AbbVie's merger termination fee has been deemed an ordinary loss by the US Tax Court.
The United States Tax Court has issued a judgment in the case AbbVie Inc. and Subsidiaries v. Commissioner of Internal Revenue, 164 T.C. No. 10, on April 1, 2025. The court's ruling has significant implications for the interpretation of Internal Revenue Code (IRC) Section 1234A.
In a recent Alert published by NTD's Tax Technical Knowledge Services group, it was noted that the court does not consider the Proposed Transaction, which involved an acquisition of AbbVie stock, as involving a capital asset in the hands of AbbVie. This is contrary to the IRS's position, which has stated that a termination fee being paid to compensate the payee for its transaction expenses does not remove it from the purview of Section 1234A.
The court's interpretation of Section 1234A is narrow, applying only to "a right or obligation to exchange an interest in property." A derivative on any property that requires cash settlement is not considered an obligation to exchange an interest in property. This latter position supports the view that IRC Section 1234A does not apply to a termination fee paid by a target in connection with an acquisition of the target's own stock.
Furthermore, the court views transaction costs as paid-for services and believes they should not be under the purview of IRC Section 1234A, contrary to the IRS position. This holding has implications for transaction costs governed by Treas. Reg. Section 1.263(a)-5.
For additional information on this topic, contacts can be made within Federal Tax Advisory, International Tax and Transaction Services - Capital Markets, and National Tax M&A Group - International Tax and Transaction Services.
It is worth noting that AbbVie's own stock was not considered a property interest owned by AbbVie. This further reinforces the court's position that the Proposed Transaction did not involve a capital asset.
In conclusion, the court's ruling in the AbbVie case offers a narrow interpretation of IRC Section 1234A, excluding transaction costs and certain derivatives from its purview. This disagreement between the court and the IRS highlights the complexity and ongoing debate surrounding the interpretation of tax laws.
