Deductibility of target's professional fees in a hostile takeover.
Author | Baldasaro, P. Michael |
Position | INDOPCO, Inc. case |
As the Supreme Court was preparing to hear oral arguments in INDOPCO, Inc., Sup. Ct., 1992 (formerly National Starch & Chemical Corp., 93 TC 67 (1989), all'd, 918 F2d 426 (3d Cir. 1990)), on the deductibility of professional fees in a friendly takeover, the IRS attempted to further erode taxpayers' ability to deduct professional fees related to a takeover or tender offer, this time in a hostile takeover setting. In IRS Letter Ruling (TAM) 9144042, the Service invoked the long-term benefit test applied in National Starch to fees incurred in a hostile takeover, stating unequivocally that the nature of the takeover (hostile or friendly) is not determinative of the proper tax treatment of such fees.
In the technical advice memorandum, X received an unsolicited tender offer from Z to purchase approximately 45% of its common stock. To assess the terms and impact of the tender offer, X's board of directors engaged a team of investment bankers, attorneys and tax and media professionals. Relying on their advice, X's board of directors rejected the tender offer, and instituted steps to defend against a takeover. These steps included a counter-tender offer for Z's shares, a self-tender offer for X's own shares, and a judicial challenge of Z's credit agreement and Z's obligations under a consent agreement with X. After a temporary restraining order was imposed on Z's takeover attempt, X and Z entered into a...
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