Success-Based Fees: Elect The Safe Harbor Or Document Thoroughly

When taxpayers pay fees contingent on the successful closing of certain "covered transactions," including, for example, taxable acquisitions of assets that constitute a trade or business, such "success-based fees" must be capitalized to the extent such fees are treated as facilitating the transaction. By contrast, any portion of such fees treated as non-facilitative may be currently deductible, depending on the situation. Accordingly, to the extent possible, taxpayers generally prefer success-based fees to be treated as non-facilitative. However, over the years, the IRS has challenged taxpayers' allocation of such fees.

Under Revenue Procedure 2011-29, a taxpayer may make a safe harbor election with respect to any covered transaction to treat 70% of any success-based fee in connection with such transaction as non-facilitative (i.e., potentially currently deductible) and 30% of such fee as facilitative (i.e., capitalized). If the safe harbor election is properly made,