Square D Co. v. Comm'r of Internal Revenue , 6067–97.
| Court | United States Tax Court |
| Writing for the Court | GALE |
| Citation | 121 T.C. No. 11,121 T.C. 168 |
| Parties | SQUARE D COMPANY and Subsidiaries, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Docket Number | No. 6067–97.,6067–97. |
| Decision Date | 26 September 2003 |
121 T.C. 168
121 T.C. No. 11
SQUARE D COMPANY and Subsidiaries, Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
No. 6067–97.
United States Tax Court.
Sept. 26, 2003.
Corporate taxpayer petitioned for redetermination of deficiencies arising from its acquisition in reverse subsidiary merger, and related golden parachute payments. The Tax Court, Gale, J., held that: (1) taxpayer was entitled to amortize payments for loan commitment and legal fees related to its merger; (2) lump sum payments to taxpayer's executives were golden parachute payments; and (3) a portion of payments was deductible as reasonable compensation.
Decision for taxpayer in part, and for IRS in part.
[121 T.C. 169]
Robert H. Aland, Gregg D. Lemein, Tamara L. Meyer, Oren S. Penn, David G. Noren, John D. McDonald, and Holly K. McClellan, for petitioner.
Lawrence C. Letkewicz and Dana E. Hundrieser, for respondent.
GALE, J.[121 T.C. 168]
P was a publicly held U.S. corporation and, after its acquisition by a foreign corporation (S) through a reverse subsidiary merger, was a U.S. corporation indirectly owned by S, during the years in issue.
To finance the acquisition of P, S obtained a commitment from two banks to extend loans to a to-be-organized subsidiary equal to one-half the acquisition price, not to exceed $1.125 billion. The subsidiary was created for the purpose of acquiring P. It was to use the loan proceeds to purchase P's outstanding shares, at which time it would merge into P and cease to exist. As consideration for the banks' commitment, S became obligated to pay the banks a loan commitment fee and to indemnify the banks for any legal fees incurred in connection with their agreement to extend credit for the acquisition. The subsidiary formally assumed S's obligations with respect to the banks' legal fees and became obligated to pay a portion of the loan commitment fees. After initially resisting the acquisition, P agreed to it and as a consequence of the merger assumed the subsidiary's obligations. P paid the legal fees directly. S invoiced P for the full cost of the loan commitment fee, and P reimbursed S for those costs in a subsequent year.
Held, P is entitled to amortization deductions for its payments for the loan commitment and legal fees because, by virtue of its merger with S's subsidiary, the costs were incurred on P's behalf and eventually paid by P.
In 1990, prior to S's acquisition of P, certain executives of P who were “disqualified individuals” within the meaning of sec. 280G(c), I.R.C., obtained employment agreements (1990 agreements) under which they were entitled, upon a change in ownership or control of P, to certain lump-sum payments if they chose to terminate their employment during the 13th month after the acquisition or if their employment was involuntarily terminated within 3 years of the acquisition. The lump-sum payments would have been parachute payments within the meaning of sec. 280G(b)(2), I.R.C.
S's acquisition of P in May 1991 triggered the executives' rights to the parachute payments under the 1990 agreements. S sought to retain the executives' services for P beyond the 13th month after the acquisition, rather than have the executives terminate their employment at that time to obtain the parachute payments. To that end, S negotiated new employment agreements (1991 agreements) with the executives. The executives used their rights to parachute payments under the 1990 agreements as leverage to secure lump-sum payments under the 1991 agreements. The lump-sum payments provided in the 1991 agreements were larger than the parachute payments and, further, were conditioned on the executives' either remaining in petitioner's employment, or ceasing employment only under specified circumstances, for approximately 3 years through 1994. The 1991 agreements were subsequently amended to accelerate the payment of the lump sums (in a reduced amount) to December 1992 in exchange for an extension of the employment term for an additional year through 1995.
Held, under the facts of this case, the lump-sum payments (excluding a portion conceded by R to be otherwise) paid under the 1991 agreements as amended, were contingent on a change in ownership or effective control within the meaning of sec. 280G(b)(2)(A)(i), I.R.C., because they would not have been made but for the change in ownership or control. The phrase “contingent on a change in the ownership or effective control” of sec. 280G(b)(2)(A)(i), I.R.C., is interpreted in light of legislative history. Accordingly, the payments are parachute payments for purposes of sec. 280G(b)(2), I.R .C.
Held, further, whether P has established that any portion of the parachute payments was reasonable compensation for purposes of sec. 280G(b)(4)(A), I.R.C., must be determined on the basis of a multifactor test, considering all the facts and circumstances. Exacto Spring Corp. v. Commissioner, 196 F.3d 833 (7th Cir.1999), revg. Heitz v. Commissioner, T.C. Memo.1998–220, applying an independent investor test to determine reasonable compensation for purposes of sec. 162(a), I.R.C., distinguished.
Held, further, extent to which P has met burden of showing by clear and convincing evidence that any portion of parachute payments was reasonable compensation within the meaning of sec. 280G(b)(4)(A), I.R.C., determined.
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¦CONTENTS ¦
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¦FINDINGS OF FACT ¦7 ¦
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¦I. ¦Background ¦7 ¦
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¦II. ¦Loan Commitment and Legal Fees Arising From Acquisition of Petitioner ¦8 ¦
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¦ ¦A. The Commitment Letter ¦8 ¦
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¦ ¦B. Takeover Events and Litigation ¦10 ¦
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¦ ¦C. Commitment Letter Addendum ¦12 ¦
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¦ ¦D. The Bridge Loan ¦13 ¦
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¦ ¦E. The Term Loan ¦14 ¦
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¦ ¦F. Payment of the Commitment and Legal Fees ¦15 ¦
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¦III.¦Executive Compensation ¦15 ¦
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¦ ¦A. Background ¦15 ¦
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¦ ¦B. 1990 Employment Agreements ¦16 ¦
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¦ ¦C. Importance of Schneider's Retaining Petitioner's Key Executives ¦20 ¦
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¦ ¦D. ¦ ¦
¦ ¦Negotiations Between Retained Executives and Schneider Over New Employment Agreements ¦21 ¦
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¦ ¦E. 1991 Employment Agreements ¦24 ¦
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¦ ¦F. Mr. Garrett's Termination ¦29 ¦
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¦ ¦G. The 1992 Amendments ¦29 ¦
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¦ ¦H. Other 1992 Compensation of Retained Executives ¦32 ¦
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¦ ¦I. Retained Executives' Pre- and Postacquisition Compensation ¦34 ¦
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¦ ¦J. Retained Executives' Duties and Responsibilities ¦35 ¦
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¦IV. ¦Tax Returns, Notice of Deficiency, and Petition ¦36 ¦
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¦OPINION ¦37 ¦
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¦I. ¦Loan Commitment and Legal Fees ¦37 ¦
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¦ ¦A. The Legal Obligation To Pay the Loan Costs ¦40 ¦
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¦ ¦B. Reimbursed Expenses ¦45 ¦
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¦ ¦ ¦ ¦...To continue reading
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