TAM denies loss deduction for capitalized costs

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February 2020

Overview

Regulations under Section 263(a) provide rules requiring taxpayers to capitalize costs incurred in certain transactions if they create a separate and distinct intangible asset or facilitate the acquisition of a trade or business, among other consequences.  Recently issued TAM 202004010 holds that fees a target company incurred in connection with its acquisition by a taxpayer did not create a separate and distinct intangible asset, but nonetheless were capitalizable because they facilitated the acquisition.  Accordingly, the TAM holds that, in the tax year the taxpayer sold all of the target’s stock, the target could not deduct the amount of the fees as a loss on a separate and distinct asset.

The takeaway

Taxpayers undergoing or that have undergone business restructurings that include acquired businesses should be aware of the IRS’s conclusions in this TAM and should discuss with their tax advisors how and when to properly recover previously capitalized facilitative costs.

After Reg. sec. 1.263(a)-5 was finalized in December 2003, the IRS and Treasury included regulations under Section 263(a) on the subsequent treatment of capitalized transaction costs on the 2004/2005 Priority Guidance Plan and the next six plans.  The project was omitted without explanation from the 2011/2012 plan and thereafter.  Accordingly, Reg. sec. 1.263(a)-5(g), which should provide the appropriate guidance to address the treatment of capitalized transaction costs, remains in large part reserved.

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Christine Turgeon

Partner, Federal Tax Services Leader, PwC US

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