US IRS concludes that termination fees in failed merger were capital losses

The IRS determined that transaction termination payments are Section 165 losses and not Section 162 business expenses.

Applying Section 1234, the IRS Office of Chief Counsel determined that a taxpayer must recharacterize a loss under Section 165 for termination fees as a capital loss.

The IRS conclusion that Section 1234A applies to all transaction-related expenses conflicts with views held by some practitioners, who note that transaction costs are typically paid for services rendered in connect…