Plano Holding LLC v. Comm'r
| Decision Date | 16 October 2019 |
| Docket Number | T.C. Memo. 2019-140,Docket No. 9169-17. |
| Parties | PLANO HOLDING LLC, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
Donald A. Barnes, for petitioner.
Thomas F. Harriman, Naseem Jehan Khan, and Michelle E. Marcove, for respondent.
The Ontario Teachers' Pension Plan Board (OTPP) is one of Canada's largest institutional investors. In 2012 it caught whiff of a chance to acquire Plano Molding Co. (Plano), an Illinois plastics manufacturer. OTPP did so later that year for approximately $240 million, which resulted in Plano's becoming a wholly owned subsidiary of petitioner Plano Holding LLC (), which was in turn controlled by OTPP. Before closing (and contingent on the closing's success) OTPP agreed to pay $1.5 million to Robert W. Baird & Co., Inc. (Baird), the company that put OTPP onto Plano's scent. It was Plano, however, that ended up footing the bill.
Holding and Plano filed a consolidated Federal income tax return for 2012, in which a business expense deduction under section 1621 was claimed for Plano's payment to Baird. The Internal Revenue Service (IRS) issued a notice of deficiency disallowing the deduction on the ground that Baird had not provided any services to Holding or Plano. The IRS determined a deficiency of $90,385 and an accuracy-related penalty of $18,077. We will sustain both.
The parties have submitted this case for decision without trial under Rule 122. All relevant facts have been stipulated or are otherwise included in the record. See Rule 122(a). Holding, a Delaware limited liability company thatelected to be taxed as a corporation for Federal tax purposes, had its principal place of business in Illinois when it timely filed the petition.
Plano specializes in the manufacture of plastic storage equipment for outdoor sports. Founded in Illinois in 1932, it introduced the first plastic tackle box to the fishing world 20 years later and since then has expanded its product lines to include archery and gun cases, ammunition boxes, shelving, tool boxes, and cosmetics cases.
In February 2007 Tinicum Capital Partners (Tinicum), an investment firm, became Plano's majority shareholder. Three years later (in 2010) Plano retained Baird as its financial advisor with an eye to a potential sale of the company. No sale took place at that time, however.
In 2012 Baird suggested Plano as a potential acquisition candidate to OTPP--a Canadian corporation without share capital (a not-for-profit corporation) and a major institutional investor. After gauging Tinicum's interest in selling Plano, Baird's managing director sent an email on July 2, 2012, to set up an introductory lunch. Although lunch proved unworkable, representatives of OTPP and Tinicum later discussed the matter by phone. Baird did not participate on the call and had no further input into the acquisition that followed.
On July 26, 2012, Plano retained Harris Williams LLC (Harris Williams) as investment banker and financial advisor for "the possible sale through merger, exchange, or sale of all or substantially all of the assets, business, or stock of * * * [Plano]". Plano expressly agreed that "it has engaged exclusively * * * [Harris Williams]" to act in that capacity. During September and October Harris Williams and OTPP exchanged correspondence and information, and OTPP performed its due diligence. By the end of October OTPP was "ready to proceed on this matter without delay", suggesting that the sale could be closed by early December.
November 2012 saw OTPP and Plano set the table for the acquisition. Acting through a wholly owned subsidiary, OTPP organized Holding and Plano Acquisition, LLC, as Delaware limited liability companies. On November 20, 2012, these two entities entered into a merger agreement with Plano and New Plano Molding, LLC--a vehicle for converting Plano to a Delaware limited liability company--to bring Plano into the OTPP fold as a wholly owned subsidiary of Holding. The deal, as outlined in the merger agreement, closed on December 21, 2012.
The agreement set the purchase price at $240 million, subject to certain adjustments. As relevant here, the parties agreed to an adjustment for "Estimated Transaction Expenses," defined as all unpaid fees or expenses incurred by Plano or its subsidiaries (or for which they were liable) in connection with the planned merger. The definition of transaction expenses included fees and expenses payable to financial advisors.
When the deal closed on December 21, 2012, Plano made two different payments to purported financial advisors. Plano first paid Harris Williams a fee of roughly $2.89 million for its services in connection with the merger. Plano also paid $1.5 million to Baird, pursuant to a November 28, 2012, agreement between Baird and OTPP. While the fee paid to Harris Williams was treated as a transaction expense that reduced the purchase price of Plano, the Baird fee was not.
The November agreement stemmed from OTPP's determination that "Baird should be compensated for suggesting * * * [Plano] as a potential acquisition candidate and attempting to arrange an introductory meeting between representatives of OTPP Board and * * * [Plano]." OTPP agreed to pay Baird $1.5 million (upon the successful acquisition of Plano) for Baird's services as its "exclusive financial advisor * * * in connection with the Acquisition." The agreement provided that Baird's services were rendered "solely for the benefit and use of OTPP's management and directors in considering the transaction(s) to which they relate." The agreement further stated that "OTPP and Baird agree and acknowledge that * * * this letter is solely for the benefit of the parties to this letter." It likewise specified that the parties' obligations under the agreement could not be assigned by OTPP without Baird's prior written consent.
To sum up, Baird's sole activities regarding the acquisition consisted of (1) suggesting Plano as an acquisition target to OTPP, (2) gauging Tinicum's interest, and (3) attempting to set up lunch between OTPP and Tinicum representatives. At no time did Baird provide any financial advisory services (or other services) to OTPP with respect to the acquisition.
Holding, Plano, and certain other affiliated corporations filed a consolidated Federal income tax return for the 2012 taxable year in which 70% of the Baird fee ($1.05 million) paid by Plano was deducted (with the balance capitalized) pursuant to an election under Rev. Proc. 2011-29, 2011-18 I.R.B. 746. The IRS thereafter issued Holding a notice of deficiency for 2012 in which it disallowed the claimed deduction of the Baird fee. The IRS asserted that Plano did not establish "that you incurred, or if incurred, paid this amount during the taxable year for ordinary and necessary business purposes and/or that any amount qualifies as a business expense under the provisions of the Internal Revenue Code." The IRS determined a deficiency of $90,385 and an accuracy-related penalty under section 6662(a) of $18,077.
Holding subsequently sought redetermination in this Court.
The IRS' determinations in a notice of deficiency are generally presumed correct, and the taxpayer bears the burden of proving those determinations wrong. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). The taxpayer also has the burden of proving its entitlement to deductions allowed by the Code. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). The parties' decision to submit this case fully stipulated does not change these burdens. Rule 122(b); Okerson v. Commissioner, 123 T.C. 258, 263 (2004); Borchers v. Commissioner, 95 T.C. 82, 91 (1990), aff'd, 943 F.2d 22 (8th Cir. 1991).
Holding argues that the IRS erred in disallowing the deduction claimed for Plano's payment of $1.5 million to Baird. Whether an expenditure constitutes an "ordinary and necessary" business expense within the meaning of section 162 generally presents a question of fact. See Commissioner v. Heininger, 320 U.S. 467, 475 (1943); Pac. Mgmt. Grp. v. Commissioner, T.C. Memo. 2018-131, at *33.
Section 162(a) provides a deduction for ordinary and necessary business expenses paid or incurred during the taxable year in carrying on a trade or business. An expense is "ordinary" if it is customary or usual within a particular trade, business, or industry or relates to a common or frequent occurrence in the type of business involved. See Deputy v. du Pont, 308 U.S. 488, 495 (1940); Cooper v. Commissioner, 143 T.C. 194, 213 (2014), aff'd, 877 F.3d 1086 (9th Cir. 2017). An expense is "necessary" if it is appropriate and helpful to the development of the taxpayer's business. See Commissioner v. Tellier, 383 U.S. 687, 689 (1966); Commissioner v. Heininger, 320 U.S. at 471. To be deductible, ordinary and necessary expenses must be "directly connected with or pertaining to the taxpayer's trade or business". Sec. 1.162-1(a), Income Tax Regs.; see also Cooper v. Commissioner, 143 T.C. at 213.
A taxpayer generally may not deduct the payment of another person's expenses. See Deputy v. du Pont, 308 U.S. at 494-495; Welch v. Helvering, 290 U.S. at 114; Dietrick v. Commissioner, 881 F.2d 336, 338 (6th Cir. 1989), aff'g T.C. Memo. 1988-180, 55 T.C.M. (CCH) 706 (1988); Lohrke v. Commissioner, 48 T.C. 679, 684 (1967). We have recognized a narrow exception to this rule where (1) the taxpayer's primary motive for paying the other's obligation is to protect or promote the taxpayer's own business and (2) the expenditure is an ordinary and necessary expense of the taxpayer's business. Lohrke v. Commissioner, 48 T.C. at 688; see also Cooper v. Commissioner, 143 T.C. at 214; Scheurer v. Commissioner, T.C. Memo. 2017-36, at *16.
The parties have stipulated that OTPP entered into an...
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