Key Takeaways:
- The Tax Court ruled in AbbVie, Inc. Subsidiaries v. Commissioner that a $1.6 billion termination fee is deductible as an ordinary business expense, not a capital loss.
- IRS reporting requirements for Section 355 spin-offs and reorganizations have been rolled back, restoring more favorable frameworks for taxpayers.
- Taxpayers should carefully document service-oriented obligations and contract structures to support deductibility and navigate evolving M&A guidance.
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In AbbVie, Inc. Subsidiaries v. Commissioner, the Tax Court held that a $1.6 billion termination fee paid by AbbVie following a failed merger with Shire was deductible as an ordinary business expense, not a capital loss.
The IRS had argued that the break fee should be treated as a capital loss under Section 1234A, which applies to the cancellation of a right or obligation related to a capital asset. The Tax Court disagreed, ruling that the fee arose from a services-focused “Cooperation Agreement” rather than from rights or obligations to exchange property.
The court emphasized that Section 1234A only applies to rights to buy, sell, or otherwise transfer property — not to service-based obligations. This narrow interpretation of 1234A provides taxpayers with stronger footing when deducting termination fees, though the ruling is fact-specific and currently under appeal.
Planning Considerations
This decision is favorable but should be applied with caution:
- Not all break fees are currently deductible — Reg. §1.263(a)-5 may require capitalization if the fee terminates a deal to enter another.
- The ruling is limited to situations where the underlying contract does not involve the transfer of property.
- Taxpayers should document the service-oriented nature of termination agreements to support deductibility.
Companies involved in M&A transactions should evaluate how termination fee arrangements are structured and documented, particularly if competing transactions are in play.
IRS Withdraws M&A Reporting Requirements
In a separate move, the IRS has withdrawn two proposed regulation packages introduced in January 2025 (REG-112261-24 and REG-116085-23) that would have expanded reporting requirements for Section 355 spin-offs and reorganizations.
These proposals were accompanied by Notice 2024-38 and a shift in the private letter ruling process under Rev. Proc. 2024-24. The IRS has now reversed course, issuing Rev. Proc. 2025-30 to supersede the prior guidance and largely revert to the more favorable frameworks established in Rev. Procs. 2017-53 and 2018-53.
This rollback is a win for taxpayers, especially those pursuing private letter rulings or strategic separations. The earlier guidance would have imposed years of post-transaction reporting obligations and restricted access to IRS rulings.
The Tax Court’s decision gives taxpayers more room to treat break fees as ordinary deductions, not capital losses.
What This Means for Taxpayers
- Break fees may be deductible if related to service obligations rather than property transfers.
- Private letter rulings for M&A deals are more accessible under pre-2024 IRS policies.
- Section 355 transactions are no longer subject to the proposed expanded reporting regime — but companies should still watch changes.
Together, these developments reflect a more flexible IRS posture toward M&A activity, though taxpayers should continue to document transactions carefully to preserve favorable treatment.
MGO Can Help You Navigate Complex Transaction Tax Rules
MGO works with companies and deal teams to evaluate the tax treatment of M&A-related payments and obligations, including break fees and restructuring costs.
Our knowledgeable advisors help businesses document contracts, support deductions, and avoid pitfalls under Sections 1234A and 263(a)-5. We also aid with private letter ruling requests and can help structure transactions that align with current IRS guidance while preserving flexibility.
As the M&A landscape shifts, we help you stay ahead of the tax implications. Connect with MGO to evaluate your M&A agreements, support break-fee deductions, and navigate complex transaction tax rules with confidence.