Safe Harbor Allocation Does Not Apply To Milestone Payments

In ILM 201234027, the IRS concluded that the safe harbor election under Rev. Proc. 2011-29 is not available for milestone payments paid to an investment banker.

The taxpayer entered into an engagement letter with an investment banker for services related to a covered transaction as described in Treas. Reg. 1.263(a)-5(e)(3). The engagement letter provided that the investment banker would receive $10 million when the transaction closed successfully, $1 million when a merger agreement was signed and $1 million when shareholders approved the transaction. Each $1 million payment was creditable toward the $10 million fee that was payable when the transaction closed. Accordingly, when the transaction closed, the taxpayer would pay $8 million to the investment banker. If the transaction did not close, the $1 million milestone payments were not refundable.