Deducting acquisition costs incurred by a shareholder, but paid by the corporation.

• Author: Yecies, Mark

In Square D Co., 121 TC No. 11 (2003), the Tax Court ruled that a corporation could amortize fees its acquirer-parent incurred to finance the acquisition, even though the corporation paid the fees.

Facts

In anticipation of initiating a hostile takeover of Square D Co., Schneider S.A. (Schneider), a French corporation, sought financing from two French banks. Schneider obtained a commitment letter from the banks, under which they agreed to provide acquisition financing; as consideration, Schneider agreed to pay a nonrefundable loan commitment fee and to indemnify the banks for any legal fees associated with the commitment of funds. The commitment letter specified that the loans would be made to a Schneider subsidiary organized to effectuate the acquisition. Thus, while Schneider obtained the commitment to finance, it never intended to be the borrower.

Subsequently, Schneider formed Acquisition Co., which entered into a bridge loan agreement (BLA) with the French banks, as contemplated by the commitment letter. Under the BLA, the banks agreed to lend Acquisition Co. the funds needed to effectuate the acquisition. As consideration, Acquisition Co. became liable for a commitment fee (and related legal fees). The BLA contained no provision (1) under which Acquisition Co. assumed Schneider's obligation under the original commitment letter to pay a loan commitment fee or (2) by which Schneider was relieved of its obligation to pay that fee. In August 1991, Acquisition Co. merged with and into Square D, with the latter surviving; the Square D shareholders exchanged their stock for cash. As the surviving corporation, Square D effectively assumed Acquisition Co.'s obligations under the BLA.

Following the merger, Schneider paid a commitment fee to the French banks, and sought reimbursement from Square D. In 1993, Square D paid Schneider the requested amount. In its court petition, Square D asserted entitlement to a deduction in 1991 for the reimbursement payment. In addition, in 1991 Square D reimbursed the French banks for legal fees incurred in the financing transaction and deducted this amount under Sec. 162(a) on its 1991 return.

Analysis

The Service argued that Square D could not deduct either the commitment fee or the legal fee paid, because they were Schneider's legal obligation, but the Tax Court disagreed. The court found it persuasive that under the BLA, Acquisition Co. (and consequently, Square D, as the merger survivor) was obligated to pay...