On April 8, 2011, the IRS released Revenue Procedure 2011-29, which established a safe harbor for the deduction of a portion of success-based fees incurred in certain business acquisitions or reorganizations occurring in tax years ended on or after April 8, 2011. The safe harbor allows electing taxpayers to expense 70 percent of success-based fees, and to capitalize the remainder. For more information on Revenue Procedure 2011-29, see this previous article.
The IRS recently issued a Directive to examiners to not challenge a taxpayer's treatment of success-based fees incurred in business acquisitions or reorganizations occurring in tax years ended before the effective date of Revenue Procedure 2011-29 (i.e. April 8, 2011) if the taxpayer capitalized at least 30 percent of the total success-based fees incurred in the transaction on its originally filed return. Essentially, the IRS has expanded the scope of the relief it announced in Revenue Procedure 2011-29 by making it retroactive. As a result, taxpayers who have capitalized at least 30 percent of the fees can find comfort that their treatment of those success-based fees will not be challenged.