Court Opinion

ID: 4472702
Source: CourtListenerOpinion
Date Created: 2020-01-14 19:34:51.741081+00
Date Added: 2024-06-11T11:51:19.996356
License: Public Domain

Laro, J., dissenting: The majority opinion seems to establish a rule of law that expenses incurred in connection with a successful takeover of a corporation are not deductible. In arriving at this conclusion, the majority opinion presumes, but does not find as a fact, that long-term benefits were achieved as a result of this transaction. I respectfully dissent from the legal analysis and the result reached by the majority. The Supreme Court in INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992), affg. National Starch & Chem. Corp. v. Commissioner, 918 F.2d 426 (3d Cir. 1990), affg. 93 T.C. 67 (1989), held that a target corporation must capitalize professional fee expenses that it incurs in furtherance of a friendly acquisition involving significant long-term benefits to itself. In Victory Mkts., Inc. & Subs. v. Commissioner, 99 T.C. 648 (1992), we applied the Supreme Court’s long-term benefits analysis to similar facts and denied a current deduction for professional fees. In both cases we found that the target company’s board anticipated benefits to the target company from the proposed takeover and worked toward conclusion of a deal on mutually agreeable terms. This case, however, involves a hostile takeover. Tate & Lyle made a public tender offer directly to the SCI shareholders, seeking to gain control of SCI, fire its senior management, sell off certain of its assets, and change its business policies. With the help of its investment bankers, SCI resorted to various maneuvers to thwart Tate & Lyle’s tender offer, including stockholder rights plans (“poison pills”) and an exhaustive search for other candidates for a merger that would leave SCl’s business structure intact. Despite the contextual differences between the professional fee expenditures in this case and in the INDOPCO, Inc. and Victory Mkts., Inc. cases, the majority concludes that the tax treatment of the expenditures should be the same. It reaches this result by denying that the purpose of the expenditures is relevant to the analysis and by inferring the existence of benefits to SCI with little, if any, factual foundation in the record for this inference. The majority opinion’s attempt to apply the holding of INDOPCO, Inc. to the facts of a hostile takeover is unconvincing, and the broad and novel proposition that emerges represents an unwarranted extension of INDOPCO, Inc. and a departure from other settled principles of law in this area. In INDOPCO, Inc. the Supreme Court used as a test for capitalization whether ' the change in corporate structure “produced significant [long-term benefits] to * * * [the target company] that extended beyond the tax year in question”. INDOPCO, Inc. v. Commissioner, 503 U.S. at 88. The Supreme Court also inquired as to whether “changing the corporate structure for the benefit of future operations” was the “purpose for which the expenditure is made”. Id. at 89-90. The majority opinion identifies no specific long-term benefits to SCI from the takeover that could account for the SCI board’s decision to abandon its resistance. The majority suggests that since the “‘directors approved the takeover, they must have determined that it was in the best interest of [the company] and its shareholders’”. Majority op. p. 198 (quoting National Starch & Chem. Corp. v. Commissioner, 93 T.C. at 76). However, the majority does not identify any significant benefit to SCI to conclude that indeed it was in the best interest of SCI for the takeover to occur. It would be erroneous to conclude that a benefit is achieved merely by taking a public company private. In some instances, such a transaction is beneficial, but in other instances it is not. A private company does not have access to the public markets for new capital and does not have the same liquidity for its shareholders. One cannot accurately conclude, therefore, that a hostile takeover resulting in a public company’s going private produces in and of itself a long-term benefit. It would be wrong to suggest that merely because a takeover is hostile, rather than friendly, the expenses incurred in connection therewith should be deductible. However, a complete legal analysis would address the issue as to whether or not the takeover was hostile or friendly for the purpose of seeing whether there were any long-term benefits in connection with the transaction. Having found facts to conclude that the takeover is hostile, one should strongly suspect that there are no long-term benefits anticipated by the target in connection with the transaction.1 Yet the majority opinion seems to dismiss the fact that the takeover involved in this case was hostile as a relevant factor. Under INDOPCO, Inc. the long-term benefits inquiry addresses whether the expenses were incurred for the purpose of changing the corporate structure for the benefit of future operations. INDOPCO, Inc. v. Commissioner, supra at 89. In hostile takeovers this element will not be present. Defensive measures are not intended to produce any lasting improvements; their goal is merely to preserve the status quo, to enable the target to continue its business operations in the same manner as before the threat emerged. They are designed to prevent, not facilitate, a change in corporate structure. The majority opinion disregards the references to the purpose of the expenditures in the INDOPCO, Inc. opinion and dismisses purpose as irrelevant. To the contrary, however, INDOPCO, Inc. seems to place emphasis on “purpose”. The majority opinion also does not distinguish successfully the recent District Court case of United States v. Federated Dept. Stores, Inc., 171 Bankr. 603 (S.D. Ohio 1994), which allowed a deduction for certain expenses (break-up fees) paid to a “white knight” by the target in an unsuccessful defense to a hostile takeover. The court relied on a long line of cases that allow deduction for expenses incurred in the defense of an existing business against attack as well as other well-settled principles of law concerning the deductibility of expenses incurred for abandoned transactions. Although the majority cites the Federated Dept. Stores case, I believe that it does not satisfactorily distinguish that case from the case at hand. Moreover, the majority fails to address the central proposition of that decision: INDOPCO, Inc. did not purport to override the body of law relied on by the court in United States v. Federated Dept. Stores, Inc., supra. Chabot and Jacobs, JJ., agree with this dissent.   “Some circumstantial evidence is very strong, as when you find a trout in the milk.” Bartlett, Familiar Quotations 557 (15th ed. 1980).