Country / Language

IRS Rules on Capitalization of Management Termination Fees

June 2015

View the full newsletter.


In PLR 201518012 , the IRS determined whether a management termination fee should be capitalized under Treas. Reg. §1.263(a)-4(d)(7) and Treas. Reg. §1.263(a)-5. Treasury Reg. § 1.236(a)-4 provides rules for applying I.R.C. §263 and the treatment of costs related to acquired and created intangibles. Treasury Reg. §1.236(a)-4(d)(7)(i) requires a taxpayer to capitalize amounts paid to terminate certain agreements to another party. Treasury Reg. §1.263(a)-5 provides rules for applying I.R.C. §263 to amounts paid or incurred to facilitate certain transactions.


The taxpayer was a U.S. corporation and a party to a management services agreement. Under the agreement, the manager provided monitoring services on a regular basis to assist the taxpayer with governance and oversight of its business. As the taxpayer’s business began to flourish, the taxpayer and manager agreed to terminate the management services agreement upon completion of a successful public offering. The taxpayer agreed to pay the manager a termination fee for all amounts owed under the management services agreement.

The taxpayer did complete the initial public offering, and used the net proceeds from the IPO to pay the termination fee. The IRS ruled that, while the taxpayer’s obligation to pay the termination fee depended on whether the public offering occurred, the termination fee was not paid to facilitate the IPO.

“As the court ruled in A.E. Staley Manufacturing Co. v. Commissioner, 119 F.3d 482 (7th Circ. 1997), fees associated with general activities not directly related to the capital transaction must be treated differently (i.e., not capitalized).” Accordingly, the termination fee should not be capitalized under Treas. Reg. §1.263(a)-5 as facilitative of the IPO.


Richard Shevak, a CohnReznick director, at or 862-245-5029.

To learn more about CohnReznick’s Tax Practice, please visit our webpage.

Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

Search Our People

Search Our People

Look ahead. Gain insight. Imagine more. Is your business ready to break through?

View our new TV commercial..

Industry Outlooks

Industry Outlooks

Gain insight into what is ahead for the Commercial Real Estate, Technology and Middle Market Private Equity industries.


Learn about our upcoming events.


Working With Us

Working With Us

What makes CohnReznick different from others in our profession? And what should our clients come to expect when working with us? The answer is The CohnReznick Advantage. Contact us to learn how we can out the CohnReznick Advantage to work for your business.


The value of an organization is determined by the skills and qualities of its leaders. With more than 280 partners serving clients nationwide, CohnReznick is renowned for the diverse experiences, knowledge and backgrounds of its leadership.

Learn More


We align our services in three segments: Accounting and Assurance, Tax, and Advisory. This approach allows us to provide holistic solutions to complex business problems and to seize upon opportunities requiring an integrated approach.

Learn More


Accounting and tax issues different significantly based on an organization's industry. We provide clients with expertise in nearly two dozen industries – we know the opportunities, the obstacles, the competitive landscape.

Learn more


CohnReznick professionals are thought leaders in their industries. Clients benefit from relevant and timely economic, legislative and industry insights that can keep them a step ahead of competition.

Learn More

Global Reach

Our involvement in the Nexia International network of firms enables us assist our clients wherever they do business-providing local expertise and connections wherever they needed. Nexia is comprised of 20,000 professionals operating in over 100 countries.

Learn More