Competitiveness Wins if IRS Accepts Tax Court Ruling in AbbVie

No matter your specialty, a recent case from the US Tax Court is worth your attention.

The IRS has until Sept. 17 to decide whether to appeal the Tax Court’s opinion in AbbVie Inc. v. Commissioner, which focuses on part of Section 1234A of the federal tax code concerning terminations of capital assets.

The court’s June 17 ruling centered on whether certain losses, known as break fees, associated with an unsuccessful and abandoned merger negotiation could be deducted as “ordinary business expenses,” like any other risk-based expenditure in pursuit of a business strategy.

The IRS argued that they must be treated as “capital losses” with less favorable consequences—an argument the court rejected. If the IRS accepts the decision, the market and competitiveness will be the winners.

Case Background

In July 2014, pharmaceutical powerhouse AbbVie, through its managers, entered into an agreement with a company called Shire plc in which it agreed to take steps to advance a merger between the entities.

In the agreement, AbbVie committed to working to obtain regulatory approvals, recommend the merger to its shareholders, cooperate with Shire in steps toward the merger, and do other related things to advance the effort. The agreement also included a so-called break fee that required AbbVie to pay Shire a certain “inconvenience fee” or “assignment of risk of failure fee” if the effort was abandoned.

These kinds of break fees encourage parties to enter into uncertain deals that still can be profitable in ways that benefit shareholders, consumers, and the market as a whole.

However, efforts to complete the deal were abandoned. In September 2014, the Treasury Department proposed intervening tax regulations that made the merger seem less profitable for all parties. Consequently, AbbVie and Shire entered into a termination agreement in which AbbVie agreed to pay an approximately $1.6 billion break fee. It then deducted that fee as an ordinary business loss.

The IRS rejected that characterization, saying the fee should be treated as a capital loss because it essentially was a disposal of a right to acquire property under Section 1234A(1). The IRS issued a $572 million deficiency notice to AbbVie, and litigation followed.

No Property to Give

Basic rules of property law and statutory interpretation very clearly support the Tax Court’s holding in favor of AbbVie.

A loss can’t be a “loss with respect to property” if the triggering commitments were made by managers of a company who themselves have no authority to sell or transfer property.

A fundamental governing principle in property law is nemo dat quod non habet—you can only give as much as you have. And here, the managers had no property to give.

Only AbbVie’s shareholders held the authority to transfer property of AbbVie (that is, shares of AbbVie) to complete a merger. The most the managers could do was make a recommendation to the shareholders, which is what the agreement required.

Everything about the agreement was about actions to grease the wheels in hopes of setting the conditions for a property transfer. And the losses paid were based on an inability to complete the provision of those services. The losses weren’t losses with respect to property under Section 1234A(1).

The ruling in AbbVie Inc. may seem obvious and unexceptional. Until 2016, the IRS had long recognized break-up fees as legitimate, deductible ordinary business expenses. Numerous IRS rulings and court decisions support that position.

The case becomes especially important because it rejects the IRS’s attempted departure from precedent and its attempts to penalize ordinary costs in a way that would have discouraged future risk-taking, research and development, and strategic mergers and acquisitions.

The vitality of the Tax Court’s interpretation is critically important for the market. It rightly encourages risk-taking, including in finding efficient mergers and acquisitions. The IRS position, had it been accepted, would have punished risk.

That effect on risk and the incentives to pursue the possibility of economically beneficial mergers is why everyone should care—and hope the Tax Court decision isn’t challenged, or that it’s affirmed if it hypothetically gets to an appeal.

Because risk is oil that fuels the engine of innovation, and innovation is the engine of prosperity, we want to encourage risk if we wish to innovate and prosper. The courts should continue to reject an interpretation that not only is contrary to the rules of property law and statutory interpretation, but also would dangerously weaken US competitiveness.

The case is AbbVie Inc. v. Commissioner, T.C., No. 2597-23, 6/17/25.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Donald Kochan is professor of law and executive director of the Law and Economics Center at George Mason University Antonin Scalia Law School.

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