In a private letter ruling the federal Internal Revenue Service has held that costs of litigation, including settlement payments, arising out of the merger of two companies, were deductible as ordinary and necessary business expenses by the acquiring company in the merger, and did not have to be capitalized. The transaction here, characterized by IRS as a business reorganization, involved the acquisition by one publicly traded C corporation of all of the stock of another such company. After the deal was agreed to by both parties, shareholders of the acquiring company sued, alleging that that company had made misrepresentations about the acquired company that affected the stock price of the acquiring company following the merger. The suit was settled, and the acquiring company asked IRS for advice. The Service first noted that expenses incurred in acquiring a capital asset, including intangibles such as an ownership interest in a corporation, are commonly required to be capitalized. However, it continued, the expenses here, the occasion of which arose after the actual acquisition deal, were not expenses of that nature. Following prior court cases, IRS looked to “the origin of the claim” involved in the litigation, and found it to be in the acquiring company’s ordinary and necessary business activities rather than in the capital transaction. IRS Private Letter Ruling no. 201412002, released March 21, 2014.
~ATA State Laws Newsletter