IRS Issues Guidance on Deductibility of Milestone Payments to Investment Bankers
(May 13, 2013)
The IRS issued a Large Business & International (LB&I) directive on April 29, instructing examining agents not to challenge the application of the safe-harbor provisions of Revenue Procedure 2011-29 for eligible milestone payments incurred in an acquisition, reorganization, or similar transaction and made to investment bankers.
An eligible milestone payment is one that is nonrefundable but contingent on the achievement of specific milestone events such as the signing of a letter of intent. The directive does not apply to payments made to an investment banker that are due regardless of whether a specific milestone has been met.
In an effort to reduce controversies, the LB&I directive provides that if milestone payments made to investment bankers meet certain criteria, taxpayers are allowed to treat the success-based fees as 70 percent deductible, with the remaining 30 percent subject to capitalization even if incurred prior to April 8, 2011, the effective date of the Revenue Procedure.
For tax years beginning on or after April 8, 2011, a taxpayer may rely on the safe harbor if the taxpayer satisfies all of the following:
- Qualifies to make a safe-harbor election under Rev. Proc. 2011-29
- Has not deducted more than 70 percent of any eligible success-based milestone payment in an original filed tax return
- Does not contest the liability related to eligible milestone payments
If the milestone payments are made in tax years that end prior to April 8, 2011, and the transaction closes after that date, taxpayers can rely on the safe harbor if they meet the first two items listed above and have documented in their books and records that they intended to make a safe-harbor election for success-based fees.
If a taxpayer made an eligible milestone payment in a year that ended before April 8, 2011, the IRS will not challenge the treatment of the payment if the amount deducted was 70 percent or less of the milestone payments and the taxpayer does not contest the liability related to the eligible milestone payments.
The LB&I guidance includes practical guidance for taxpayers that have deducted milestone payments.
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