Most Americans don’t spend much time thinking about Internal Revenue Service policy, nor should they have to. They’re supposed to trust that the agency will apply the rules the same way every time so businesses can plan ahead, invest, and innovate. Investment decisions, research and development, job creation, and mergers and acquisitions depend on stable, predictable tax rules. But when the IRS abruptly reinterprets long-standing tax rules, especially by retroactively reclassifying routine business expenses, it injects uncertainty into markets that depend on clear and consistent guidance.
This concern has become more acute in recent months as the IRS has undergone notable internal shifts, capped by President Donald Trump’s decision to withdraw Donald Korb’s nomination for Chief Counsel. The move reflects deeper concerns about how the agency’s legal positions shape economic behavior—from the cost of capital to the incentives behind mergers and investment. The clearest example is the IRS’s effort to recast ordinary breakup fees as capital losses—a shift that would reshape how firms approach risk and investment.
The recent Tax Court ruling in AbbVie v. Commissioner underscores why this issue matters. The court held that the breakup fee AbbVie paid after its failed merger with Shire PLC was an ordinary business expense, consistent with decades of IRS precedent. Yet the IRS appealed this ruling in an effort to reclassify breakup fees as capital losses, effectively taxing them more heavily.
In 2014, AbbVie entered into a proposed merger with Shire PLC, a biotech firm. As in virtually every major merger, the agreement included a breakup fee designed to compensate one party if the deal didn’t close. Breakup fees are standard tools that encourage due diligence by firms and are routine costs of doing business in a competitive marketplace. When the merger unraveled, AbbVie paid the $1.64 billion breakup fee and deducted it as an ordinary business expense, consistent with longstanding IRS rulings.
The IRS rejected this and reclassified the fee as a capital loss, making it effectively nondeductible, and demanded an additional $572 million in taxes from AbbVie. This approach ignored the consistent line of court decisions treating breakup fees as ordinary business expenses. The Tax Court restored that clarity, but by appealing the ruling, the IRS has injected new uncertainty into how firms plan and price mergers.
That uncertainty has real economic consequences. Breakup fees exist because mergers are risky ventures. If the IRS can retroactively redefine these fees, the cost of pursuing deals rises, and fewer transactions will move forward. That is especially damaging in pharmaceuticals, where successful mergers link two complementary strengths: smaller firms reinvesting in early-stage research and larger firms distributing products at scale. Smaller firms, not the industry giants, are often the most affected. They depend on stable M&A incentives to raise capital, finance innovation, and secure successful exits.
If breakup fees become effectively non-deductible then investors will have less incentive to finance research-intensive startups, and larger companies will hesitate to acquire promising innovators. Across all industry sectors, businesses would be discouraged from the kind of strategic dealmaking that drives productivity and streamlines operations—forces that keep America competitive globally.
A stable, pro-growth environment depends on consistent application of the tax code. Businesses need clear rules, not sudden reinterpretations that conflict with long-settled precedent and now the Tax Court itself. The IRS’s role is to provide that clarity, not disrupt it.
The next IRS leader has an opportunity to bring the agency back in line with precedent and the administration’s economic priorities. Dropping the AbbVie appeal would send a strong signal that the IRS intends to support an investment-friendly environment.
Businesses thrive when rules are predictable. The IRS shouldn’t undermine the stability companies have long relied on in the merger and acquisition space, especially not by changing the rules after the fact.
Danielle Zanzalari is an Assistant Professor of Economics at Seton Hall University. She frequently researches on financial regulation, public finance and antitrust issues.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller News Foundation.
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