Section of Taxation Publications
  VOL. 54
NO. 2
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 Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.

When are Pre-Merger Officer Salaries and Investigatory Expenses Deductible under Section 162: The Eighth Circuit's Answer in: Wells Fargo & Co. v. Commissioner
Kelsey Lemaster


In Wells Fargo & Co. v. Commissioner, the U.S. Court of Appeals for the Eighth Circuit held that salaries paid to corporate officers who provided services in connection with a capital acquisition were deductible as ordinary business expenses under section 162 of the Code. The Eighth Circuit also held that certain investigatory expenses incurred by the taxpayer before signing a consolidation agreement were properly deductible under section 162. Investigatory expenses incurred by the taxpayer after signing the consolidation agreement, however, were held to be capital expenditures and therefore not eligible for deduction. The decision handed down by the Eighth Circuit is important because of the conciseness with which it clarifies the existing United States Supreme Court distinction between deductible and capital expenditures. Encasing its decision in a flow chart of logic, the Eighth Circuit announced a rule of law that, in theory, is simple and precise. The decision is also important because it reveals, but does not resolve, a problem with a recent position taken by the Service concerning the deductibility of investigatory expenses. Specifically, the Service has not made clear the extent to which it will allow deductions for investigatory expenses in future cases, and although the Eighth Circuit addressed the question in Wells Fargo II, it did not provide a clear answer.

Part I of this Note provides a general thematic of the facts of the case. Part II summarizes the holding of the Tax Court. Part III introduces Revenue Ruling 99-23 and identifies its relevance to the case. Part IV summarizes the holding of the Eighth Circuit Court of Appeals. Part V analyzes the Eighth Circuit’s decision. Part VI concludes that the Eighth Circuit decides one issue correctly but confuses the other.


Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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