Retainer fees not deductible when applied to acquisition costs.

• Author: Sargent, Amy
• Position: Corporate acquisitions

The Federal Circuit recently issued an opinion overruling a Claims Court decision that allowed a deduction for a retainer fee applied to acquisition costs. In Dana Corporation, 4/8/99, the taxpayer paid an annual retainer fee to a law firm with expertise in the area of corporate takeovers. The retainer fee ensured that the law firm would be available if the taxpayer needed legal representation and that it would not represent competitors. The retainer was applied to any services that the law firm actually rendered. In the years at issue, the taxpayer used the law firm's services to make corporate acquisitions; the retainer fee was credited against the legal fees for these services. The taxpayer subsequently deducted the retainer fee and capitalized the remaining portion of the legal fees.

Applying the origin-of-the-claim doctrine, the Claims Court determined that the claim originated at the time the payment was made to the law firm to guarantee its representation, rather than when the legal fees were incurred. The Claims Court cited Newark Morning Ledger...