Washington Law Review


In A.E. Staley Manufacturing Co. v. Commissioner, the Court of Appeals for the Seventh Circuit held that costs a corporation incurred to resist a hostile takeover were analogous to costs incurred to defend a business against attack and thus qualified as ordinary and necessary business expenses deductible under Internal Revenue Code section 162. Alternatively, the court held that those costs associated with abandoned capital transactions qualified for loss deductions under section 165. This Note argues that although the court reached approximately the right result in this case, its primary reliance on a defense of business rationale for deductibility under section 162 was erroneous and misguided. The Note further argues that the distinction between hostile and friendly acquisitions is irrelevant to the uniform and objective application of the Tax Code, and that the successful consummation of any acquisition, regardless of how it is subjectively characterized, always constitutes a corporate restructuring necessitating the capitalization of proximately related costs under I.R.C. § 263. Finally, this Note concludes that although the court failed to fully address its proper application, the authorization of a loss deduction under section 165 focuses upon more salient facts than the distinction between friendly and hostile acquisitions and should be the primary avenue for any deductions in such transactions. By more accurately accounting for the real economics of the so-called hostile takeover, this proposed approach better protects the Tax Code's underlying goal of matching income and expenses.

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