Taxpayers who paid a success-based fee to an investment banker or private equity firm that was contingent on the successful closing of the transaction may be able to deduct a large portion of the amount on their 2010 tax return. Under previous IRS regulations, success-based fees were generally required to be capitalized.
Earlier this year, the IRS issued Revenue Procedure 2011-29 which provided taxpayers with favorable treatment of these success-based fees. However, the Rev. Proc. was effective for tax years ending on or AFTER April 8, 2011 so taxpayers could not apply this to their 2010 tax return.
Now, the IRS has issued a Large Business & International Directive (LB&I) that provides that LB&I examiners should not challenge a taxpayer’s treatment of success-based fees paid or incurred in taxable years ended BEFORE April 8, 2011. The Directive cites an “effort to balance current resources and workload priorities” as the reason to not challenge the early application of the Rev. Proc.
The Directive specifically notes that this applies only to original timely filed returns and not for amended returns. This may provide a taxpayer who has extended their 2010 tax return an opportunity to deduct these fees provided they meet certain requirements.
Do you have a question about the application of this guidance to your specific facts? Post a comment below or contact our Transaction Advisory Services Group at 440-449-6800.