IRS clarifies treatment of certain legal fees for FDII


The IRS recently issued a program manager technical assistance (PMTA 2022-008) that provides information on the method of allocating and apportioning certain legal fees and expenses for purposes of computing a taxpayer’s foreign-derived intangible income (FDII) deduction. The PMTA concludes that legal fees and expenses related to an event, incident or claim that occurred or arose prior to the effective date of Section 250 must be allocated to related income in a given year based on the rules for characterizing income in effect that year.


The PMTA follows a previously issued advice memorandum (AM 2022-001), in which the Associate Chief Counsel International concluded that for purposes of allocating and apportioning deferred compensation expense under Section 861, expenses that relate to services provided in pre-FDII years but are deductible in post-Section 250 enactment years should be allocated to FDII. For more information on this AM, see our prior story, “Deferred compensation expensing treatment reversed.”


Both advice memorandums apply general federal income tax principles when arguing that taxpayers must take into account the law in effect for the taxable year the deduction is allowed regardless of the fact that the deduction factually relates to gross income that accrued prior to the effective date of the classification of gross income in question. According to the IRS, in order to accurately measure the income eligible for a FDII deduction, a taxpayer must use consistent standards for characterizing income and expenses related to that income which is recognized in a taxable year.



Tax professional standards statement

This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.


More tax hot topics