Inducement payments to shareholders in merger are not intangibles, IRS rules

Inducement payments to shareholders in merger are not intangibles, IRS rulesIn 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.

Contact Sharon Kay
Partner, Washington National Tax Office
T +1 202 861 4140

Bryan Keith
Managing Director, Washington National Tax Office
T +1 202 861 4116

Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.