IRS examines treatment of restructuring costs.

• Author: Staley, Jessica M.

In December 2007, the IRS issued Technical Advice Memorandum (TAM) 200749013, providing guidance on the treatment of costs related to investigating various corporate restructuring transactions that ultimately were not consummated. Specifically, the TAM addresses whether these costs are deductible as ordinary and necessary business expenses under Sec. 162(a), are deductible losses under Sec. 165, or must be capitalized under Sec. 263(a).

Costs incurred while investigating and pursuing mutually exclusive proposed business restructurings (meaning that only one restructuring transaction can be completed) must be capitalized as part of the completed transaction costs. If part of the mutually exclusive proposal is abandoned, no abandonment loss under Sec. 165 is recognized unless the entire proposal is abandoned ( United Dairy Farmers, Inc., 267 F3d 510 (6th Cir. 2001)). Alternatively, restructuring costs incurred in investigating and pursuing nonmutually exclusive potential business restructurings, otherwise capitalized under Sec. 263(a), are deductible under Sec. 165 when each proposed transaction is abandoned (Rev. Rul. 73-580).

The TAM was written in response to a taxpayer engaged in one primary and two lesser businesses that restructured its business in order to refocus its efforts on its core activities. Before restructuring, the taxpayer investigated several options, including (1) maintaining the status quo, (2) a leveraged recapitalization or a full recapitalization with a spin-off of the lesser business divisions, and (3) divestiture of the lesser business divisions, including a targeted stock offering or an initial public offering (IPO) with a split-off or spin-off. The taxpayer's board of directors quickly eliminated the first two alternatives and then shortly thereafter eliminated the consideration of a spin-off or targeted stock offering. The only restructuring option remaining was an IPO split-off, and the board soon approved this alternative. Subsequently, the taxpayer formed a subsidiary and contributed to the subsidiary its lesser business divisions. The IPO of the subsidiary was soon completed. The taxpayer abandoned the split-off of the subsidiary because it would not maximize shareholder value but later completed a spin-off of the subsidiary.

The IRS field personnel maintained that the...