The following article is adapted from reprinted from the M&A Tax Report, Vol. 7, No. 9, April 1999, Panel Publishers, New York, NY.
PREACQUISITION SALARIES NONDEDUCTIBLE UNDER INDOPCO
By Robert W. Wood, San Francisco
As we close this month's newsletter, we must report on the latest and most debilitating of recent INDOPCO-era cases. The Tax Court in Norwest Corp., et al. v. Commissioner, 112 T.C. No. 9 (March 8, 1999), has held that an acquired subsidiary of Norwest Corp. may not deduct a portion of the salaries it paid to its officers in 1991. Salaries not deductible? The ostensible reason for the result is that Norwest made an acquisition, and the IRS took the position that a portion of the salaries paid during this episode was attributable to the services that particular officers performed in the transaction.
The case has been widely watched, and even merited almost front page Wall Street Journal coverage. See MacDonald, "U.S. Tax Court Strikes Down Key Write-Offs," Wall Street Journal, March 16, 1999, p. A3. Norwest later became part of Wells Fargo & Co., but the particular acquisition that was scrutinized in the recent Tax Court case involved Norwest's acquisition of Davenport Bank & Trust Co. Recall that most of the debate about the reach of INDOPCO has focused on fees paid to outsiders (investment bankers, lawyers, accountants, etc.).
Here, the question was salaries paid to officers. Norwest quite predictably insisted that the salaries were deductible because the services of the officers were for investigating the expansion of an existing business. The Tax Court, in ruling that this argument was a "no go," relied not only on INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992), but also on Victory Markets, Inc. v. Commissioner, 99 T.C. 648 (1992), and A.E. Staley Manufacturing Co. v. Commissioner, 105 T.C. 166 (1995), rev'd and remanded, 199 F.2d 482 (7th Cir. 1997).
Full Analysis Coming
Next month, in the May issue of The M&A Tax Report, we'll have a full rundown on what the Norwest case involved in detail and the arguments presented. Most importantly, we'll devine what the Norwest case means to the future of M&A deal structuring. Until May, though, remember that the "INDOPCO" mantra seems to be on the lips of every IRS employee....
Preacquisition Salaries Nondeductible Under INDOPCO, Vol. 7, No. 9, The M&A Tax Report (April 1999), p. 7.