IRS Provides Safe Harbor for Transaction Costs
(April 14, 2011)
The Internal Revenue Service (IRS) issued Revenue Procedure 2011-29 on April 8, 2011, offering a taxpayer-favorable safe harbor for allocating certain transaction costs. Under existing law, costs incurred to facilitate a covered transaction (an acquisition, reorganization, or similar transaction) are required to be capitalized. Taxpayers must document certain costs that do not facilitate a transaction, and therefore are deductible, by the time their tax return is filed. This requirement has created uncertainty regarding the documentation of certain success-based fees, such as investment banker fees that are contingent on the closing of a transaction.
In an effort to eliminate controversies, the IRS provides an elective safe harbor that allows 70 percent of success-based fees to be considered nonfacilitative costs, with the remaining 30 percent subject to capitalization. The election is available for success-based fees paid or incurred in tax years ending on or after April 8, 2011, and requires a statement be included with the tax return identifying the applicable costs. The safe harbor generally will not apply to non-success-based fees such as legal and accounting costs and success-based fees incurred in tax years ending prior to April 8, 2011. Also, the safe harbor applies only to transaction costs for which an irrevocable election is made and does not constitute a change in accounting method. Taxpayers should evaluate if making the election would be advantageous and consider the impact it might have on FASB ASC 740-10 liabilities.
Under U.S. Treasury rules issued in 2005, we must inform you that any advice in this communication to you was not intended or written to be used, and cannot be used, to avoid any government penalties that may be imposed on a taxpayer.