If the taxpayer is not the proper legal entity to take the transaction costs into account, the amount (if paid by the taxpayer) may be a capital contribution, a distribution, or a loan. An amount considered to have been paid by a party to the transaction includes an amount paid on its behalf by another party to the transaction. The party to the transaction that pays a cost is not always the legal entity that incurs the cost. Generally, the legal entity that incurs a cost takes the cost into account for tax purposes, either as a deduction, or as a capital expenditure however, there is an exception for costs that facilitate a borrowing, as defined in Reg. The proper legal entity. Many of the transactions listed under Reg. 263(a) regs (which are not discussed in the Practice Unit) address facilitative costs.Įxamining a transaction cost issue. The Practice Unit discusses the three-step process for analyzing a transaction costs issue: (1) determine whether the taxpayer is the proper legal entity to take the transaction costs into account for tax purposes (2) determine whether the costs facilitate the transaction and (3) determine how the taxpayer should treat facilitative costs it must capitalize.
TRANSACTION COSTS SAFE HARBOR CODE
In addition, other sections of the Code Sec. …forming or organizing a disregarded entity 351, or to a partnership in exchange for a partnership interest, as described in Code Sec. …contributing property to a corporation in exchange for stock, as described in Code Sec. 368 and a stock distribution described in Code Sec. …restructuring, recapitalizing or reorganizing the capital structure of a business entity, including a reorganization described in Code Sec. …acquiring an ownership interest in the taxpayer …acquiring an ownership interest in a business entity if, immediately after the acquisition, the taxpayer and the business entity are related within the meaning of Code Sec. …acquiring assets that constitute a trade or business § 1.263(a)-5(a) requires a taxpayer to capitalize amounts that facilitate: § 1.263(a)-5 and provide guidance where Reg. Case law and other published guidance interpret the application of the rules under Reg. § 1.263(a)-5(a) and how the costs that facilitate some of those transactions are treated when capitalized. § 1.263(a)-5 describes whether a cost incurred facilitates a transaction listed in Reg. § 1.263(a)-5(a) (e.g., acquiring or selling a trade or business, or changing a company’s capital structure), the taxpayer must capitalize the cost.īackground. If the cost facilitates a transaction described in Reg. In a Practice Unit, IRS has set out the best practice recommendations for examining a taxpayer’s treatment of corporate transaction costs, i.e., costs that a taxpayer may incur, such as legal, accounting, consulting, or investment advisory service fees, when executing a business transaction.
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