IRS Advises on Treatment of Costs to Facilitate IPO

IRS Advises on Treatment of Costs to Facilitate IPO

Internal Revenue Service

In generic legal advice, the IRS determined that a taxpayer may not deduct previously capitalized costs that facilitated an initial public offering when the taxpayer later ceases to be a publicly traded company as a result of a take private transaction. The taxpayer was originally a privately held company but converted to a publicly traded company. In connection with its IPO, the taxpayer incurred various costs including legal, accounting, investment banking, underwriting, printing, and regulatory and filing fees. The taxpayer capitalized the costs as a separate and distinct asset but did not net the costs against the proceeds from the stock issuance. The taxpayer later ceased to be a publicly traded company as a result of a take private transaction. The taxpayer also deducted the costs incurred in connection with the IPO as an abandonment loss under <a href="/research/federal/usc26/165" resolve="/lr/resolve/section-165/cqrs" title="section 165">section 165</a>. According to the IRS, it is well established that a corporation may not deduct or amortize costs incurred in connection with issuing its capital stock. Costs incurred to prepare for a public offering of stock are considered costs incurred to sell the offered stock and those costs offset or reduce the proceeds of the sale of the stock. The IRS determined that stock issuance costs do not create a separate and distinct intangible asset and even though the costs reduce the amount realized, they are still considered capitalized. Accordingly, because the costs are capitalized by netting against the proceeds, there is no amount to recover later, the IRS said. The amount of a loss under <a href="/research/federal/usc26/165" resolve="/lr/resolve/section-165/cqrs" title="section 165">section 165</a> is the adjusted basis in the property. The IRS noted that under established precedent, costs incident to the sale of stock are never recoverable except when a planned public offering is abandoned. In this case, the IRS found that the taxpayer has no adjusted basis in the stock issuance costs so there is nothing to abandon. Therefore, the taxpayer may not deduct under <a href="/research/federal/usc26/165" resolve="/lr/resolve/section-165/cqrs" title="section 165">section 165</a> previously capitalized costs that facilitated its IPO when it later ceased to be a publicly traded company as a result of a take private transaction. There are no costs to recover and even if there were, the taxpayer continues to benefit from once being a publicly traded company, the IRS concluded.

In generic legal advice, the IRS determined that a taxpayer may not deduct previously capitalized costs that facilitated an initial public offering when the taxpayer later ceases to be a publicly traded company as a result of a take private transaction.

In generic legal advice, the IRS determined that a taxpayer may not deduct previously capitalized costs that facilitated an initial public offering when the taxpayer later ceases to be a publicly traded company as a result of a take private transaction. The taxpayer was originally a privately held company but converted to a publicly traded company. In connection with its IPO, the taxpayer incurred various costs including legal, accounting, investment banking, underwriting, printing, and regulatory and filing fees. The taxpayer capitalized the costs as a separate and distinct asset but did not net the costs against the proceeds from the stock issuance. The taxpayer later ceased to be a publicly traded company as a result of a take private transaction. The taxpayer also deducted the costs incurred in connection with the IPO as an abandonment loss under section 165. According to the IRS, it is well established that a corporation may not deduct or amortize costs incurred in connection with issuing its capital stock. Costs incurred to prepare for a public offering of stock are considered costs incurred to sell the offered stock and those costs offset or reduce the proceeds of the sale of the stock. The IRS determined that stock issuance costs do not create a separate and distinct intangible asset and even though the costs reduce the amount realized, they are still considered capitalized. Accordingly, because the costs are capitalized by netting against the proceeds, there is no amount to recover later, the IRS said. The amount of a loss under section 165 is the adjusted basis in the property. The IRS noted that under established precedent, costs incident to the sale of stock are never recoverable except when a planned public offering is abandoned. In this case, the IRS found that the taxpayer has no adjusted basis in the stock issuance costs so there is nothing to abandon. Therefore, the taxpayer may not deduct under section 165 previously capitalized costs that facilitated its IPO when it later ceased to be a publicly traded company as a result of a take private transaction. There are no costs to recover and even if there were, the taxpayer continues to benefit from once being a publicly traded company, the IRS concluded.

Sec. 165 Losses

Sec. 263 Capital expenditures

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IRS Advises on Treatment of Costs to Facilitate IPO