Capitalized IPO costs are nondeductible after take-private transaction.

• Author: Heroux, Mark
• Position: Initial public offerings

In Advice Memorandum (AM) 2020-003, the IRS addressed how a taxpayer's previously capitalized initial public offering (IPO) transaction costs are treated once the taxpayer becomes a privately held company. The IRS concluded that the expenditures were not deductible as an abandonment loss in the year the take-private transaction closed because stock issuance costs reduced the IPO proceeds and, therefore, did not result in basis that was recovered under Sec. 165.

Furthermore, the IRS concluded that even if the taxpayer had basis in the IPO costs, these expenditures continued to benefit the taxpayer after it became privately held, and, consequently, no abandonment loss deduction was available. Taxpayers considering or implementing take-private transactions should review the guidance when determining the appropriate treatment of previously capitalized stock issuance costs. This discussion summarizes the key points and potential implications of AM 2020-003.

Facts

The taxpayer incurred transaction costs consisting of advisory, regulatory, and filing fees and expenses in connection with an IPO and capitalized the costs as a separate and distinct asset rather than netting the costs against the proceeds from the stock issuance. The taxpayer subsequently ceased to be a publicly traded company after completing a take-private transaction and deducted the previously capitalized IPO transaction costs as an abandonment loss under Sec. 165.

Background

Sec. 165 allows taxpayers to deduct losses sustained during the tax year, provided they are not compensated by insurance or otherwise.

Regs. Sec. 1.165-1(b) generally requires that deductible losses under Sec. 165(a) be evidenced by closed and completed transactions, fixed by identifiable events, and actually sustained during the tax year.

Regs. Sec. 1.165-2(a) allows a deduction for a loss incurred in a business or in a transaction entered into for profit and arising from the sudden termination of the usefulness in that business or transaction of any nondepreciable property where such business or transaction is discontinued or where such property is permanently discarded from use.

Sec. 165(b) provides that, for purposes of Sec. 165(a), the basis for determining the amount of the deduction for any loss from the sale or other disposition of property shall be the adjusted basis provided in Sec. 1011.

Regs. Sec. 1.263(a)-5 requires capitalization of amounts paid to facilitate the acquisition of a trade or...