SECTION 2. BACKGROUND

.01 Section 263(a)(1) of the Internal Revenue Code and § 1.263(a)–2(a) provide that no deduction shall be allowed for any amount paid out for property having a useful life substantially beyond the taxable year. In the case of an acquisition or reorganization of a business entity, costs that are incurred in the process of acquisition and that produce significant long-term benefits must be capitalized. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 89–90 (1992); Woodward v. Commissioner, 397 U.S. 572, 575–576 (1970).

.02 Under § 1.263(a)–5, a taxpayer must capitalize an amount paid to facilitate

a business acquisition or reorganization transaction described in § 1.263(a)–5(a). An amount is paid to facilitate a transaction described in § 1.263(a)–5(a) if the amount is paid in the process of investigating or otherwise pursuing the transaction.

.03 Section 1.263(a)–5(f) provides that an amount that is contingent on the successful closing of a transaction described in § 1.263(a)–5(a) (“success-based fee”) is presumed to facilitate the transaction. A taxpayer may rebut the presumption by maintaining sufficient documentation to establish that a portion of the fee is allocable to activities that do not facilitate the transaction.

.04 A taxpayer’s method for determining the portion of a success-based fee that facilitates a transaction and the portion that does not facilitate the transaction is a method of accounting under § 446.

.05 The Internal Revenue Service and the Treasury Department are aware that the treatment of success-based fees continues to be the subject of controversy between taxpayers and the Service. 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 a business acquisition or reorganization transaction described in § 1.263(a)–5(e)(3) (“covered transaction”). The Service and the Treasury Department 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. Accordingly, this revenue procedure provides a safe harbor election for allocating a success-based fee between activities that facilitate a covered transaction and activities that do not facilitate a covered transaction.