OPINION:
The IRS will stop at nothing to take whatever it can from businesses, households and even nonprofit groups. The tax agency routinely ignores taxpayer due process protections and puts its own gain above the law. Meanwhile, IRS bureaucrats have lawlessly targeted conservative nonprofit organizations and may soon do the same to liberal groups.
Of all these bizarre shakedowns, the strangest yet has to do with mergers. The taxman has tried to block companies from deducting acquisition-related costs as ordinary and necessary expenses, making the tax code even more complicated than it is now. Fortunately, a judge rejected these shady shenanigans. Yet the IRS won’t give up that easily, and it has appealed the ruling. The agency should give it a rest (for once) and let entrepreneurs grow and collaborate as they see fit.
The U.S. Tax Court’s recent decision in AbbVie Inc. v. Commissioner is a rare, albeit welcome, piece of good news for taxpayers and consumers. The court ruled that pharmaceutical firm AbbVie’s $1.6 billion break fee, paid when its merger with Shire collapsed, is an ordinary business expense under Section 162 of the Internal Revenue Code, not a capital loss under Section 1234A. That distinction might sound technical, but it carries major real-world implications. Ordinary deductions can immediately offset ordinary income, while capital losses can offset only capital gains. In practical terms, that means faster relief and fairer treatment for businesses when deals fall apart.
Large deals and acquisitions drive U.S. growth, giving companies avenues to expand, hire more workers and raise wages. According to a landmark 2025 analysis by Federal Reserve, Stanford, Harvard and London School of Economics researchers, “M&A enables reallocation of management practices which improves overall management quality. Preventing acquisitions could decrease average management quality and average revenue by about 15%.”
This management revolution simply cannot happen if companies on the cusp of an acquisition are afraid of other companies walking away from the deal. Markets have kept these fears at bay through “break fees,” or compensation to one party if the deal fails because of specific reasons. These contractual payments encourage commitment by penalizing a party for walking away. Being able to deduct these fees as ordinary expenses allows companies to embrace M&A without thinking twice about the taxman.
The tax court ruling hopefully closes the door to taxpayer uncertainty. With clearer guidance from the court, businesses will likely be able to structure future agreements more efficiently. In short, the AbbVie decision is more than a victory for one pharmaceutical company; it’s also a win for fairness and flexibility in the tax system.
The fight isn’t over yet. The IRS appealed the ruling to the 7th U.S. Circuit Court of Appeals, complicating M&A and injecting uncertainty into an already shaky economy. Fortunately, the 7th Circuit can enforce tax code language to prevent the greedy agency’s cash grab. The AbbVie case turned on merger agreements’ established rights and obligations “with respect to property.” The IRS had been interpreting that broadly, arguing that any failed deal created capital-type rights not worthy of large ordinary deductions.
The 7th Circuit could easily fix that by holding explicitly that merger termination fees are ordinary business expenses. This would eliminate uncertainty, denying the IRS legal room to hassle taxpayers.
For too long, America’s tax collection agency has made it far too difficult for businesses and households to thrive. With a little help from the courts, that can change.
• Ross Marchand is a senior fellow for the Taxpayers Protection Alliance.
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