Tax treatment of takeover costs: Was the merger friendly or hostile?

A controversy is raging between the IRS and corporate taxpayers concerning the deductibility of costs incurred in relation to corporate takeovers, mergers, and acquisitions. The IRS has held that costs incurred in a “friendly” merger or acquisition are not deductible, while costs incurred in defending against a “hostile” takeover are deductible. Because there is a lack of clear, concise criteria to differentiate a hostile takeover from a friendly takeover, taxpayers argue that the criteria used by the IRS are extremely subjective and, thus, lead to inconsistent rulings. The IRS position is found in several revenue rulings. Further, in National Starch and Chemical Corp. v. Commissioner, deductions of friendly takeover costs were denied by the Tax Court. In an attempt to help corporate taxpayers and practitioners cope with the IRS's position, this article reviews the position of the IRS along with the reasoning of the courts concerning takeover costs.