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CCH (cch.taxgroup.com) reports:

  A $65-million dollar merger termination fee paid by a mining company as the result of its termination of a white knight merger agreement in order to accept a merger offer from a competitor was currently deductible as an ordinary business expense under Code Sec. 162 or, alternatively, as a Code Sec. 165 loss incurred in connection with the abandonment of a capital transaction.

  The mining company was the subject of a hostile takeover. A merger with the competitor would result in the effective termination of the compabny as an operating company. The competitor's primary purposes in seeking the takeover was the acquisition of the company's mineral rights and achieving significant cost savings by firing the majority of the company's employees and management. The company made an unsuccessful attempt to defend against the takeover by entering into a white knight merger agreement pursuant to which it would have continued its business operations. The merger agreement included a termination clause which required the company to pay a $65-million termination fee if it breached the agreement by accepting a third-party offer. Ultimately, the company was required by state (Delaware) law to accept the competitor's final takeover offer and breach the termination clause because the competitor's offer exceeded the white knight's final bid.

  The court ruled that the company did not receive a long-term benefit from payment of the termination fee because its operations did not benefit from the payment insofar as the company , as a subsidiary of the competitor, was nothing more than a shell company owning the land following the transaction. Therefore, any benefit, as a result of incurring the termination fee, was extinguished upon the termination of the white knight agreement. The hostile takeover transaction was separate from, and not a continuation of, or modification of, the white knight transaction. The effects that each transaction would have on the company's future operations were clearly distinguishable.

  Alternatively, the company could claim the termination fee as an abandonment loss under Code Sec. 165. The two merger transactions were separate and distinct and not part of an overall plan by the company to change its capital structure. The white knight agreement was a closed and completed transaction that was abandoned when the company was forced under state law to accept the competitor's offer and breach the white knight agreement.

Santa Fe Pacific Gold Company and Subsidiaries, 132 TC No. 12, Dec. 57,793

Other References:

 
Code Sec. 162

  CCH Reference - 2009FED ¶8526.4234

 
Code Sec. 165

  CCH Reference - 2009FED ¶9804.135

 
Code Sec. 263

  CCH Reference - 2009FED ¶13,709.641

  Tax Research Consultant

  CCH Reference - TRC BUSEXP: 9,412.10