The IRS Creates a 70% Safe-Harbor for Deductibility of Investment Banking and Other Success-Based Fees Contingent on the Closing of a Transaction
By Andrew M. Short & Ziemowit T. Smulkowski
The IRS has released Revenue Procedure 2011-29 which provides taxpayers with a safe-harbor for deducting a portion of certain success-based fees that are contingent on the closing of certain acquisition and reorganization transactions. Generally, a taxpayer is required to capitalize such fees. A current deduction for such fees is available only to the extent that the taxpayer has sufficient contemporaneous documentation that establishes the portion of the fee allocable to activities that do not facilitate the transaction. Practitioners have been expressing a wide variety of views as to how much of a typical investment banking fee is deductible with appropriate documentary evidence, with estimates varying from 30% to 90%. The new IRS safe-harbor provides taxpayers with the ability to currently expense 70% of such fees and should provide a significant cash flow benefit to financial sponsors and strategic investors with success-based fees.