Victory Mkts., Inc. & Subsidiaries v. Comm'r of Internal Revenue, 11276–90.
| Citation | 99 T.C. 648,99 T.C. No. 34 |
| Decision Date | 23 December 1992 |
| Docket Number | No. 11276–90.,11276–90. |
| Parties | VICTORY MARKETS, INC. AND SUBSIDIARIES, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Michael J. Sarofeen and Thomas S. Brett, for petitioner.
Randall P. Andreozzi, for respondent.
Respondent determined deficiencies in Federal income tax due from petitioner for its 1980, 1983, and 1984 taxable years in the amounts of $998, $184,099, and $63,320, respectively. The deficiencies determined result from adjustments respondent made disallowing net operating loss carrybacks from petitioner's short taxable years ending July 8, 1986, and December 27, 1986. In its short taxable year ended July 8, 1986, petitioner deducted $571,544 for professional services in connection with an unsolicited takeover offer. Petitioner has accepted as correct all of respondent's adjustments except for those related to expenses for professional services. Respondent disallowed $540,036 of the claimed deduction as a nonamortizable capital expenditure, which represents a portion of the net operating loss carryback from petitioner's short taxable year ended July 8, 1986. In addition to the $571,544 deduction claimed on the return, petitioner now seeks to deduct an additional $978,369 in expenses in conjunction with the consummation of the acquisition.
The issue presented for our consideration is whether petitioner, the acquired corporation in a takeover, may deduct under section 162 1 the expenditures it incurred incident to the takeover.
Some of the facts have been stipulated and the stipulation of facts and attached exhibits are incorporated herein by this reference. At the time the petition was filed, petitioner, Victory Markets, Inc. (hereinafter Victory Markets or petitioner), the parent of a group of affiliated corporations that filed consolidated income tax returns, had its principal office in Norwich, New York.
Petitioner is a New York corporation which, prior to a corporate takeover, owned and operated grocery stores and related businesses primarily in central and northern New York State. Prior to June 1986, shares of common stock of Victory Markets were publicly traded in the over-the-counter market. The price of Victory Markets' common stock for the period between May 1985 and May 27, 1986, ranged from $15.50 to $24.50 per share.
On May 23, 1986, Richard J. Hill (Hill), managing director of the investment banking firm of Wardley, Inc. (Wardley), telephoned the office of Darryl R. Gregson (Gregson), president and chief executive officer of Victory Markets. Gregson, who was leaving for California on vacation, declined to accept the call and instructed his secretary to take a message. Hill communicated to the secretary, who in turn relayed to Gregson, that he represented a group that was interested in acquiring Victory Markets. Gregson, through the secretary, communicated to Hill his lack of interest.
During the evening of his arrival in California, Gregson received a message from Joseph Nishimura (Nishimura), chief financial officer of Victory Markets. When Gregson returned Nishimura's call, Nishimura informed him that corporate headquarters received a letter from Wardley addressed to Gregson earlier that same day. The Wardley letter disclosed that the party interested in acquiring Victory Markets was LNC Industries Pty.2 Limited (LNC), an Australian corporation.
LNC is a wholly owned subsidiary of Permewan Wright Consolidated Pty. Ltd. (Permewan Wright), itself a subsidiary of JGL Investments Pty. (JGL), one of the largest privately held companies in Australia. All of JGL's stock is owned by its chairman, Jack Liberman (Liberman), and by other members of the Liberman family. In addition to being the largest importer of motor vehicles in Australia, LNC is also engaged in a variety of industrial manufacturing and distribution enterprises. In addition, LNC maintains an investment portfolio in diverse businesses. The business activities of JGL include: Retailing, textile manufacturing, cold storage facilities, food manufacturing, property management services, and real estate investments. From 1972, when it acquired Permewan Wright, through 1985, JGL was heavily involved in food retailing in Australia, owning over 500 food markets. LNC's worldwide sales for fiscal year ended June 30, 1985, were $320,000,000; 3 net income was $11 million. On June 30, 1985, LNC had assets of $227 million and stockholders equity of $106 million. Total sales for all businesses owned by the Liberman family for the fiscal year ended June 30, 1985, were over $1 billion.
In the initial contact letter of May 23, Hill represented that
In the letter Hill explained that “LNC has been impressed by the success of Victory Markets' management and wishes to emphasize its desire that Victory Markets operate as a separate and autonomous subsidiary of LNC.” Toward that end, the letter stated that LNC intended to preserve the continuity of Victory Markets' senior management by continuing the existing employment arrangements or entering into mutually satisfactory employment agreements with the present members of senior management. The letter also stated that “Given the geographical distance and lack of presence here, LNC, unlike a domestic competitor of Victory Markets, would have no interest in closing or consolidating Victory Markets' facilities or operations.” The letter further advised that LNC expected that Victory Markets would continue to maintain its headquarters in Norwich, New York. In closing, Hill represented that “LNC hopes that this transaction can be completed on a mutually acceptable and friendly basis.” Hill's letter did not state a price-per-share offer.
Early the next day, May 24, 1986, Gregson telephoned Willkie, Farr & Gallagher (Willkie Farr), attorneys for Victory Markets, to discuss the letter and asked counsel to recommend an investment banking firm to provide a fairness opinion on any offer made by LNC. After consulting with counsel, Gregson telephoned Hill and communicated Victory Markets' lack of interest in being acquired and its desire to remain independent.
On Tuesday, May 27, 1986, after again consulting with counsel, Gregson telephoned each of the board members and apprised them of the situation. In addition, a letter was sent to the home of each board member along with a copy of Hill's letter. After receiving a vote of confidence from the board to remain independent, Gregson again contacted Willkie Farr to discuss the board's position and what its responsibilities were with regard to LNC's “expression of interest”.
On May 28, 1986, Liberman submitted a written offer to Gregson, subject to the approval of Victory Markets' board of directors, to acquire all of Victory Markets' outstanding common stock for a cash payment of $30 per share. In the letter Liberman stated that to effectuate this objective, “LNC is prepared to negotiate and enter into a mutually acceptable merger agreement with your company.” Liberman further advised that, in addition to the board's approval, the offer was “conditioned upon Victory Markets continuing to conduct business solely in the ordinary course.” The letter also stated: “However, as Mr. Hill indicated to you, our offer is not conditioned upon the obtaining of financing.” In his letter Liberman personally reiterated that LNC's intention was that Victory Markets' present management operate Victory Markets as a separate and autonomous subsidiary. Liberman further advised: “Since this matter is of the utmost importance to us, we must ask for the response of your Board of Directors no later than 5:00 P.M., New York time, on Tuesday, June 3rd. I hope you and your Board will consider LNC's offer carefully and will respond promptly so that together we can move expeditiously to complete a transaction.”
Upon receipt of Liberman's letter and after consulting with Willkie Farr, Gregson negotiated a fee with E.F. Hutton (Hutton) to provide advice and services relating to any possible merger, tender offer, sale, or disposition involving all or any part of the business, assets, or stock of Victory Markets. The negotiations were memorialized in an agreement dated May 30, 1986, and executed by petitioner on June 3, 1986, which set forth E.F. Hutton's duties as follows:
(a) To provide financial advice to Victory Markets with respect to the LNC acquisition proposal;
(b) to provide the board of directors with an opinion as to the financial adequacy of the LNC offer (fairness opinion);
(c) to provide ongoing advice and counsel relating to the financial and strategic alternatives available to Victory Markets;
(d) to explore and develop opportunities for the sale of Victory Markets, if the board of directors so desired;
(e) to advise the board concerning opportunities for sale of Victory Markets, whether or not found by Hutton; and
(f) to represent Victory Markets in negotiations with LNC or any third party.
The agreement provided a fee structure for Hutton's professional services as follows:
(a) A financial advisory fee of $150,000 payable in cash upon execution of the agreement;
(b) an additional advisory fee of $200,000 payable at the time the acquisition is completed, or when the offer is either withdrawn or expires;
(c) an additional fee if the transaction occurs based on the incremental value received by Victory Markets and its shareholders on a per-share basis as follows: (i) Two percent of the incremental value resulting from a transaction price of $30 to $33, (ii) plus 4 percent of the additional incremental value resulting from a transaction price of $33 to $36, (iii) plus 6 percent of the...
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