A break fee in a merger-gone-south can be deducted as an ordinary expense, the U.S. Tax Court held today, finding for biopharmaceutical giant AbbVie and rejecting the IRS’s argument that AbbVie must treat the fee as a capital loss.
The issue was before the Tax Court on the parties’ cross motions for summary judgment. The parties disputed whether § 1234A(1) applied to a break fee AbbVie had paid Shire as the result of the two companies' failed combination in 2014. The court found that § 1234A(1)'s requirement that the terminated right or obligation be “with respect to” property was not met, stating:
At its core, the Co-operation Agreement is not an agreement to buy, sell, or otherwise transfer property. . . it could not be such an agreement, because the parties to the agreement (AbbVie and Shire) did not own the valuable property (their own shares) that would have been exchanged in the proposed combination. In other words, none of the Co-operation Agreement’s terms could have conferred “rights or obligations with respect to [AbbVie or Shire shares]” because the power to confer such rights rested with the companies’ public shareholders.
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