AbbVie's Merger Termination Fee Classified as Ordinary Loss by the US Tax Court

In a significant ruling, the US Tax Court has sided with AbbVie Inc. in a case that could reshape the interpretation of IRC Section 1234A. The decision, made in the case of AbbVie Inc. and Subsidiaries v. Commissioner of Internal Revenue, 164 T.C. No. 10, has implications that extend beyond the realm of mergers and acquisitions.

The Court's holding centres around a $1.6 billion Break Fee paid by AbbVie to Shire plc, which was triggered when AbbVie's board decided not to recommend a proposed merger between the two companies due to adverse tax guidance. The IRS disagreed with AbbVie's view that the Break Fee should be treated as an ordinary loss, asserting that it should be classified as a capital loss under IRC Section 1234A.

However, the Court ruled in favour of AbbVie, allowing the company to claim the Break Fee as an ordinary business loss on its 2014 tax return. The Court found that the Break Fee was fundamentally related to services, not property, as it involved obligations to secure regulatory approvals and recommend the merger to shareholders.

The Court's decision does not apply IRC Section 1234A to a termination fee paid by a target in connection with an acquisition of the target's own stock. However, it may not apply to derivatives on any property that require cash settlement.

The attorneys who argued for AbbVie were from the law firm Jones Day. The Tax Technical Knowledge Services group published an Alert on the matter, with Carolyn Wright serving as the legal editor. The Alert provides a full listing of contacts and email addresses, which can be found in the Tax News Update: Global Edition (GTNU) version of the Alert.

The contacts include Allison Somphou, Lena Hines, Michael Yaghmour, Matthew Stevens, Brian Peabody, and Amy Sargent, who are available for queries related to Federal Tax Advisory, International Tax and Transaction Services - Capital Markets, and National Tax M&A Group - International Tax and Transaction Services, respectively.

The IRS issued AbbVie a Notice of Deficiency, determining a deficiency of approximately $572 million as a result of treating the Break Fee as a capital loss rather than an ordinary loss. The Court's decision grants AbbVie a significant victory, potentially setting a precedent for future cases involving merger termination fees and the classification of similar expenses for tax purposes.

The Court's interpretation of IRC Section 1234A in the AbbVie case may have far-reaching implications, as there are many types of derivatives in which this relationship may be seen as attenuated. It remains to be seen how this decision will shape tax law in the coming years.