Santa Fe Pacific Gold Co. v. Comm'r of Internal Revenue
| Decision Date | 27 April 2009 |
| Docket Number | No. 22956–06.,22956–06. |
| Citation | 132 T.C. 240,132 T.C. No. 12 |
| Parties | SANTA FE PACIFIC GOLD COMPANY AND SUBSIDIARIES, by and through its Successor in Interest Newmont USA Limited, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
SF was a wholly owned subsidiary of parent P. P spun SF off into a stand-alone entity. Two years after being spun off, SF faced a hostile takeover by competitor N. In order to avoid being taken over, SF entered into a merger agreement with white knight HS. The merger agreement provided for the payment of a termination fee should the agreement be terminated. Shortly thereafter N increased its offer. SF's board accepted the increased offer. SF paid a $65 million termination fee to HS. SF claimed a deduction for the amount of the termination fee on its 1997 tax return, which R disallowed.
Held: SF is entitled to a deduction of $65 million for the termination fee.
David D. Aughtry, Arnold B. Sidman, and William O. Grimsinger, for petitioner.
Curt M. Rubin and Jennifer S. McGinty, for respondent.
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¦Contents ¦
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¦FINDINGS OF FACT¦ ¦ ¦ ¦ ¦3 ¦
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¦ ¦A.¦Introduction ¦4 ¦
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¦ ¦B.¦Spin–off of Mining Unit ¦5 ¦
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¦ ¦C.¦The Mining Industry in General ¦5 ¦
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¦ ¦D.¦Santa Fe's First 2 Years ¦6 ¦
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¦ ¦ ¦1.¦Initial Corporate Strategy ¦8 ¦
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¦ ¦ ¦2.¦Becoming Poolable ¦8 ¦
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¦ ¦E.¦Initial Contacts ¦9 ¦
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¦ ¦F.¦Initial Contact With Newmont and Homestake ¦10 ¦
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¦ ¦G.¦November 21, 1996, Santa Fe Board Meeting ¦17 ¦
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¦ ¦H.¦Newmont Responds to Santa Fe's Rejection ¦18 ¦
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¦ ¦I.¦December 8, 1996, Santa Fe Board Meeting ¦19 ¦
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¦ ¦J.¦Newmont Reacts to the Santa Fe–Homestake Agreement¦22 ¦
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¦ ¦K.¦Santa Fe Reacts to Newmont's Increased Offer ¦25 ¦
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¦ ¦L.¦The March 7–8, 1997, Santa Fe Board Meeting ¦29 ¦
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¦ ¦ ¦1.¦Newmont Offer ¦29 ¦
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¦ ¦ ¦2.¦Homestake Offer ¦29 ¦
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¦ ¦ ¦ ¦a.¦Initial Homestake Offer ¦29 ¦
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¦ ¦ ¦ ¦b.¦Attempts To Obtain a Higher Offer ¦30 ¦
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¦ ¦ ¦3.¦Newmont Wins Out ¦30 ¦
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¦ ¦M.¦The Santa Fe–Newmont Agreement ¦30 ¦
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¦ ¦N.¦Santa Fe Post Merger ¦31 ¦
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¦OPINION ¦ ¦ ¦ ¦ ¦33 ¦
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¦I. ¦Burden of Proof ¦33 ¦
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¦II. ¦Deductibility v. Capitalization ¦33 ¦
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¦ ¦A.¦INDOPCO, Inc. v. Commissioner ¦36 ¦
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¦ ¦B.¦Victory Mkts., Inc. & Subs. v. Commissioner ¦37 ¦
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¦ ¦C.¦United States v. Federated Dept. Stores, Inc. ¦3 7¦
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¦ ¦D.¦Staley I & II ¦38 ¦
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¦III. ¦Origin of the Claim Doctrine ¦39 ¦
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¦IV. ¦Petitioner's Arguments ¦41 ¦
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¦ ¦ ¦A.¦Significant Benefit ¦41 ¦
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¦ ¦ ¦B.¦Origin of Claim ¦41 ¦
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¦ ¦ ¦C.¦Petitioner's Experts ¦43 ¦
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¦V. ¦Respondent's Arguments ¦44 ¦
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¦ ¦A.¦Significant Benefit ¦44 ¦
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¦ ¦B.¦Origin of Claim ¦46 ¦
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¦ ¦C.¦Respondent's Expert ¦49 ¦
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¦VI. ¦Analysis ¦49 ¦
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¦VII. ¦Conclusion ¦58 ¦
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¦VIII. ¦Section 165 ¦58 ¦
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¦IX. ¦Conclusion ¦62 ¦
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The issue for decision is whether Santa Fe Pacific Gold Co. (Santa Fe) is entitled to a deduction of $65 million for a payment made to Homestake Mining Co. (Homestake) as a result of the termination of a merger agreement between Santa Fe and Homestake (termination fee) for Santa Fe's 1997 tax year. For the reasons stated herein, we find that Santa Fe is entitled to a deduction pursuant to sections 162 and 165.1
Some of the facts have been stipulated, and the stipulation of facts and accompanying exhibits are incorporated herein by this reference.
Petitioner's principal office and place of business was Denver, Colorado, on the date it filed its petition.
During the late 1800s the Federal Government hoped to spur development of cross-country railroads. In order to entice private companies to develop those railroads, the Federal Government offered and granted large parcels of land bordering the railroads to the companies that developed them. The program was successful, and as a result a checkerboard pattern of land owned by the railroads spread across the country.
Santa Fe Pacific Corp. was one company that took part in the Government program, worked to build transcontinental railroads, and was granted land alongside its rails. Some of this land contained minerals that could be mined for profit. Santa Fe Pacific Corp. took no part in the mining of its land. Until the late 1970s Santa Fe Pacific Corp. leased these mineral rights to unrelated companies and individuals rather than mine the land itself.
Santa Fe Industries, successor to Santa Fe Pacific Corp., later developed an internal unit to manage the mining of the parcels of land. The mining unit originally focused on uranium mining but later switched to coal and then gold mining.
In the late 1980s Santa Fe Industries became the target of a hostile takeover attempt. In a move meant to help defeat the attempted acquisition, the mining unit was put up for sale. Although the sale was never consummated, the mining unit's management realized that they were not considered an integral part of Santa Fe Industries and began to appreciate the benefits of the mining unit's...
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