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Examination of Success-Based Fees in the Acquisition of Businesses

July 28, 2011

LB&I Control Number: LB&I -04-0511-012
Impacted IRM: 4.51.2

MEMORANDUM FOR

INDUSTRY DIRECTORS, LB&I
DIRECTOR, FIELD SPECIALISTS, LB&I
DIRECTOR, INTERNATIONAL BUSINESSCOMPLIANCE, LB&I

FROM:

Cheryl P. Claybough  /s/ Cheryl P. Claybough
Director, Pre-Filing and Technical Guidance

SUBJECT:

Examination of Success-Based Fees in the Acquisition of Businesses

This LB&I Directive provides that Large Business & International (LB&I) examiners should not challenge a taxpayer’s treatment of success-based fees paid or incurred in a transaction described in § 1.263(a)-5(e)(3) of the Income Tax Regulations in taxable years ended before April 8, 2011, where the taxpayer’s original return position is to capitalize such fees to the transaction in an amount of at least 30 percent of the total success-based fees incurred by the taxpayer with the respect to the transaction.

Background/Strategic Importance:

On April 8, 2011, IRS issued Revenue Procedure 2011-29, 2011-18 I.R.B. 746, which provides a safe harbor for allocating success-based fees paid or incurred in transactions described in §1.263(a)-5(e)(3).  In lieu of maintaining the documentation required by § 1.263(a)-5(f), Rev. Proc. 2011-29 permits electing taxpayers to treat 70 percent of the success-based fees as an amount that does not facilitate the transaction.  The remaining 30 percent of the fee must be capitalized as an amount that facilitates the transaction.

An election under Rev. Proc. 2011-29 applies only to the transaction for which the election is made and, once made, is irrevocable.  The election applies with respect to all success-based fees paid or incurred by the taxpayer in the transaction for which the election is made.

To make the election described in Rev. Proc. 2011-29, the taxpayer must attach a statement to its original federal income tax return for the taxable year in which the success-based fee is paid or incurred.  In the attachment, the taxpayer must state that it is electing the safe harbor, identify the transaction to which the election relates, and state the success-based fee amounts that are deducted and capitalized.

Rev. Proc. 2011-29 applies by its terms only to success-based fees paid or incurred in taxable years ended on or after April 8, 2011.

Compliance Measure:

In an effort to balance current resources and workload priorities, LB&I examiners are directed not to challenge a taxpayer’s treatment of success-based fees paid or incurred in a transaction described in § 1.263(a)-5(e)(3) in taxable years ended before April 8, 2011, where the taxpayer’s original return position is to capitalize such fees to the transaction in an amount of at least 30 percent of the total success-based fees incurred by the taxpayer with respect to the transaction.

The directive applies only to transaction costs paid or incurred in covered transactions, as defined in Treas. Reg. § 1.263(a)-5(e)(3), and applies to costs incurred by either an acquiring corporation or a target corporation.

As indicated above, this compliance measure applies only for the amounts deducted on original timely filed returns, and not for claims, whether formal or informal.

UIL Code:

  • UIL Code 263.14-00 Allocation between Capital Expenditure v. Expense for Success Based Fees in the Acquisition of Businesses.

Questions should be directed to the following IRS personnel:

  • Wayne Melton at (804) 916-8337
  • Diane Taylor at (310) 535-7515.

This LB&I Directive is not an official pronouncement of the law or position of the Service and cannot be used, cited, or relied upon as such.

cc:  Commissioner, LB&I
       Commissioner, TEGE
       Deputy Commissioner, Operations, LB&I
       Deputy Commissioner, International, LB&I
       Director, Planning, Analysis, Inventory and Research (PAIR)
       LB&I Division Counsel, LB&I
       Chief, Appeals

Page Last Reviewed or Updated: 13-Mar-2014