IRS rules payment of M&A breakup fee generated capital loss
TAX BLOG |
Many M&A transactions include provisions for breakup fees payable if a party to the transaction backs out of the deal. Many taxpayers generally view a breakup fee as an ordinary expense deductible by the payor. However, the IRS recently issued a Field Attorney Advice (FAA 20163701F) ruling that a breakup fee generated a capital loss. Many believe that the breakup fee addressed in the FAA resulted from the 2014 proposed AbbVie Inc.-Shire Plc merger (AbbVie Deal), which would have resulted in an inversion of AbbVie if completed.
Capital losses are not deductible as ordinary expenses and usually are only allowed to offset capital gains. As a result, treatment of the loss addressed in the FAA as capital in character likely would limit the taxpayer’s ability to benefit from the loss.
The ruling describes a merger between two companies – a deal which fell apart because a Treasury Department Notice adversely impacted the tax benefits expected to result from the deal. The cancellation of the deal resulted in a breakup fee under the merger agreement. The IRS characterized the merger agreement as a contract to acquire stock, a capital asset. Citing section 1234A, the IRS held that that payment of the breakup fee on termination of the merger agreement generated a capital loss.
The FAA’s facts, though redacted, are similar to those of the AbbVie Deal. During the AbbVie Deal, the IRS released Notice 2014-52. This notice had an adverse tax impact on the transaction; AbbVie withdrew from the deal and was required to pay a $1.6 billion breakup fee. If the AbbVie Deal is indeed the subject of FAA 20163701F, there may be litigation concerning the tax treatment of the breakup fee, given the amount of dollars at stake.
This Field Attorney Advice may serve as an eye opener to some taxpayers. If the IRS’ position in FAA 20163701F is upheld, it could apply to a large number of M&A transactions requiring capital loss treatment of certain breakup fees. You should discuss the tax treatment of any breakup fee with your tax advisor.