IRS Rules That A Partially Tax-Free Transaction Qualifies As 'Covered Transaction' For Purposes Of The Transaction Cost Regulations

The Internal Revenue Service (the Service) recently released Priv. Ltr. Rul. 2013-19-009,1 which interprets the transaction cost regulations of Treas. Reg. §1.263(a)-5. Under these rules, transaction costs associated with certain "covered" transactions receive favorable tax treatment.2 Covered transactions include various reorganizations and taxable acquisitions; the rules generally exclude non-taxable, divisive and other corporate transactions. The ruling is significant because the Service found that a hybrid transaction, which involved both a taxable acquisition and a non-taxable exchange (here, a Section 351 transaction), qualified as a covered transaction. While this position could be inferred from previous rulings, this ruling makes the government's view explicit. Although the ruling provides welcomed insight, it unfortunately does not provide broad guidance regarding the application of the covered transaction rules, which means questions remain for both tax return and provision purposes. It is unclear from the ruling whether all hybrid transactions, or merely certain ones, qualify for covered transaction status.

Background - PLR 2013-19-009

Under Treas. Reg. §1.263(a)-5(a), a taxpayer must capitalize an amount paid to facilitate any one of ten specified transactions. The list of specific transactions includes for example: certain acquisitive transactions;3 debt issuance;4 stock issuance;5 writing an option;6 and a tax-free exchange under Section 351 or 721.7 These regulations provide that capitalization is required for costs that facilitate one of these transactions, and specify that the costs of investigating a transaction are generally considered facilitative. That is, transaction costs that are attributable to services provided in the process of investigating or pursuing one of the ten transaction types are generally considered non-deductible.

However, the regulations provide a significant exception for costs associated with investigating a transaction defined as a covered transaction. Specifically, costs incurred prior to a definitive decision to proceed with a transaction may be deducted (generally referred to as the bright-line date rule.)8 For this purpose, the regulations describe covered transactions as: (i) taxable acquisitions of assets that constitute a trade or business; (ii) taxable acquisitions of an ownership interest in a business entity if immediately after the acquisition the parties are related; and (iii) certain reorganizations.9

In Priv. Ltr. Rul. 2013-19-009...