IRS directive provides much-needed clarity regarding the treatment of milestone payments

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Overview

The IRS Large Business and International Division (LB&I) recently updated a previously issued memorandum regarding the treatment of certain ‘eligible milestone payments’ paid in the course of a ‘covered transaction’ in which the taxpayer also incurs a success-based fee.

The updated memorandum broadens the definition of a ‘milestone’ by removing the condition that a milestone can occur only after the signing of a letter of intent, exclusivity agreement, or approval of the transaction by the taxpayer’s board of directors.  

For taxpayers electing to use the safe harbor described in Rev. Proc. 2011-29, the revisions to the directive greatly simplify the analysis regarding the proper federal income tax treatment of milestone payments. 

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Kelley McLaughlin

US Tax Marketing Leader, PwC US

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