APRIL 2011

IRS RELEASES SAFE-HARBOR GUIDANCE REGARDING SUCCESS-BASED

FEES IN CERTAIN ACQUISITION AND REORGANIZATION TRANSACTIONS

In response to longstanding controversy regarding the treatment of success-based fees in certain acquisition and reorganization
transactions (i.e., whether they are currently deductible), the IRS has just released safe-harbor guidance to taxpayers in the form of
Revenue Procedure 2011-23 (available at http://www.irs.gov/pub/irs-drop/rp-11-29.pdf).

In particular, numerous disagreements have arisen regarding the type and extent of documentation required to establish that a
portion of a success-based fee is allocable to activities that do not facilitate certain business acquisition or reorganization transac-
tions (“covered transactions”). The IRS and Treasury expect that much of this controversy can be eliminated by providing taxpayers
a simplified method for allocating a success-based fee paid in a covered transaction between “facilitative” and “non-facilitative”
activities.

The new pronouncement provides a safe harbor election for allocating success-based fees paid in business acquisitions or reorgani-
zations described in the regulations. In lieu of maintaining the documentation otherwise required by the applicable regulations, this
safe harbor permits taxpayers to treat 70% of the success-based fee as an amount that does not facilitate the transaction (and is
thus currently deductible). The remaining portion of the fee must be capitalized as an amount that facilitates the transaction (and is
thus not currently deductible, albeit possibly deductible in the future).
Revenue Procedure 2011-23 is effective for success-based fees paid or incurred in tax years ending on or after April 8, 2011. As
always, please let us know if you have any questions about this new guidance.

As always, please call if you would like to discuss any of these items further.

Your Tax Partners,

Mark G. Cook, Partner Richard A. Linder, Partner Jon Widdowson, Partner

Steven J. Cupingood, Partner David Neighbors, Partner Michael Wu, Partner
John A. Eckweiler, Partner Todd Northrup, Partner Don Leve, Partner
Dan B. Faulk, Partner Javier Ramirez, Partner
Andrew L. Gantman, Partner Thomas E. Wendler, Partner

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