On April 8, 2011, the IRS released Revenue Procedure 2011-29, providing a safe-harbor election for taxpayers to allocate success-based fees, which are fees that are contingent on the successful closing of a transaction, between facilitative and non-facilitative amounts for covered transactions. Under the safe-harbor, a taxpayer can irrevocably elect to treat 70 percent of all success-based fees incurred with respect to a covered transaction as non-facilitative.
Additionally, on July 28, 2011, the IRS Large Business and International (LB&I) division issued a directive to LB&I examiners not to challenge a taxpayer's treatment of success-based fees paid or incurred in tax years ended before April 8, 2011, where the taxpayer's original return treatment was to capitalize at least 30 percent of the fees.
The new guidance, although limited in scope, is expected to relieve an area of significant controversy between taxpayers and the IRS regarding the type and extent of documentation needed to substantiate these tax positions. Companies that have incurred success-based fees in M&A transactions should assess the implications of this guidance on uncertain tax positions.