IRS addresses whether Section 1234A applies to breakup fees attributable to termination of merger agreement

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The IRS recently addressed whether Section 1234A applies to amounts paid to terminate a merger agreement (breakup fee). In a Field Attorney Advice (FAA), the IRS concluded that a breakup fee paid by an acquiring corporation resulted in a capital loss under Section 1234A. Shortly thereafter, in a Chief Counsel Advice (CCA), the IRS concluded that a recipient of a breakup fee must treat the gain arising from the payment as a capital gain under Section 1234A. 

Taxpayers receiving or paying merger breakup fees should be aware of how the recent activity in this area may affect the federal income tax treatment of such payments.

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Christine Turgeon

Partner, Federal Tax Services Leader, PwC US

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