![]() ![]() 1.263(a)- 5(f) requiring taxpayers to properly document with supporting records the portion of the success- based fee allocable to activities that do not facilitate the transaction (i.e., the potentially deductible portion). 1.263(a)- 5(e)(3) describes three covered transactions, including "a taxable acquisition by the taxpayer of assets that constitute a trade or business." Note that the regulations do not include a taxable sale of assets by the taxpayer as a covered transaction.Īmounts paid contingent on the successful closing of the covered transaction, such as success- based fees incurred to investment bankers, are subject to additional provisions of Regs. 1.263(a)- 5(e), under which transaction costs are not required to be capitalized to the extent they are incurred to investigate or otherwise pursue a covered transaction and satisfy certain other technical requirements. 1.263(a)- 5 also provides several exceptions and special rules that permit taxpayers an accelerated deduction for expenses of certain covered transactions, including the " bright- line" date exception in Regs. 1.263(a)- 5(a) provides that transaction costs paid to "facilitate" any of the enumerated transactions must generally be capitalized, regardless of "whether the transaction is comprised of a single step or a series of steps carried out as part of a single plan and without regard to whether gain or loss is recognized in the transaction." Exception: Covered Transactions Safe Harbor 1.263(a)- 5(a)(1) through (10), with the first being "n acquisition of assets that constitute a trade or business (whether the taxpayer is the acquirer in the acquisition or the target of the acquisition)." 1.263(a)- 5 largely governs the federal income tax treatment of transaction costs incurred in connection with 10 types of transactions listed in Regs. With respect to the success- based costs, the target S corporation attached a statement to its timely filed original 2012 federal income tax return electing to deduct 70% of these costs and to capitalize the remaining 30%, under the safe- harbor allocation method described in Rev. In connection with implementing the transaction, the target S corporation incurred transaction costs consisting of success- based fees paid to an investment bank and non- success- based expenses to draft information memoranda, review contracts, and prepare letters of intent. The parties jointly elected to treat the stock acquisition as a taxable asset acquisition under Sec. 31, 2012, the shareholders of an S corporation sold all of their outstanding stock to a corporation. Although it may not be used or cited as precedent, the CCA provides helpful insight to taxpayers planning or negotiating merger and acquisition transactions. In Chief Counsel Advice (CCA) 201624021, the IRS affirmed that taxable asset acquisitions are "covered" transactions for acquirers but not for targets, and, therefore, targets are ineligible to deduct success- based transaction costs using the elective safe- harbor method because the election is available only for covered transactions. ![]()
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