The recent decision in AbbVie Inc. and Subsidiaries v. Commissioner, 164 T.C. No. 10 (2025), provides critical guidance for tax professionals regarding the application of Internal Revenue Code (I.R.C.) § 1234A, specifically concerning the characterization of termination fees as ordinary deductions or capital losses. This case clarifies the often-debated phrase "right or obligation . . . with respect to property" within § 1234A(1) and its implications for complex corporate transactions.

Factual Background

In July 2014, AbbVie, Inc. (a domestic public corporation) and Shire plc (a foreign public limited company) announced their boards’ agreement on the terms of a proposed combination, valuing Shire at nearly $55 billion. The combination was structured in two phases: Shire shareholders would exchange their shares for shares of a newly formed Jersey company, New AbbVie, via a "scheme of arrangement," and then AbbVie would merge into a New AbbVie subsidiary, with AbbVie shareholders also receiving New AbbVie shares.

To facilitate this, AbbVie and Shire entered into a "Co-operation Agreement," outlining mutual commitments to implement the proposed combination. A key provision of this agreement was AbbVie’s undertaking to pay Shire a "Break Fee" of approximately $1.6 billion under certain conditions, primarily if AbbVie’s board failed to recommend the combination to its shareholders or if shareholder approval was not obtained after an "AbbVie Adverse Recommendation Change". AbbVie’s core obligations included securing regulatory approvals, cooperating with Shire, recommending the merger to its shareholders, and using best efforts to obtain shareholder approval. The agreement stipulated that AbbVie’s board could only withdraw its recommendation if it determined that failing to do so would be inconsistent with its fiduciary duties under Delaware Law.

In September 2014, the Department of the Treasury issued I.R.S. Notice 2014-52, signaling new retroactive regulations on inversion transactions. Following a review of this guidance, AbbVie’s board withdrew its recommendation for the proposed combination in October 2014, citing "unacceptable level of uncertainty" due to the new regulations. Subsequently, AbbVie and Shire entered into a Termination Agreement, which ended the Co-operation Agreement and required AbbVie to pay the Break Fee, amounting to $1,635,410,676. AbbVie made this payment on October 21, 2014.

Taxpayer’s Stance and Commissioner’s Challenge

On its 2014 tax return, AbbVie reported the Break Fee payment as an ordinary deduction. The Commissioner of Internal Revenue, however, disallowed this deduction. The Commissioner asserted that I.R.C. § 1234A(1) required AbbVie to treat the payment as a capital loss, reasoning that the payment and termination of the agreement resulted in a loss that must be treated as from the sale of a capital asset. The central issue before the Tax Court was whether I.R.C. § 1234A(1) applied to AbbVie’s payment to Shire under the Termination Agreement.

Legal Framework: Section 1234A

Purpose and History of Section 1234A

Before the enactment of I.R.C. § 1234A, judicial decisions often allowed taxpayers to treat contract cancellations as generating ordinary, rather than capital, losses. Taxpayers exploited this by strategically canceling contracts that would have otherwise resulted in a capital loss, effectively converting capital losses into ordinary losses. Some taxpayers even engaged in "tax straddles," where offsetting contracts were used to realize capital gains on appreciated contracts while canceling depreciated contracts for ordinary losses, yielding a tax benefit even with zero economic gain.

Concerned about these tax-avoidance strategies and the ability of taxpayers to elect loss character, Congress enacted § 1234A in 1981. The original provision generally required gains or losses from terminations of rights with respect to "personal property" to be treated as capital. This was designed to ensure that transactions "economically equivalent to the sale or exchange of a capital asset obtain similar treatment". Congress has amended § 1234A multiple times, most notably in 1997, expanding its scope from "personal property" to "property" generally.

For the tax year at issue, I.R.C. § 1234A provided that: "Gain or loss attributable to the cancellation, lapse, expiration, or other termination of— (1) a right or obligation (other than a securities futures contract, as defined in section 1234B) with respect to property which is (or on acquisition would be) a capital asset in the hands of the taxpayer, or (2) a section 1256 contract (as defined in section 1256) not described in paragraph (1) which is a capital asset in the hands of the taxpayer, shall be treated as gain or loss from the sale of a capital asset".

The Four Requirements for Application

The Tax Court identified four requirements for I.R.C. § 1234A(1) to apply:

There must be a gain or loss.
That gain or loss must be attributable to the cancellation, lapse, expiration, or other termination of a right or obligation.
The terminated right or obligation must be "with respect to" property.
The property underpinning the terminated right or obligation must currently be (or would on acquisition be) a capital asset in the hands of the taxpayer.

The critical point of contention in AbbVie was the third requirement: whether the terminated right or obligation was "with respect to property".

Defining "With Respect to Property"

The Court began its analysis by considering the ordinary meaning of "with respect to," which generally means "concerning" or "relating to". Courts have often given this phrase and similar ones ("related to," "in connection with") a broad meaning. However, the Supreme Court and Tax Court decisions have consistently recognized that such broad phrases are necessarily limited by the context in which Congress uses them. An overly literal interpretation would render these phrases "indeterminat[e]" and grant "near-infinite breadth" to the statute. The context is critical to prescribing the meaning.

Considering this contextual limitation, the Tax Court held that a "right or obligation . . . with respect to property" within the meaning of § 1234A(1) is a right or obligation to exchange (i.e., to buy, sell, or otherwise transfer or receive) an interest in property. Conversely, a right or obligation to perform services related to property or to otherwise act without such a transfer is not covered.

Supporting Principles and Precedent

Several factors supported the Court’s interpretation:

Provision’s Operation: Section 1234A is a character-shifting provision designed to capture gains and losses from transactions that, if completed, would have resulted in sales, potentially generating capital gain or loss. The statutory consequence—treatment as a sale of a capital asset—implies that the targeted rights and obligations are those that would have resulted in a capital transaction, i.e., "transactions where an interest in property would have changed hands".
"Capital Asset" Language: The requirement that the property "is (or on acquisition would be) a capital asset in the hands of the taxpayer" further suggests that the underlying transaction must have included a direct or indirect transfer of a property interest to or from the taxpayer.
Related Provisions: The effective date provision of the Economic Recovery Tax Act of 1981 (ERTA), which enacted § 1234A, referred to "positions established" and "positions held" by the taxpayer. I.R.C. § 1092(d)(2), also enacted by ERTA, defines "position" as "an interest . . . in personal property". This strongly implies that the rights and obligations covered by § 1234A(1) must take the form of property interests. The inclusion of § 1234A in the "Tax Straddles" title of ERTA also supports this.
Prior Caselaw: While no court had addressed the precise issue, prior appellate and Tax Court decisions discussing § 1234A(1) consistently focused on rights to buy and sell capital assets.
Legislative History: Committee reports from 1981 explicitly stated that § 1234A was enacted to ensure "that gains and losses from transactions economically equivalent to the sale or exchange of a capital asset obtain similar treatment". The 1997 amendment merely extended the section to all types of property, not to more tenuously related contracts.

Application to AbbVie’s Break Fee

Nature of the Co-operation Agreement

The Tax Court determined that the essence of the Co-operation Agreement was not an agreement to buy, sell, or otherwise transfer property. Crucially, neither AbbVie nor Shire owned the valuable property (their own shares) that would have been exchanged in the proposed combination. The power to confer such rights rested with their public shareholders, not the companies themselves. Therefore, the Co-operation Agreement could not have directly conferred "rights or obligations with respect to [AbbVie or Shire shares]".

Instead, AbbVie’s core obligations under the Co-operation Agreement were fundamentally in the nature of services aimed at increasing the likelihood of the combination. These included pursuing regulatory approvals, recommending the combination to shareholders, and hosting a shareholder meeting. The Court characterized these as "simply promises to provide services to clear the way for a desired exchange of stock". While AbbVie also had obligations to implement the combination if approved, these were considered "mechanics" to effect the shareholders’ wishes and were not the crux of the agreement.

Triggering Event for the Break Fee

A pivotal point in the Court’s analysis was that the Break Fee was triggered by the withdrawal of the AbbVie board’s recommendation in support of the combination, not by AbbVie’s failure to complete the combination itself. This reinforced the Court’s conclusion that the Break Fee was not paid to terminate rights and obligations with respect to property under § 1234A(1).

Contingent Rights and Authority

The Commissioner argued that the Co-operation Agreement created contingent rights and obligations for New AbbVie to acquire Shire’s shares, subject to shareholder approval. The Court acknowledged that § 1234A(1) can encompass certain contingent rights and obligations. However, it found that the "conditions" in the Co-operation Agreement were not typical contingencies but rather reflected AbbVie’s and Shire’s fundamental lack of authority to firmly agree to an actual combination. They did not own their own shares and lacked the legal authority to commit to such transactions. The most they could do was agree to convince their shareholders to buy and sell, which the Court viewed as performing services. For these reasons, the Court concluded that any rights and obligations AbbVie had related to Shire’s shares were not "with respect to property" within the meaning of I.R.C. § 1234A(1).

Conclusion

The Tax Court ultimately held that the Break Fee paid by AbbVie was not attributable to the termination of a "right or obligation . . . with respect to property" as defined by I.R.C. § 1234A(1). Instead, the payment was attributable to the termination of an agreement that set out mutual commitments to regulate the implementation of a proposed combination, with the core obligations being service-oriented rather than direct property transfers.

As a result, I.R.C. § 1234A(1) did not apply to the Break Fee, meaning AbbVie was not required to treat the Break Fee as a capital loss. The Court granted AbbVie’s Motion for Summary Judgment and denied the Commissioner’s, affirming AbbVie’s position that it correctly claimed the Break Fee as an ordinary deduction. This decision underscores the importance of a nuanced, contextual analysis of contractual obligations in determining the tax character of termination payments under § 1234A.

Prepared with assistance from NotebookLM.