How Could This Possibly Be? We Don’t Know What to Do With a Fee: Musings on a Variety of Finance-Related Fees

One of the most common transactions in financings is the payment of a fee. How that fee is treated for U.S. federal income tax purposes, however, varies dramatically depending upon the context. Moreover, the authorities are often sparse, non-existent, or conflict. The issues for such commonplace transactions are quite fundamental: questions of timing of income or deduction, character of income or deduction, source of the income, treaty treatment of the payment, potential for causing trade or business activity, effectively connected income and/or unrelated business taxable income.

This paper will identify several types of fees encountered in the market, explore how they are treated and where the authorities are not clear, compare the treatment of one type of fee to another, and determine whether there is any guiding principle that should apply across the various types of fees, and propose the extent to which existing treatment should continue, or how it should change and pursuant to what set of principles.

The first part of the paper identifies three common types of fees (guarantee fees, standby commitment fees and consent fees), and discusses the relevant authorities respecting their treatment. The second part of the paper compares the treatment of these three types of fees and explores whether there are any common principles that appear to emerge, and considers the extent to which those principles could or should govern. Finally, the paper proposes a unifying principle that could be used and relied upon in each of the three fee contexts.

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