer is not required to capitalize all costs incurred to investigate or pursue certain acquisitive transactions, generally including taxable asset acquisitions of a trade or business, certain taxable stock acquisitions and certain tax-free reorganizations (defined to be covered transactions).

This exception requires a taxpayer to capitalize costs incurred to investigate or otherwise pursue a covered transaction only if the fees relate to activities performed on or after the "bright line date" or if such fees are for certain "inherently facilitaive" activities, regardless of when they occur.

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Put another way; (he Transaction Cost Regulations don't require capitalization for fees and costs incurred before the bright line date and are for non-inherently facilit.ai.ivc activities.

The Transaction Cost Regulations generally define the bright line dale as the earlier of the elate that the parties enter into a letter of intent, exclusivity or similar arrangement, or the date that a taxpayer's board of directors authorizes (he material terms of the deal.

The Transaction Cost Regulations define inherently facilitative activities to be:

* Securing a fairness...