The proposed regulations, although consistent with the result reached in INDOPCO, appear to represent a retreat by the IRS from some of the more aggressive positions it has taken since INDOPCO as to the types of transactions where capitalization is required and as to the expenses that must be capitalized in those transactions. section 1.263(a)-4(e)) concerning transaction costs. ![]() The focus of this article, however, is limited to the part of the proposed regulations (Prop. The proposed regulations deal with a variety of intangible asset costs, including: expenditures to create financial interests prepaid expenses payments to obtain, modify, or terminate certain contract rights and certain payments relating to real property. In order to provide greater certainty in this area, the Internal Revenue Service recently proposed extensive regulations (REG-125638-01) regarding the capitalization and deduction of expenditures incurred to acquire, create, or enhance intangible assets. The breadth of some of the IRS assertions regarding the extent of costs required to be capitalized has been controversial. However, as the expenditures did not relate to the creation of a specific asset with an ascertainable useful life, it appears that the costs could not be deducted until the dissolution of the corporation.Īfter INDOPCO, the IRS appeared to become more aggressive in seeking the capitalization of a variety of transaction expenses, with mixed results in the Tax Court and the Courts of Appeals. ![]() The question of at what point in time, following the acquisition, the acquired corporation could deduct its costs was not at issue in INDOPCO. In that case, involving a friendly acquisition of one publicly traded corporation by another, the government successfully argued that investment banking and legal fees and other expenses incurred by the acquired corporation in connection with its own acquisition had to be capitalized, because the acquisition was expected to result in long-term benefits to the acquired corporation. Conversely, the IRS has taken the view that such expenditures are required to be capitalized, with the result that the tax benefit of incurring the cost is realized either through depreciation or amortization or on a lump-sum basis at a later date, in connection with the disposition of an identifiable tangible or intangible asset to which the cost related or upon the liquidation of the entity that incurred the cost.įocus on this issue was sharpened by the Supreme Court's decision in INDOPCO, Inc. Taxpayers have generally sought, to the greatest extent possible, to deduct such expenditures on a current basis. The tax treatment of transaction costs incurred to facilitate either (i) the creation, acquisition, or enhancement of an intangible asset or (ii) a restructuring or reorganization of a business entity or a capital-raising transaction has been the subject of controversy for many years. New Regulations Regarding Treatment of Transaction Costs
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