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September 12, 2012

“Go-Shop” Provision Does Not Change Bright-Line Date for Capitalization of Merger Costs (article)

IRS Chief Counsel has concluded that a "go-shop" provision allowing a merger candidate to continue to look for another acquirer was just another term of the merger and did not change the "bright-line date" (CCA 201234026). Thus, certain merger costs paid or incurred after a March 31, 2012 bright-line date must be treated as facilitating the merger and must be capitalized.


An acquiring corporation (Acquirer) acquired a target corporation in a business reorganization described in the capitalization regulations. Both corporations' representatives and boards of directors approved the terms of the acquisition on March 31, 2012. The merger agreement allowed the Target to continue to look for another acquirer until April 30, 2012 (the go-shop provision), and allowed Acquirer to match any offer received by Target. If Acquirer declined to match the offer, Target could terminate the agreement and enter into an agreement with the alternate acquirer.

Target did not obtain another offer. At some point after April 30, 2012, Acquirer and Target closed the transaction successfully.

Applicable regulations

The regulations provide that no deduction is allowed for an amount paid to acquire or create an intangible, which includes an ownership interest in a corporation. A taxpayer must capitalize an amount that facilitates a corporate transaction. An amount facilitates a transaction if it is paid in the process of investigating or otherwise pursuing the transaction. Whether an amount is facilitative depends on all the facts and circumstances.

Under the regulations, costs incurred to investigate a transaction or otherwise pursue the transaction (other than inherently facilitative amounts) facilitate the transaction only if they relate to activities performed on or after the bright-line date. Costs relating to activities after the bright-line date thus must be capitalized.

Under Reg. §1.263(a)-5(e)(3), the bright-line date is the earlier of (1) the date that the parties execute an exclusivity agreement, letter of intent, or similar communication (other than a confidentiality agreement), or (2) the date that the parties' boards of directors approve the transaction's material terms.

Chief Counsel's analysis

The parties executed the merger agreement and their boards of directors approved the material terms of the merger on the same date, March 31, 2012. Under the regulations, these events establish the bright-line date as March 31, 2012. Thus, expenses for activities after that date facilitate the merger and must be capitalized.

According to Chief Counsel, the go-shop provision is only one of the terms of the merger agreement and does not negate the agreement's execution or trump the directors' approval of the merger's terms. Therefore, the go-shop provision does not change the bright-line date.

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