LB&I directive - No challenge to treatment of “milestone payments” as success-based fee paid to investment bank 

January 28:  The IRS Large Business and International (LB&I) division issued an LB&I directive stating that if certain requirements are satisfied, the LB&I examiner is not to challenge a taxpayer’s treatment of eligible “milestone payments” made as part of certain business acquisitions—i.e., “covered transactions”—and for which the taxpayer incurs a success-based fee paid to an investment bank. LB&I-04-0114-001 (January 27, 2014)

Read text of the LB&I directive


The LB&I directive applies only with respect to investment banker fees incurred by either an acquiring corporation or a target corporation.

Safe harbor

The LB&I directive explains that Rev. Proc. 2011-29 provides a safe harbor for allocating success-based fees paid or incurred for certain transactions (generally, allowing a taxpayer to treat 70% of such fee as an amount that does not facilitate the transaction, with the remaining 30% of the fee to be capitalized).


Rev. Proc. 2011-29, however, does not provide a safe harbor for “milestone payments.”

Definitions

  • The term “milestone” means an event, including the passage of time, occurring in the course of a covered transaction (whether the transaction is ultimately completed or not).
  • “Milestone payment” means a non-refundable amount that is contingent on the achievement of a milestone.
  • “Eligible milestone payment” means a milestone payment paid for investment banking services that is creditable against a success-based fee.

No challenge to taxpayer’s treatment of eligible milestone payments

LB&I examiners are directed not to challenge a taxpayer’s treatment of eligible milestone payments if the taxpayer satisfies one of the following conditions:


  • For tax years ended on or after April 8, 2011—treatment of eligible milestone payment incurred in a transaction for which taxpayer elects the safe harbor in Rev. Proc. 2011-29 - The taxpayer must: (1) have qualified for and timely elected the Rev. Proc. 2011-29 safe harbor for the covered transaction; (2) not have deducted more than 70% of any eligible milestone payment incurred in connection with the respective success-based fee on its original tax return for the year in which the taxpayer's liability for the eligible milestone payment accrued; and (3) not be contesting its liability for the eligible milestone payment.


  • Treatment of eligible milestone payment incurred in tax years before taxpayer can elect the safe harbor in Rev. Proc. 2011-29 - In instances when a covered transaction spans multiple years, a taxpayer may make eligible milestone payments in tax years preceding the tax year in which the success-based fee would be paid (and, therefore, also preceding the tax year in which the taxpayer could qualify for and timely elect the Rev. Proc. 2011-29 safe harbor) if the transaction successfully closes. In those situations, the taxpayer must:
    • Satisfy (2) and (3) above


    • Have documented, for example in its books and records, that in the year in which the eligible milestone payments were made, the taxpayer intended to elect Rev. Proc. 2011-29 with regard to the respective success-based fee, and


    • If the transaction successfully closed, have in fact made the Rev. Proc. 2011-29 election for the success-based fee that was paid or incurred

      This documentation is to be made available to the examiner upon request.
  • For tax years ended before April 8, 2011 - The taxpayer’s return position must meet the requirements of LB&I Directive 04-0511-012 with regard to success-based fees paid or incurred in tax years ended before April 8, 2011, and the taxpayer must satisfy (2) and (3) above.



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