Takeover defense expenditures: deductibility not necessarily precluded by National Starch.

Takeover Defense Expenditures: Deductibility Not Necessarily Precluded by National Starch 

Introduction

When confronted with a takeover attempt, a target corporation's board of directors must evaluate the tender offer in view of its fiduciary responsibility to shareholders. Regardless of whether a takeover attempt is "friendly" or "hostile," the directors will be compelled to take several takeover-related actions. For instance, an investment banker often is retained to value the corporation's stock and issue a "fairness" opinion. The costs associated with the various takeover-related actions can be substantial, often exceeding $1 million. Given the increased frequency with which corporations are confronted with takeover threats and the magnitude of the resultant costs, the proper tax treatment to be accorded those costs is of considerable importance to tax practitioners.

Despite the obvious importance of the issue, the deductibility of costs incurred by a target in response to a takeover attempt was only recently addressed by a court. In July 1989, the Tax Court provided the first judicial analysis of the tax treatment accorded a target's takeover-related expenses. In National Starch & Chemical Corp. v. Commissioner,(1) the court held that the costs incurred by a target in a friendly takeover constituted nondeductible capital expenditures. The Tax Court did not expressly address the treatment of expenses incident to resisting a tender stock offer, and there remains some question whether National Starch can be extended to preclude the deductibility of such expenses.

Until recently, the Internal Revenue Service (IRS) had assented to the deductibility of expenses incurred by a target in resisting a tender offer. In two different Technical Advice Memoranda (TAM),(2) the IRS held certain takeover defense costs to be deductible expenditures. In light of its recent victory in National Starch, however, the IRS has reversed its position. The IRS's current position, as set forth in a third TAM,(3) is that the Tax Court's decision in National Starch precludes the deductibility of costs incident to resisting a takeover attempt.

This article examines the proper tax treatment of a target's takeover-related expenses. The Tax Court's holding in National Starch is thoroughly analyzed as is the IRS's changing position on the issue. These and other authorities are then applied to expenses incurred by a target in both "friendly" and "hostile" takeover attempts in an effort to establish the proper tax treatment of such expenses. The article concludes with an argument favoring the deductibility of certain takeover-related expenses, particularly those incident to defending against a takeover attempt.

National Starch Decision

1. Background

In a meeting with National Starch and Chemical Corporation's (NSC) chairman of the board and its principal shareholder, representatives of Unilever expressed an interest in making a (friendly) tender offer for all of NSC's stock. The principal shareholder indicated that he would voluntarily relinquish his holdings (approximately 14.5 percent of the shares outstanding) as long as the takeover was structured in such a manner as to be tax-free to any interested shareholders. As a result, NSC's independent legal counsel was engaged to devise a tax-free structure for the transaction.

The resulting strategy, which had been blessed by the IRS in a favorable letter ruling, involved the formation of two new corporations within the Unilever corporate family for use in acquiring NSC's outstanding stock. One of those corporations (NSC Holding Corp.) exchanged its nonvoting preferred stock for each share of NSC's common stock, a transaction that was tax-free under section 351 to each participating NSC shareholder. The other new corporation (NSC Merger, Inc.) acquired the remaining NSC stock in a reverse subsidiary cash merger (into NSC), a transaction that was taxable to each participating NSC shareholder.

Prior to consummating the aforementioned transaction, NSC's board of directors had been instructed by its legal counsel that they had a fiduciary duty (under Delaware law) to ensure that the tender offer was fair to the shareholders. Specifically, the board was advised to retain an independent investment banking firm to value the stock and to serve as counsel in the event of any hostile takeover attempt by Unilever or other party. As a consequence, NSC engaged the services of Morgan Stanley & Co. to value the stock, to issue a fairness opinion, and to stand ready in the event of a hostile takeover attempt. Morgan Stanley ultimately submitted a report to NSC's management favoring the tender offer. The report was based, in part, on Morgan Stanley's belief that NSC affiliation with Unilever would produce synergistic effects.

The costs incurred by NSC with respect to the takeover included approximately $.5 million in legal fees and $2.2 million in fees for investment banking services. NSC originally had deducted only the investment banking fee. The company asserted the deductibility of the legal fees only after the IRS had issued a notice of deficiency in which the deduction for the investment banking fee was disallowed. The issue confronting the Tax Court was whether any of NSC's takeover-related expenses were deductible trade or business expenses under section 162 of the Internal Revenue Code.

2. The Government's Position

The IRS's principal contention was that the takeover-related expenses constituted nondeductible capital expenditures.(4) In particular, the IRS argued that the expenses were nondeductible because the takeover transaction constituted a recapitalization, merger, or reorganization. Although the Tax Court acknowledged that expenditures incident to such transactions generally constitute nondeductible capital expenditures,(5) the court was unconvinced that Unilever's takeover of NSC, as structured, sufficiently resembled any of the types of transactions proffered by the IRS.(6)

The IRS offered as evidence of a recapitalization certain (post-takeover) amendments made to NSC's Charter of Incorporation that reduced the amount of previously authorized stock. The Tax Court, however, noted that those amendments were made for administrative purposes and that the changes were not relevant for the issue at hand. Although the IRS had indicated in the favorable letter ruling that the reverse subsidiary cash merger would be ignored for tax purposes, the agency pointed to that portion of the transaction as evidence that the takeover was, in substance, a merger. The Tax Court concurred with the IRS's initial ruling, finding the merger of NSC Merger, Inc. into NSC to be incidental to the transaction; thus, it rejected the idea that the expenditures were incurred incident to a merger. The IRS's final line of attack was that, from NSC's viewpoint (versus the shareholders' perspective), the takeover transaction was essentially a "B" reorganization under section 368(a)(1)(B). The Tax Court rejected this line of reasoning.

Instead of accepting any of the IRS's various arguments, the Tax Court applied its own test to the takeover-related costs to determine their deductibility. In applying a "long-term benefit" test, the court concluded that the costs represented nondeductible capital expenditures. The Tax Court's holding is delineated below.

3. The Tax Court's Analysis:

Long-Term Benefit Test

The Tax Court initiated its analysis of the tax treatment to be accorded the takeover-related expenses by reviewing the prerequisites to a valid section 162(a) deduction. Of the five requirements set forth by the court, only one was relevant in the instant case: the costs must represent current expenses, not capital expenditures.(7) Although the Tax Court had rejected the IRS's contention that the takeover of NSC constituted a merger, reorganization, or recapitalization, the court sought guidance from several court decisions involving changes in corporate structure or capitalization in order to classify the expenditures at hand.

Upon analyzing the resolution of the deduction/capitalization issues in those cases, the Tax Court concluded that NSC's takeover-related costs represented a capital expenditure. The court established this conclusion by applying a "long-term benefit" test to the takeover costs. Specifically, the Tax Court pointed to the decision of NSC's directors that it would be in the long-term interest of NSC to be acquired by Unilever.(8) Since the takeover expenditures were incurred incident to the shift in ownership of NSC to Unilever, the costs therefore produced a long-term benefit to NSC.

The Tax Court cited several cases, particularly the Third Circuit's decision in E.I. du Pont de Nemours & Co. v. United States,(9) in which an expenditure resulting in a long-term benefit was held to be capital in nature. The Tax Court noted that capitalization of such expenditures was appropriate because the expenditures related more to the corporation's operations or improvement for an indefinite duration than to income production in the current year.(10) The court concluded that while the period of benefits may not always be controlling, "it nonetheless remains a prominent, if not predominant, characteristic of a capital item." (11) Additionally, the court noted that an expenditure could be capital in nature even if it did not result in the acquisition or increase of an asset,(12) and that the absence of such an asset did not, by itself, make an expenditure currently deductible.(13)

Having found the takeover-related costs incurred incident to a long-term benefit, the Tax Court held that the costs constituted a nondeductible capital expenditure. The court was not swayed by NSC's various arguments for deductibility of the takeover costs.

NSC presented three arguments why the takeover-related costs should be deductible as trade or business expenses under section 162(a). The Supreme Court's ruling in Commissioner v. Lincoln Savings & Loan Ass'n (14) was offered by NSC as support for two of its arguments. The relevant language of that decision, in which the Court addressed the deductibility of special premiums paid by Lincoln to the FSLIC, reads as follows:

[T]he presence of an ensuing benefit that may have

some future aspect is not controlling; many expenses

concededly deductible have prospective effect beyond

the taxable year.

What is important and controlling, we feel, is that

the ... payment serves to create or enhance for

Lincoln what is essentially a separate and distinct

additional asset and that, as an inevitable consequence,

the payment is capital in nature and not an

expense ....(15)

NSC first asserted that the Supreme Court's opinion in Lincoln Savings imposed, as a necessary condition for the capitalization of any costs, a requirement that the costs relate to the creation or improvement of a separate and distinct asset. NSC argued that the takeover-related costs failed the Court's "separate and distinct" test. The Tax Court distinguished NSC's facts from those in Lincoln Savings by noting that the Supreme Court was confronted with payments that created or improved a separate and distinct asset. Because the Supreme Court had not considered the obverse situation - the capitalization of payments which failed to create or enhance a separate and distinct asset - the Tax Court did not feel constrained to accept Lincoln Savings as supporting the deductibility of the takeover-related expenses.

In response to the Tax Court's "long-term benefit" test, NSC also argued that Lincoln Savings and other decisions supported the proposition that a future benefit derived from payments was not the controlling factor in the deduction/capitalization issue. The Tax Court assigned little weight to this proposition in NSC's case. The Tax Court apparently felt the issue had been adequately addressed in its analysis of the long-term benefit test.

Finally, NSC argued that the takeover-related costs should be deductible because the "dominant aspect" of the expenditures was to ensure the directors' satisfaction of their fiduciary responsibility to the shareholders. NSC cited several decisions in which the deductibility of expenses had been determined by reference to the dominant aspect of the related transaction. (16) The Tax Court gave recognition to the dominant aspect test but found NSC's application of the test to be unpersuasive:

The dominant aspect of the transaction was not the

fiduciary duty. Instead, the dominant aspect was

the transfer of petitioner's stock for the benefit of

petitioner and its shareholders. We would let the

tail wag the dog if we were to view the stock transfer

as the incidental aspect and the fiduciary duty

that arose from the stock transfer as the dominant

aspect.(17)

The Tax Court, having rejected NSC's various arguments, held all the takeover-related costs to be nondeductible. NSC has filed an appeal in the Third Circuit, which is currently pending.(18)

The IRS's Changing Position

While National Starch serves as clear and compelling authority for the capitalization of certain expenses incurred incident to a friendly takeover, the deductibility of a target's takeover-defense expenses remains an unsettled issue. The IRS twice has acquiesced to the deductibility of expenses incurred in resisting a hostile takeover. The latest of those rulings was recently revoked, however, and the IRS's current position appears to be that National Starch generally precludes the deductibility of takeover defense expenses.

1. Takeover Defense Expenses Are Deductible:

TAM 8927005

Four months prior to the Tax Court's decision in National Starch, the IRS had issued TAM 8927005 (19) in which the deductibility of expenses incident to resisting a takeover was addressed. In TAM 8927005, the board of directors of the target corporation viewed the tender offer as being detrimental to the target's operations (because of the prospective suitor's debt servicing needs) and to the target's minority shareholders (because of the prospective suitor's refusal to acquire all the target's stock). Consequently, the board of directors voted to resist the tender offer.

An investment banker was engaged to assist in the target's defense of the takeover attempt. (20) The investment banker was charged with developing a defensive strategy, including a search for an alternative suitor, and with providing a fairness opinion. As a result of the investment banker's efforts, a "white knight" agreed to acquire all of the target's stock. The acquisition of the target by the white knight was approved by the target's board of directors and shareholders. The hostile suitor agreed to end its takeover attempt and to sell its target stock to the white knight in exchange for reimbursement of its (unsuccessful) takeover expenses by the target.

The target sought to deduct under section 162(a) all its takeover-related expenses, including the investment banking fee and the expense reimbursement payment to the hostile suitor. The target argued that those expenses constituted ordinary and necessary expenses incurred by the directors in carrying out their fiduciary responsibilities. Additionally, the target asserted that the expenses did not result in the creation of a capital asset.

The IRS concluded that the expenditures were incurred incident to the directors' performance of their fiduciary duties. The IRS found expenditures such as those incurred by the target to be "ordinary" and "necessary" within the context of section 162(a). In addressing the issue of capitalization, the IRS held that the expenditures were not capital in nature for the following reasons:

We do not believe that section 263(a)... applies to

the expenses... because the Directors... were

attempting to insure the continued profitability of

the business and to protect the interests of shareholders.

The expenditures... are not pursuant to an alteration 

or change in the capital structure... for any

period of time. To the contrary, it is quite clear that

the amounts expended... and to fight off, what

they believed to be, a tender offer that was not in

the best interests of the corporation or its shareholders

to accept.(21) Based on its conclusions, the IRS held the target's takeover defense costs to be deductible trade or business expenditures under section 162(a).(22)

2. Prior Acquiescence to Defense

Expense Deductibility: TAM 8516002

TAM 8927005 has attracted the lion's share of attention because it was issued so close in time to the Tax Court's decision in National Starch. The IRS, however, had issued a ruling several years earlier in which the tax treatment of takeover defense expenses was also addressed. In TAM 8516002,(23) the target had entered into a stock purchase agreement with another ("purchasing") corporation that provided the purchasing corporation the opportunity to acquire certain previously unissued target stock. The purchasing corporation also acquired the target's shares in the open market and indicated in a filing with the SEC an intention to obtain a majority interest in the target by means of a tender offer.

Prior to the tender offer, however, the relationship between target's management and representatives of the purchasing corporation had soured. Conflicts between the two groups arose over several aspects of the target's operations including the target's compensation packages; the target's investment decisions; and the prospective suitor's representation on the target's board of directors and executive committee. As a result of these and other reservations, the target's board of directors decided to resist the takeover attempt.

To assist in the takeover defense, an investment banker was engaged to seek out an alternative suitor or a merger candidate, and legal counsel was retained to initiate certain defensive tactics. "Additionally, the board's opposition to the tender offer was expressed in a mailing to the target's shareholders. Subsequent to those actions, however, the target agreed to end its resistance to the takeover.

The issue confronting the IRS was the deductibility of the expenditures arising from the target's takeover defense actions. The IRS gave only cursory attention to the capitalization issue; instead, the requirements under section 162(a) became the focus of the IRS's analysis. The IRS found that the "ordinary" and "necessary" requirements of that provision were met with respect to all the takeover defense costs. The costs were "ordinary" because the actions taken by the target were a common and accepted means of defending against a takeover. The costs were "necessary" in addressing the directors' perceived harm that would result from the takeover. The IRS held that the legal fees were incurred in the business context and were deductible. The investment banking fees related to the unsuccessful attempt to locate another suitor or a merger partner for the target. Since the target abandoned those efforts, the fees were held to be deductible.(24) The costs incurred in mailing the director's arguments against the tender offer to the shareholders were found to be similar to proxy costs, which are currently deductible.(25)

3. TAM 8945003: The IRS Revisits

and Revokes TAM 8927005

Dated only one week after the National Starch, TAM 8945003(26) sets forth the IRS's current position on the deductibility of costs incident to resisting a tender offer. In TAM 8945003, the IRS revisited the takeover defense expenses set forth in TAM 8927005 in the light of the Tax Court's decision in National Starch. The IRS held in TAM 8945003 that National Starch precluded the deductibility of the takeover defense expenses in question.

The IRS's analysis in TAM 8945003 centers around the expenses incurred by the target in securing the white knight. In particular, the IRS addressed the cost of the fairness opinion since that expense comprised the bulk of the expenses related to the white knight search. The IRS noted that the Tax Court in National Starch had denied the deduction of a target's expenses incident to a friendly takeover, including the cost of a fairness opinion. With respect to the Tax Court's rebuttal of the taxpayer's dominant purpose argument, the IRS provided the following interpretation:

The fact that these expenses had been incurred in

fulfillment of the fiduciary duty of the board of

directors was not controlling. The court found that

the expenses incurred resulted in a long term benefit

to the company and its shareholders.(27)

The IRS concluded that the Tax Court's reasoning in National Starch was equally applicable with respect to costs incurred in the successful search for a white knight. In requiring the takeover defense expenses to be capitalized, the IRS offered the following explanation:

The court's reasoning applies with equal force in

the case of a hostile takeover that is successfully resisted

by locating a white knight. There is no less

a long term benefit to the target of the hostile takeover

in this situation than there is to the target of

a friendly takeover as in the National Starch case.(28)

Having found TAM 8927005 to be inconsistent with the Tax Court's decision in National Starch, the ruling was revoked.

Analysis

The board of directors of a corporation targeted for takeover has a legal responsibility to ensure that a tender offer is in the best interests of the corporation and its shareholders.(29) When confronted with a takeover attempt, it is common business practice for a target's management to take certain precautionary measures. Those measures generally include the retention of legal counsel and the engagement of an investment banker. The costs incurred in responding to a takeover threat will almost always satisfy the "ordinary" and "necessary" requirements of section 162(a). Satisfying those tests, however, is not sufficient for deductibility under section 162(a). An additional requirement for deductibility is that the costs not be in the nature of a capital expenditure.(30) The deductibility of a target's takeover-related costs will thus depend upon whether the costs are noncapital in nature.

1. Friendly Takeovers

When a tender offer is "friendly" and a target's costs relate to facilitating the takeover, the costs will constitute a nondeductible capital expenditure. The Tax Court's decision in National Starch requires this treatment. Since the costs are incurred incident to the change in ownership and not with respect to the board of directors' fiduciary responsibilities or the target's current business operations, capitalization is justified. Indeed, it could be argued that the target's expenditures give rise to an intangible asset in the form of the altered ownership structure.(31) Moreover, the target could be expected to derive increased returns for an indefinite future period as a result of its altered ownership structure, thereby producing returns similar to that of another intangile - goodwill.

If a target incurs expenditures incident to assisting in a takeover but the takeover is subsequently abandoned by the suitor, any previously capitalized costs should then become deductible.(32) The costs related to the abandoned takeover presumably would produce no increased future returns, thereby failing the Tax Court's long-term benefit test. This would be the case even if the corporation later became the target of another tender offer. In such a case, the target would bear the burden of distinguishing the costs incident to the abandoned takeover from those attributable to the successor takeover attempt.(33)

It may be that the "fiduciary responsibility" argument could give rise to deductible expenditures even in friendly takeover situations. When confronted with a tender offer, a board must address the merits of the offer in face of its responsibilities to the corporation and shareholders. In National Starch, the takeover costs were incident to facilitating the transfer of ownership. If costs are incurred prior to the directors' approval, however, it would seem that those costs could be deductible under the fiduciary responsibility theory. In such case, there would be a more tenuous nexus between the expenditures and any long-term benefit resulting from the ownership change. To be successful in obtaining any deduction for those expenditures, however, a target would bear a heavy burden in accurately establishing a breakdown of expenditures allocable to the performance of fiduciary duties.(34)

2. Hostile Takeovers

The argument for deductibility of takeover-related costs is stronger where the costs are incident to defending against a hostile takeover attempt. If the takeover is perceived as an attack on the corporation's policies, expenses incident to defending those policies would be akin to costs incurred in corporate proxy fights.(35) Several courts have found corporate proxy expenses to be deductible when incurred in defense of corporate policy.(36) The IRS has also assented to the deductibility of such expenses.(37) (The "fiduciary duty" argument might also give the same results.) Deductibility of takeover defense costs is not inconsistent with the Tax Court's long-term benefit test since the expenditures would not give rise to enhanced future earnings or any other long-term benefit.

A successful defense that also comprises the use of a "white knight," however, would give rise to capitalized expenditures. Once a decision has been made to seek out a white knight, any subsequent costs would be capital in nature under the Tax Court's reasoning in National Starch. The IRS, as noted in TAM 8945003, would also require capitalization of the white knight costs. Nevertheless, any costs directly related to defending against the hostile takeover (and not related to the white knight) should remain deductible. An accurate breakdown of charges by investment bankers and legal counselors would ease a target's burden of distinguishing the defense-related costs from those associated with the search for the white knight and any subsequent ownership change.

Conclusion

The Tax Court's decision in National Starch should not preclude the deductibility of all takeover-related costs incurred by target corporations. Costs directly related to defending corporate policies or fulfilling fiduciary responsibilities do not give rise to any long-term benefit or other capital asset and therefore should be deductible. Deductibility of at least some expenditures is particularly justified where the costs are incident to a hostile takeover. In the case of a friendly takeover, however, many of the target's costs will be incident to the shift in ownership and capitalization is dictated by the Tax Court's long-term benefit test. Still, adequate documentation and allocation of costs may justify deducting certain expenditures, even in friendly takeover situations.

Finally, although the Tax Court addressed only NSC's takeover-related expenses, the IRS might argue that the long-term benefit test is equally applicable to other types of expenses that also produce future benefits. For example, while the deductibility of advertising expenses is probably not threatened by the Tax Court's long-term benefit test, the IRS may view other expenses as falling within the realm of that test and require their capitalization. The Third Circuit Court of Appeals, in its review of the National Starch decision, must address the efficacy of the long-term benefit test in resolving the capitalization issue with respect to NSC's takeover-related expenses. Since the Tax Court derived its test from the Third Circuit's decision in E. I. du Pont de Nemours, it is hopeful that the Third Circuit's forthcoming decision in National Starch will provide valuable insight into the applicability of the long-term benefit test to other types of expenses.

Footnotes - Deductibility of Takeover Defense Expenditures

(1) 93 T.C. 67 (1989).

(2) TAM 8927005 (Mar. 27, 1989); TAM 8516002 (Dec. 12, 1984).

(3) TAM 8945003 (Nov. 9, 1989).

(4) The IRS argued, in the alternative, that the takeover-related expenses constituted nondeductible constructive dividends to NSC's shareholders. Since the Tax Court found in favor of the government for other reasons, the court did not consider the constructive dividend argument. This issue was addressed and rejected by the IRS in TAM 8927005 (Mar. 27, 1989). See also American Properties,28 T.C. 1100 (1957).

(5) See e.g., Mills Estate Inc., 206 F.2d 244, 246 (2d Cir. 1953) (recapitalization); Denver & Salt Lake Ry., 24 T.C. 709,719 (1955), dismissed pursuant to stipulation, 234 F.2d 663 (10th Cir. 1956) (merger); Gravois Planing Mill Co., 299 F.2d 199, 206 (8th Cir. 1962) (reorganization).

(6) The Tax Court also acknowledged that expenses incident to other types of changes in corporate structure or capitalization generally constitute capital expenditures. See, e.g., Missouri-Kansas Pipe Line Co., 148 F.2d 460, 462 (3d Cir. 1945) (distribution of subscription warrants); General Bancshares Corp., 326 F.2d 712, 717 (8th Cir. 1964) (distribution of stock dividends); Bush Terminal Buildings Co., 27 T.C. 793, 819 (1946) (bankruptcy reorganization); Fishing Tackle Products Co., 27 T.C. 638, 645 (1957) (increase in capitalization).

(7) The other four necessary components for a deduction under section 162(a) are: (1) the expenditures are paid or incurred during the taxable year; (2) the expenditures are necessary; (3) the expenditures are for the carrying on of a trade or business; and (4) the expenditures are ordinary. 93 T.C. at 73 (1989). See Lincoln Savings & Loan Ass'n, 403 U.S. 345, 352 (1971).

(8) The court based its conclusion on the following facts: (1) the board approved the takeover in light of its legal obligation to ensure that a tender offer is in the best interests of both the corporation and the shareholders; (2) representations in NSC's annual report and in the Morgan Stanley report that the association with Unilever would be in the long-term interest of NSC; and (3) the availability of Unilever's resources to expand opportunities for NSC.

(9) 432 F.2d 1052, 1059 (3d Cir. 1970).

(10) See General Bancshares Corp., 326 F.2d 712, 715 (8th Cir. 1964).

(11) 93 T.C. at 76 (1989), quoting Central Texas Savings & Loan Ass'n, 731 F.2d 1181, 1183 (5th Cir. 1984).

(12) See General Bancshares Corp., 326 F.2d 712, 716 (8th Cir. 1964).

(13) See Baltimore & Ohio R.R., 29 B.T.A 368, 372-73 (1933), aff'd, 78 F.2d 460 (4th Cir. 1935).

(14) 403 U.S. 345 (1971).

(15) Id. at 354.

(16) The "dominant aspect" approach to determining the deductibility of expenditures first arose in Mills Estate, Inc., 206 F.2d 244, 246 (2d Cir. 1953) (dominant aspect of transaction was reorganization - costs capitalized). The test has been applied to several transactions involving characteristics of both a partial liquidation and a reorganization. In those cases where the dominant aspect of the transaction was found to be a partial liquidation, the related costs were held to be deductible expenditures. See, e.g., Gravois Planning Mill Co., 299 F.2d 199, 209 (8th Cir. 1962). If the dominant aspect was a reorganization, capitalization of expenses was required. See, e.g., Bilar Tool & Die Corp., 530 F.2d 708, 711 (6th Cir. 1976).

(17) 93 T.C. at 78 (1989).

(19) TAM 8927005 (Mar. 27, 1989).

(20) While TAM 8927005 does not specifically state that an investment banker was engaged, the nature of the services sought by the target suggest the presence of an investment banker.

(21) TAM 8927005 (Mar. 27, 1989).

(22) The IRS also questioned whether the takeover defense expenditures constituted constructive dividends to the shareholders. That issue was dismissed by the IRS upon its findings that the expenditures were incurred incident to target's business and not for the benefit of any shareholder. TAM 8927005 (Mar. 27, 1989). See also American Properties, 28 T.C. 1100 (1957).

(23) TAM 8516002 (Dec. 14, 1984). See also TAM 8626001 (Aug. 23, 1985) (withdrawing TAM 8516002); TAM 8816005 (Feb. 13, 1987)(reinstating TAM 8516002).

(24) See Doernbecher Manufacturing Co., 30 B.T.A 973 (1934, acq. XIII-2 C.B. 6 (1934), aff'd and remanded on other issues, 80 F.2d 573 (9th Cir. 1935); Rev. Rul. 67-125, 1967-1 C.B.31. Interestingly, the IRS sanctioned the deduction of the investment banking fees "nothwithstanding the fact that reorganization expenses are generally capital expenditures that are not deductible under section 162." TAM 8516002 (Dec. 14, 1984).

(25) See Locke Manufacturing Cos., 237 F. Supp. 80 (D. Conn. 1964); Rev. Rul. 67-1, 1967-1 CB 28.

(26) TAM 8945003 (Nov. 9, 1989). (TAM 8945003 was dated Aug. 1, 1989).

(27) Id.

(28) Id.

(29) See e.g., Northwest Industries Inc. v. B.F. Goodrich Co., 301 F.Supp. 706, 712 (N.D.Ill. 1969).

(30) See, e.g., Woodward, 397 U.S. 572,575 (1969); General Bancshares Corp., 326 F.2d 712,716 (8th Cir. 1964).

(31) In justifying the capital nature of expenditures incurred incident to corporate reorganizations or recapitalizations, courts often point to the creation of an intangible asset - the "altered corporate structure." See, e.g., Mills Estate, Inc., 206 F.2d 244, 246 (2d Cir. 1953).

(32) See Doernbecher Manufacturing Co., 30 B.T.A 873 (1934), acq. XIII-2 C.B. 6 (1934), aff'd and remanded on other issues, 80 F.2d 573 (9th Cir. 1935); Rev.Rul. 67-125, 1967-1 C.B. 31. See also Sibley, Lindsay & Curr Co., 15 T.C. 106 (1950), acq. 1951-1 C.B.3.

(33) See, e.g., Arthur T. Galt, 19 T.C. 892 (1953).

(34) See E.I. du Pont de Nemours and Co., 432 F.2d 1052, 1059 (3d Cir. 1970).

(35) See TAM 8516002 (Dec. 14, 1984).

(36) see, e.g., Locke Manufacturing Cos., 237 F.Supp.80, 85 (D.C.Conn. 1964); Central Foundry Co., 49 T.C. 234, 248 (1967). See also Roger Dolese, 605 F.2d 1146, 1151 (10th Cir. 1979).

(37) Rev.Rul.67-1, 1967-1 C.B. 28. See also TAM 8516002 (Dec. 14, 1984).

Mark B. Persellin is an Assistant Professor of Accounting in the School of Business at Southwest Texas State University. He holds a Ph.D. from the University of Houston, and is a certified public accountant in the State of Texas. Mr. Persellin is a member of the Tax Division of the AICPA and the American Taxation Association. He lectures and writes on numerous individual corporate tax topics.