Can you deduct them, or must you offset them against the proceeds of the stock issuance? A recent Technical Advice Memorandum concludes that stock issuance costs are simply netted, and do not create a separate intangible asset.

In Technical Advice Memorandum 200503026, Tax Analysts Document No. 2005-1316, 2005 TNT 14-22, there were two domestic holding companies that issued additional stock in a public offering. One of the companies reflected the issuance costs in the equity section of its financial statements. The holding companies then merged into another domestic holding company, with both of the targets’ shares being converted into the shares of the acquiring company.

The acquiring company then claimed a refund on an amended tax return, showing increased deductions for transaction costs that no longer provide a future benefit. The Service dug up its old saw: INDOPCO, Inc. v. Commissioner, 503 US 79 (1992). Despite the Service’s long fixation with the INDOPCO case, the TAM concludes that INDOPCO does not change the result of earlier precedent. In fact, a hoary old case, Pacific Coast Biscuit Co. v. Commissioner, 32 BTA 39 (1935) stands for the proposition that no loss is allowed for stock issuance costs. The issuance costs simply reduce the amount of capital the taxpayer received on the stock sales.

When you consider that the stock issuance costs can be substantial, this is obviously not a happy result. Although taxpayers would obviously hope to deduct the costs, the Service treats the issuance costs as a nontaxable item, since the proceeds of the stock sale themselves do not generate income, the issuance costs do not create a loss.

How to Treat Stock Issuance Costs, Vol. 13, No. 7, M&A Tax Report (February 2005), p. 4.