## Facts

- Santa Fe Pacific Gold Company, a stand-alone gold-mining company following a corporate spin-off, faced a hostile takeover attempt by Newmont Mining Corporation.
- Santa Fe entered into a merger agreement with Homestake Mining Company as a defensive “white knight” transaction.
- The Homestake merger agreement required Santa Fe to pay a $65 million termination fee if the agreement was terminated.
- Newmont later increased its bid; Santa Fe’s board accepted the higher offer and terminated the Homestake merger agreement.
- Santa Fe paid Homestake the $65 million termination fee and claimed a deduction for the payment on its 1997 federal income tax return as an ordinary and necessary business expense.
- The Commissioner disallowed the deduction, treating the termination fee as a capital expenditure required to be capitalized.
- Santa Fe petitioned the U.S. Tax Court to redetermine the asserted deficiency.

## Issues

1. Whether the $65 million termination fee was a deductible ordinary and necessary business expense under I.R.C. § 162.
2. Whether the payment was a capital expenditure that must be capitalized under I.R.C. § 263 because it created a long-term benefit or related to a capital transaction.

## Decision

- The Tax Court held for Santa Fe.
- The court allowed a current deduction under § 162 for the $65 million termination fee.
- The court rejected the Commissioner’s position that the fee was required to be capitalized under § 263.

## Legal Principles

- The tax characterization of a termination fee turns on the origin and character of the obligation that produced the payment, not solely on the fact that it arose in an acquisition setting.
- An expenditure must be capitalized if it creates or enhances a separate and distinct asset, or is paid to acquire, improve, or modify a capital asset.
- A termination fee paid to exit an agreement, without producing a legally protectable asset or ongoing contractual right, may be a currently deductible expense.
- Defensive or protective costs incurred to manage threats to corporate control and preserve business operations can qualify as “ordinary and necessary” under § 162 when they are customary in the relevant business context and are not shown to be unreasonable.

## Conclusion

The Tax Court treated Santa Fe’s $65 million termination fee as a deductible business expense because it arose from a customary protective provision in a defensive merger agreement and merely released Santa Fe from contractual obligations, without creating or enhancing a separate and distinct asset requiring capitalization.


Santa Fe Pac. Gold Co. v. Comm'r, 132 T.C. 240 (2009)