The Trial Court dismissed Mr McMahon`s appeal, finding that the expenses had a dual purpose and that one of those objectives resulted from Mr McMahon`s employment contract. As a result, the expenses were not complete and exclusively intended for the purposes of the corporation and could not constitute an eligible deduction. 38 (2) For the purposes of this section and all other provisions of this Act, incidental costs for a person who makes the sale of the acquisition or its sale include expenses incurred wholly and exclusively for the purpose of the acquisition or, as the case may be, for the purpose of the acquisition. the assignment, fees, commissions or remuneration paid for the professional services of a surveyor, appraiser, auctioneer, accountant, agent or legal adviser, as well as transfer or transportation costs……. Non-facilitating costs that need to be capitalized (Step 2): A common misconception is that expenses are classified as “non-facilitating” according to the regulations. §§ 1.263(a)-5 are currently deductible in all cases. However, Regs. Article 1.263(a)-5(j) expressly provides that “[t]he processing in this Article shall not alter the treatment of an amount expressly provided for in any other provision of the Internal Revenue Code (other than Article 162(a) or 212) or the provisions arising therefrom”. Fines, penalties, damages and associated legal fees will not be allowed as deductions if penalties apply for violations of the law. It is considered that they do not constitute a “business loss” in the present case. The basic principles that apply when assessing the eligibility of an expense, in particular the full and exclusive criterion and the distinction between capital and income, must also be taken into account when deciding whether legal, criminal or judicial costs may constitute a tax deduction. Fortunately, when the particular nuances of a particular transaction defy simple decisions, there is a plethora of court cases to refer to, and case law should hopefully provide advice to confused business owners.
Most selling costs will be clearly tax deductible, but for some, the situation is not so clear. For example, in the event of a sale, is it possible to claim a deduction for a previous transaction that has been cancelled? A failed acquisition or disposal is no different from a successful acquisition or disposal in terms of the nature of the expenses. If the expenses were capital when the asset was acquired, they would not change their nature, since the attempt to acquire it failed. This view is well supported by case law. In Lothian Chemical Company Ltd v. Rogers 11TC508, it was stated that the costs of defending a defamation action could be admissible if, for example, they had to be borne by the publication. However, in Fairrie v. Hall (1947), the costs were considered uncollectible. Mr.
Fairrie had to pay damages to Mr. Rook for malicious defamation. Those communications could have damaged Mr Rook`s professional reputation and business, but the High Court held that the expenditure was not wholly and exclusively intended for the purposes of Mr Fairrie`s business and that it was not a loss related to or resulting from that activity. The same tax treatment of fees should also apply if an offer is successful. Of course, it is easier to argue that expenses are separable from acquisition costs if there is no acquisition. However, a successful bid is always preceded by an investigative process that leads to a decision on the submission of a bid. All costs incurred up to this point should be deductible from administrative costs. The Camas decision states: There does not appear to be any reason why Camas should not apply the costs incurred in connection with the acquisition or eventual acquisition of other types of investments such as real estate and intellectual property before 1 April 2002. If these costs are “separable” from the cost of the underlying asset (i.e.
before the decision to proceed with the acquisition), they should be deductible as administrative costs if they are borne by an investment company. The IRS`s Large Business and International Division published in 2018 a practice unit entitled “Investigating a Transaction Cost Issue” (available under www.irs.gov regarding the U.S. federal tax treatment of transaction costs incurred in certain business transactions. Taxpayers often incur millions of dollars in professional and consulting fees paid to bankers, lawyers, accountants and other service providers in connection with corporate transactions. Tax regulations for dealing with these costs are complex, generally do not follow the processing of books, and may require a comprehensive analysis of facts and circumstances to meet subjective technical requirements and extensive documentation standards. The Camas decision contradicts the turnover position, based on the Irish case of Hibernian Insurance Company, that there is no tax relief for the cost of a failed bid. In practice, some companies have been able to negotiate at least one deduction for at least part of these costs, but it is useful that UK legislation in this area has been clarified in favour of the taxpayer. High Court – The cost of a failed offer is deductible The case cited above, Strong & Co of Romsey v Woodifield, is over a hundred years old, but there are still cases that are on trial today that deal with the types of issues mentioned in this article. Take, for example, the case of P McMahon v.
HMRC in 2014, which dealt with the cost of defending a lawsuit brought by a former employer. Mr. McMahon left his position at Quantica plc and became independent in the same field. The company later filed a lawsuit against him, claiming he had violated an agreement not to contact or advertise his former employer`s customers. Mr McMahon agreed to pay £100,000 to settle Quantica`s claim. He then claimed the £100,000 plus the associated legal fees on his tax return. HMRC dismissed the claim on the ground that the expenses had not been incurred in full and solely for the purposes of Mr McMahon`s business. 2. Determine if the cost facilitates the transaction; and we must therefore answer the question of whether the defaulting costs are incurred “completely and exclusively” for the purposes of “disposal”. 3. Determine how the taxpayer should treat the costs to be capitalized, depending on the party (target or acquirer) and the nature of the transaction (e.g., assets, shares or tax-free acquisition). It should be noted that investment companies may be in a more advantageous position than trading companies when it comes to claiming tax breaks for the costs associated with an investment or a potential investment.