Previous tax rulings, notably the INDOPCO Inc. vs. Commissioner case, have required that the tax treatment of officers’ salaries in an acquired subsidiary be capitalized. The Tax Court recently ruled that a bank acquisition in Iowa fit the INDOPCO mold and required capitalization of first year officers’ salaries and legal fees relating to the acquisition.
The Eighth Circuit reversed the Tax Court, stating that, “if an expenditure creates or enhances a separate and distinct asset, then it is a capital item which (by its very nature) provides long term benefit and must be capitalized.” Further, “If there is not a long term benefit associated with the expenditure, then the appropriate tax treatment is current deduction.”
Claiming the Tax Court erred in not performing an independent analysis to determine the fate of the officers’ salaries and the investigatory costs relating to the acquisition, the Eighth District charges that officers’ salaries are transactions of common and frequent occurrence and should thus be treated as current expenses. Additionally, the district court concluded that certain investigatory costs incurred by the acquiring company related to the investigatory stage of the acquisition and were only indirectly related to the acquisition itself.
The IRS has determined that investigatory expenses relating to the questions of “whether to acquire a business” and “which business to acquire” are deductible expenses whereas expenses relating to the consummation of the acquisition are to be capitalized. In the instant case, the Court concluded that all expenses relating to the acquisition occurring after the date on which it was agreed that the acquisition would occur should be capitalized; expenses relating to the acquisition that occurred before it was determined an acquisition would actually occur may be currently expensed.