Capitalization requirement in Wells Fargo reversed.

• Author: Sair, Edward A.

In Wells Fargo & Co., 224 F3d 874 (2000), rev'g in part 112 TC 89 (1999), the Eighth Circuit held that a bank is not required to capitalize certain investigatory and due diligence costs and officers' salaries incurred in connection with its acquisition by another corporation.

Davenport Bank and Trust Co. (DBTC) was an Iowa state bank that provided local banking and related services. In 1989, Iowa adopted interstate banking legislation that, for the first time, allowed banking institutions in states contiguous to Iowa to acquire Iowa banks. Concerned about an ability to remain competitive, DBTC began talking with Norwest Corp. (Norwest) about combining their businesses.

In July 1991, DBTC's board of directors approved a transaction by which DBTC and Bettendorf Bank, National Association (BBNA) (a subsidiary of Norwest), would consolidate to form a single national bank that Norwest would wholly own; BBNA's board approved the transaction on the same day. The transaction became effective in January 1992.

Prior to (and in connection with) the transaction, DBTC incurred certain investigatory and due diligence costs. It retained outside advisers to help evaluate the transaction, and several of DBTC's own officers performed services related to the acquisition. The investigatory costs were for legal services rendered before DBTC agreed to participate in the acquisition. A law firm was retained to investigate whether DBTC would strategically fit with Norwest, and whether a reorganization between DBTC and Norwest would be good for the community. The remaining investigatory costs related to services performed by the law firm in investigating whether, after the transaction, Norwest's director and officer liability coverage would protect DBTC's directors and officers for acts and omissions occurring before the transaction.

Some costs were for services performed by the law firm in connection with Norwest's due diligence review. Officers' salaries in question were part of their regular annual salaries and there was no increase in their compensation as a result of their work attributable to the transaction. None of the officers were hired specifically to render services on the transaction, but to conduct the bank's day-to-day business activities. DBTC deducted all of the fees paid to the law firm, as well as the entire amount of the officers' salaries, on its 1991 tax return.

Citing INDOPCO, Inc., 503 US 79 (1992), the Tax Court agreed with the IRS in...