Deducting severance payments.In two technical advice memoranda (TAMs), the Internal Revenue Service ruled that an acquiring company can deduct (on a current basis) post-acquisition severance payments made to the acquired company's employees. In TAM In Tam (September 22, 1916 - April 1, 2006) is a former Prime Minister of Cambodia. He served in that position from May 6 1973 to December 9 1973, and had a long career in Cambodian politics. 9721002, a buyer, which had purchased a target's stock in a transaction it had elected to treat as an asset acquisition, terminated employees whose severance rights had been established in preacquisition plans. The IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. concluded the liability for severance payments had arisen after the acquisition because the buyer had been free to decide after the acquisition whether to terminate the employees. Thus, the severance payments were not a preacquisition liability assumed by the buyer and did not have to be treated as part of the purchase price or the basis. The IPS (1) (Inches Per Second) The measurement of the speed of tape passing by a read/write head or paper passing through a pen plotter. (2) (IPS) (Intrusion Prevention S also concluded the severance payments did not have to be capitalized because they were "coincidental co·in·ci·den·tal adj. 1. Occurring as or resulting from coincidence. 2. Happening or existing at the same time. co·in " and originated in the termination of the target company's employees. In TAM 9731001, the acquiring company had agreed as part of a stock acquisition to make severance payments in excess of those required under the acquired company's premerger plan. The IRS determined the negotiated increase in the severance payments was "coincidental to the acquisition" and motivated by the taxpayer's desire to integrate the merged business operations Business operations are those activities involved in the running of a business for the purpose of producing value for the stakeholders. Compare business processes. The outcome of business operations is the harvesting of value from assets . The payments were deductible That which may be taken away or subtracted. In taxation, an item that may be subtracted from gross income or adjusted gross income in determining taxable income (e.g., interest expenses, charitable contributions, certain taxes). because they related to postacquisition employment activity. Observation: In revenue ruling 94-77 (1994-2 CB 19), the IRS reassured taxpayers that the tax treatment of severance payments remained deductible, for the most part, on a current basis, a position that was not changed by the decision in Indopco Inc. v. Commissioner (503 U.S. 79, 1992). However, 94-77 did not address the federal tax treatment of severance payments made as part of the acquisition of property, including a deemed acquisition of assets Acquisition of assets A merger or consolidation in which an acquirer purchases the selling firm's assets. . These TAMs are important because they clarify that severance payments made after an acquisition are deductible even when the acquisition was the catalyst for the payments or the payments were coincidental to the acquisition. Tracy Hollingsworth, Esq., staff director of tax councils at Manufacturers Alliance, Arlington, Virginia. |
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