The Internal Revenue Service says it will appeal a U.S. Tax Court’s decision that found that transaction break-up fees incurred when a business merger fails to close are tax deductible like other business expenses. While the rest of the Trump Administration is striving to support American businesses and encourage economic growth, the IRS has apparently decided to go in the opposite direction.
This stance is not just bureaucratic stubbornness—it reflects a fundamental misunderstanding of how modern businesses operate. Break fees are a standard feature of merger and acquisition proposals, designed to manage risk and encourage firms to pursue new opportunities. Treating these costs as capital losses instead of legitimate expenses punishes companies for taking the very risks that fuel innovation and growth.
The case in question is AbbVie v. Commissioner. In 2014, AbbVie, an Illinois-based pharmaceutical innovator that employs 30,000 people worldwide, producing drugs used to treat a wide range of medical issues, was interested in purchasing the Irish biotech firm Shire. However, the deal ultimately fell through--a not uncommon occurrence in the merger market. When AbbVie walked away it incurred a $1.64 billion breakup fee, which it declared as a standard business expense on its tax return.
But the IRS determined that the fee was, in fact, a capital loss and not a business expense, which the tax code treats differently. (A capital loss is only deductible if it offsets a capital gain.) As AbbVie had no capital gains with which to offset it, the ruling resulted in an additional $572 million tax bill.
AbbVie appealed the IRS decision in Tax Court this year and won, but the IRS has decided to appeal the Tax Court’s decision to the Seventh Circuit U.S. Appeals Court, which is a very un-Trumpian thing to do. The President has made it clear that he intends for his administration to be as pro-business as possible in their decision making. For instance, the recently-passed OBBB made permanent the ability of firms to immediately deduct their capital investments and restored the favorable tax treatment of investment in research and development, both of which were priorities for the administration.
This appeal risks sending a chilling signal to the marketplace. If companies believe that reasonable business expenses can be reclassified on a whim, they may be wary to pursue bold mergers or expansions if they are unable to deduct certain expenses necessary to mergers and acquisitions. That’s the opposite of what a growth-oriented economy needs and it undermines the credibility of the administration’s broader economic message. In fact, it is more consistent with the Biden Administration’s reflexive antipathy towards mergers and acquisitions.
The IRS needs to help businesses thrive instead of narrowly interpreting the tax code to squeeze more revenue out of productive businesses. Companies that spend money on potential acquisitions shouldn’t be penalized if a transaction does not ultimately transpire.
Business needs certainty to make substantive investments, and firms cannot justify investments in new technology, acquisitions, or new hires if they are unsure how the tax code will treat these investments. The heads of most government agencies appreciate this reality and have made economic growth and job creation a priority. The IRS leadership should do the same.
