IRS allows deduction for severance payments after Sec. 338 election.

• Jurisdiction: United States
• Date: 01 October 1997
• Author: Brodman, Howard

In Letter Ruling (TAM) 9721002, the IRS analyzed the question of whether severance payments made by a new target corporation are required to be capitalized in the basis of the assets acquired from an old target corporation as a result of a Sec. 338 election.

B acquired the stock of T, a wholly owned subsidiary of P, in a qualified stock purchase, and the parties filed a timely election under Sec. 338(g) and (h) (10). Two days after the purchase, B issued termination notices to certain T employees, who were entitled to severance pay pursuant to contracts previously entered into with T and T's personnel policy. B deducted these payments on its consolidated income tax return as ordinary and necessary business expenses.

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