Termination Fee Treated as Capital Loss

The IRS ruled privately that a fee paid by one corporation to another in the course of a merger when the offer was withdrawn was a capital loss. As such the loss can only be used to offset the corporation’s capital gains; excess losses can be carried back 3 years and forward for 5 years. Under Code Sec. 1274A, a cancellation payment is treated the same as the underlying asset to which it relates, which in this case is stock, a capital asset. Had the fee been characterized as ordinary income, it would have been fully deductible.