In Revenue Procedure 2011-29, the IRS recognized the ongoing controversy over success-based fees and concluded that a safe harbor would be helpful to eliminate many of the disputes. Taxpayers have tried to provide “sufficient documentation” in many ways, such as providing information on the various strategic alternatives considered for each deal and on alternative abandoned deal structures, in an attempt to allocate a portion of the success-based fees incurred to these alternative structures and abandoned deals. Because of the relative size of some success-based fees incurred for acquisitive transactions, and the difficulty of determining what constitutes “sufficient documentation,” taxpayers and the IRS have clashed frequently over this issue. The regulations specify that a success-based fee is presumed to facilitate a transaction, unless a taxpayer can maintain and provide sufficient documentation to establish that a portion of the fee can be allocated to non-facilitating activities, which generally are the services provided before a “bright-line date” such as the date the parties enter into a letter of intent. These disputes have been particularly significant in the case of fees that are contingent on the successful closing of a transaction (called success-based fees). Because the line between an expense that “facilitates” a transaction and one that does not is sometimes unclear and subject to debate, the issue of capitalization of facilitating expenses is one that has often caused disputes between the IRS and taxpayers. Amounts paid that do not “facilitate” a transaction need not be capitalized. In a typical sale of stock, this result usually means that large expenses incurred by the target company, such as investment banking expenses, do not result in deductible expenses. Generally, under Treasury Regulations Section 1.263(a)-5, amounts paid by a taxpayer to “facilitate” certain types of acquisition or reorganization transactions-including the purchase of assets constituting a trade or business, many purchases of stock or other ownership interests in a business entity, restructurings or recapitalizations of the capital structure of a business entity, stock issuances, borrowings and the like -must be capitalized by the taxpayer, rather than immediately deducted. On April 8, the Internal Revenue Service (the IRS) issued Revenue Procedure 2011-29, which provides a beneficial safe harbor with respect to the often-disputed issue of the capitalization of success-based fees incurred for certain business acquisition or reorganization transactions. Environmental, Social and Corporate Governance (ESG).Product Liability & Consumer Litigation.Restrictive Covenants, Trade Secrets & Unfair Competition.Employee Benefits & Executive Compensation.Business Solutions, Governance, Restructuring & Bankruptcy.
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