In a recent private letter ruling (PLR 201736002
), the IRS ruled that inducement payments by an investment adviser to shareholders of a target company in a merger are deductible under Section 162 and not required to be capitalized under Section 263.
Under the facts of the PLR, the taxpayer serves as an investment adviser to the acquirer, who is not a related party. The taxpayer’s management fees from the acquirer are based on the acquirer’s total assets. Subject to the approval of the target’s shareholders, the acquirer entered into a merger agreement to acquire the target in a transaction that would result in an indirect acquisition of all the target’s assets. In an effort to induce the target’s shareholders to approve the merger, the taxpayer made a payment per share to the target’s shareholders. The taxpayer did not receive anything in exchange for the payment and only had a mere hope that its business would increase due to the merger.
The IRS Office of Chief Counsel concluded that the inducement is deductible by the taxpayer as an ordinary and necessary business expense under Section 162 and is not required to be capitalized under Section 263.
The IRS analyzed the applicability of Treas. Reg. Sec. 1.263(a)-4 and held that that the inducement payment was not paid to acquire or create an intangible. The IRS also held that the payment was not paid to facilitate any of the transactions listed in Treas. Reg. Sec. 1.263(a)-5(a). Therefore, the taxpayer was not required to capitalize the inducement payments.
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