The IRS further concluded that nothing about INDOPCO or regulation § 1.263(a)-5 changes the established treatment of capitalized stock issuance costs as reducing the amount realized by the corporation on the stock issuance.Īt the same time, under Section 1032 of the tax code, corporations recognize no gain or loss on the issuance of their own stock. In the memo, the IRS observed that INDOPCO required capitalization even absent a separate asset. However, the regulations are silent as to how a taxpayer is to further treat such capitalized costs. The IRS has consistently maintained that the costs of the “asset” are recoverable as a Section 165 loss only if the stock issuance does NOT happen ( i.e., the transaction is abandoned).Ĭonsistent with that long-standing position, Regulation § 1.263(a)-5, which was issued about ten years after the INDOPCO decision, requires taxpayers to capitalize costs that facilitate a capital transaction, including a stock issuance (public or private). 98 and Regulation § 1.263(a)-1(e), dictating that commissions and other transaction costs paid to facilitate the sale of property are capitalized and reduce the amount realized on the sale. In that sense, the costs are like commissions paid in the process of selling securities, which serve to reduce the amount realized on the sale. If the stock is issued, however, the IRS has taken the position that the costs offset the proceeds of the stock sale. Historically, the IRS has viewed costs that facilitate a pending stock issuance as giving rise to an intangible asset separate from the stock. It asserted that when it became privately held, these intangible benefits ceased to exist, and thus the asset was abandoned, giving rise to a deductible loss under Section 165 of the Internal Revenue Code. Similarly, the corporation in the IRS memo argued that becoming a public company had resulted in future synergies and resource benefits, and therefore the costs facilitating the IPO should be viewed the same as expenses incurred in the purchase of an asset. In INDOPCO, the Court held th/at certain professional investment, banking and legal costs incurred by a target in the course of a friendly takeover were required to be capitalized because the target expected long-term synergistic benefits from its combination with the buyer, even if those benefits didn’t give rise to a separate asset. 79 (1992) and regulation § 1.263(a)-5, and that those authorities had overturned the IRS’s prior position that stock issuance costs are to be netted against the proceeds of the stock issuance. The corporation argued that the costs facilitating the IPO are required to be capitalized pursuant to the Supreme Court’s decision in INDOPCO, Inc. In year three, the corporation completed a take-private transaction (at that point ceasing to be a publicly traded company) and deducted, as an abandonment loss, the capitalized costs incurred in connection with the IPO from year two. The corporation did not net the costs against the proceeds from the stock issuance, but instead capitalized those costs as a separate and distinct asset. In year two, it engaged in an IPO to become a publicly traded company, incurring legal, accounting, investment banking, underwriting, printing, and regulatory and filing fees in the process. In the example in AM 2020-03 (released May 15, 2020), 1 the corporation was a private company in year one. The memorandum is potentially relevant to any corporation that either has undergone, or may in the future undergo, an IPO. A corporation may not deduct previously capitalized costs that facilitated an initial public offering (IPO) even when it later ceases to be a publicly traded company, according to an internal memorandum by the Internal Revenue Service (IRS) made public last week.
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