Success-based fees: Rev. Proc. 2011-29 safe harbor.

On March 21, 2013, TEI submitted comments to the IRS urging it to avoid creating exceptions to the safe harbor for "success-based" fees and include accounting and legal fees, among others, as expenses eligible for the safe harbor of Rev. Proc. 2011-29. The Institute's letter follows up on a January 18, 2013, letter urging the IRS to re-examine Chief Counsel Advice 201234027 and include nonrefundable milestone payments to investment bankers in the safe harbor afforded to taxpayers by the IRS procedure. (The January 2013 letter is reprinted in the February-March 2013 issue of The Tax Executive, beginning at page 49.) The Institute's comments were prepared under the aegis of the Institute's Federal Tax Committee, whose chair is Robert L. Howren of BlueLinx Corporation. Institute Senior Tax Counsel Jeffery P. Rasmussen coordinated the preparation of the comments. The letter below cross references a July 2007 submission, relating to Notice 2004-18, that urges the IRS and Treasury Department to create a 15-year amortization period for all acquisitive transaction costs. The 2007 letter is linked to the website version of this submission at www.tei.org and is also reprinted in the July-August 2007 issue of The Tax Executive, beginning at page 373. On April 29, 2013, the Large Business & International Division issued a Directive (LB&I-04-0413-002) limiting agents' examinations of nonrefundable milestone payments upon a taxpayer's satisfaction of certain conditions.

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Tax Executives Institute is the preeminent international association of in-house business tax executives with 7,000 members representing 3,000 of the leading corporations in the United States, Canada, Europe, and Asia. As a professional association, TEI is firmly committed to maintaining a tax system that works--one that is administrable and with which taxpayers can comply. Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises.

Discussion

As we noted in the January 2013 letter, under Treas. Reg. [section] 1.263(a)-5, amounts paid to facilitate a business acquisition or reorganization must be capitalized. Such costs include borrowing costs as well as costs paid in the process of investigating or otherwise pursuing the transaction.

An amount paid that is contingent on the successful closing of a transaction, known as a "success-based fee," is...