In ILM 201234027, the IRS concluded that the safe harbor election under Rev. Proc. 2011-29 is not available for milestone payments paid to an investment banker.
The taxpayer entered into an engagement letter with an investment banker for services related to a covered transaction as described in Treas. Reg. 1.263(a)-5(e)(3). The engagement letter provided that the investment banker would receive $10 million when the transaction closed successfully, $1 million when a merger agreement was signed and $1 million when shareholders approved the transaction. Each $1 million payment was creditable toward the $10 million fee that was payable when the transaction closed. Accordingly, when the transaction closed, the taxpayer would pay $8 million to the investment banker. If the transaction did not close, the $1 million milestone payments were not refundable.
Rev. Proc. 2011-29 provides a safe harbor election for taxpayers that pay or incur success-based fees for services performed in the process of investigating or otherwise pursuing a covered transaction. Under Rev. Proc. 2011-29, a taxpayer may elect to allocate 30 percent of a success-based fee to activities that facilitate the transaction and 70 percent of a success-based fee to activities that do not facilitate the transaction.
The IRS stated that nonrefundable milestone payments are not contingent on the successful closing of the transaction. Rather, they were guaranteed payments incurred when a specified milestone or some other date or event occurred. Accordingly, the allocation available under Rev. Proc. 2011-29 was not available for the nonrefundable milestone payments. The IRS concluded that the taxpayer must establish, based on all of the facts and circumstances, whether the investment banker's activities were facilitative regarding the two milestone payments of $1 million.
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