                       132 T.C. No. 12



                   UNITED STATES TAX COURT



SANTA FE PACIFIC GOLD COMPANY AND SUBSIDIARIES, BY AND THROUGH
 ITS SUCCESSOR IN INTEREST NEWMONT USA LIMITED, Petitioner v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



   Docket No. 22956-06.              Filed April 27, 2009.



        SF was a wholly owned subsidiary of parent P. P spun
   SF off into a stand-alone entity. Two years after being
   spun off, SF faced a hostile takeover by competitor N. In
   order to avoid being taken over, SF entered into a merger
   agreement with white knight HS. The merger agreement
   provided for the payment of a termination fee should the
   agreement be terminated. Shortly thereafter N increased its
   offer. SF’s board accepted the increased offer. SF paid a
   $65 million termination fee to HS. SF claimed a deduction
   for the amount of the termination fee on its 1997 tax
   return, which R disallowed.

        Held: SF is entitled to a deduction of $65 million for
   the termination fee.
                                - 2 -

      David D. Aughtry, Arnold B. Sidman, and William O.

Grimsinger, for petitioner.

      Curt M. Rubin, Matthew I. Root, Michael D. Wilder, and

Jennifer S. McGinty, for respondent.

                              Contents

FINDINGS OF FACT.........................................3

      A.   Introduction....................................4
      B.   Spin-off of Mining Unit.........................5
      C.   The Mining Industry in General..................5
      D.   Santa Fe’s First 2 Years........................6
            1. Initial Corporate Strategy.................8
            2. Becoming Poolable..........................8
      E.   Initial Contacts................................9
      F.   Initial Contact With Newmont and Homestake......10
      G.   November 21, 1996, Santa Fe Board Meeting.......17
      H.   Newmont Responds to Santa Fe’s Rejection........18
      I.   December 8, 1996, Santa Fe Board Meeting........19
      J.   Newmont Reacts to the Santa Fe-Homestake Agreement
           ................................................22
      K.   Santa Fe Reacts to Newmont’s Increased Offer....25
      L.   The March 7-8, 1997, Santa Fe Board Meeting.....29
            1. Newmont Offer..............................29
            2. Homestake Offer............................29
                   a. Initial Homestake Offer.............29
                   b. Attempts To Obtain a Higher Offer.. 30
            3. Newmont Wins Out...........................30
      M.   The Santa Fe-Newmont Agreement..................30
      N.   Santa Fe Post Merger............................31

OPINION..................................................33

I.    Burden of Proof.....................................33

II.   Deductibility v. Capitalization.....................33

      A.   INDOPCO, Inc. v. Commissioner...................36
      B.   Victory Mkts., Inc. & Subs. v. Commissioner.....37
      C.   United States v. Federated Dept. Stores, Inc....37
      D.   Staley I & II...................................38

III. Origin of the Claim Doctrine........................39
                                    - 3 -

IV.    Petitioner’s Arguments..............................41

               A.   Significant Benefit........................41
               B.   Origin of Claim............................41
               C.   Petitioner’s Experts.......................43

V.     Respondent’s Arguments..............................44

               A.   Significant Benefit........................44
               B.   Origin of Claim............................46
               C.   Respondent’s Expert........................49

VI.        Analysis...........................................49

VII.       Conclusion.........................................58

VIII. Section 165........................................58

IX.        Conclusion.........................................62



       GOEKE, Judge:      The issue for decision is whether Santa Fe

Pacific Gold Co. (Santa Fe) is entitled to a deduction of $65

million for a payment made to Homestake Mining Co. (Homestake) as

a result of the termination of a merger agreement between Santa

Fe and Homestake (termination fee) for Santa Fe’s 1997 tax year.

For the reasons stated herein, we find that Santa Fe is entitled

to a deduction pursuant to sections 162 and 165.1

                              FINDINGS OF FACT

       Some of the facts have been stipulated, and the stipulation

of facts and accompanying exhibits are incorporated herein by

this reference.


       1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year at issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                                - 4 -

      Petitioner’s principal office and place of business was

Denver, Colorado, on the date it filed its petition.

A.   Introduction

      During the late 1800s the Federal Government hoped to spur

development of cross-country railroads.    In order to entice

private companies to develop those railroads, the Federal

Government offered and granted large parcels of land bordering

the railroads to the companies that developed them.    The program

was successful, and as a result a checkerboard pattern of land

owned by the railroads spread across the country.

      Santa Fe Pacific Corp. was one company that took part in the

Government program, worked to build transcontinental railroads,

and was granted land alongside its rails.    Some of this land

contained minerals that could be mined for profit.    Santa Fe

Pacific Corp. took no part in the mining of its land.    Until the

late 1970s Santa Fe Pacific Corp. leased these mineral rights to

unrelated companies and individuals rather than mine the land

itself.

      Santa Fe Industries, successor to Santa Fe Pacific Corp.,

later developed an internal unit to manage the mining of the

parcels of land.    The mining unit originally focused on uranium

mining but later switched to coal and then gold mining.
                                  - 5 -

B.   Spinoff of the Mining Unit

      In the late 1980s Santa Fe Industries became the target of a

hostile takeover attempt.   In a move meant to help defeat the

attempted acquisition, the mining unit was put up for sale.

Although the sale was never consummated, the mining unit’s

management realized that they were not considered an integral

part of Santa Fe Industries and began to appreciate the benefits

of the mining unit’s being a stand-alone entity.    Management of

the mining unit began to consider the idea of having it separated

from the parent company.

      The spinoff of Santa Fe was a two-step process.   First,

there was an initial public offering (IPO) of 14.6 percent of

Santa Fe’s common stock on June 23, 1994.   In September 1994

Santa Fe’s parent corporation distributed its remaining shares of

Santa Fe stock to Santa Fe’s public shareholders.   As a result of

the spinoff, Santa Fe became a publicly traded stand-alone

entity.

      Once the spinoff was completed, the newly independent

company’s management appreciated the benefits of being a stand-

alone company and did not want to return to being a subsidiary of

a larger company.

C.   The Mining Industry in General

      Mining companies are classified by tiers.   First-tier mining

companies are the top mining companies in the country.    Newmont
                                 - 6 -

USA Limited (Newmont) was a first-tier mining company.       Second-

tier mining companies are smaller mines focused on developing

mines and building production.    Santa Fe and Homestake were

second-tier mining companies.    Third-tier mining companies are

the lowest ranked and consist of junior exploration companies.

      During the 1990s the mining industry was in a state of

consolidation.   Consolidation was driven by two factors:       (1)

Larger companies could lower costs; and (2) larger companies were

viewed as better investments because they had higher multiples on

earnings and cashflow than smaller companies.       Second-tier mining

companies traded at lower multiples than first-tier companies.

D.   Santa Fe’s First 2 Years

      Because Santa Fe could not qualify for “pooling of

interests” accounting treatment,2 Santa Fe was an unattractive

company to other mining companies.       Pooling of interests

accounting is preferred because it avoids the creation of

goodwill.   If a transaction qualifies for pooling of interests

accounting treatment, the purchaser will generally pick up the

target’s assets, liabilities, and net worth at the book values

those items had on the target’s financial statements, without

regard to the current fair value of those assets or liabilities,



      2
      Pursuant to the Financial Accounting Standards Board,
Statement of Financial Accounting Standards No. 141, Business
Combinations, pooling of interests accounting is no longer
available to transactions initiated after June 30, 2001.
                                 - 7 -

or the fair value of the consideration the purchaser issued in

exchange for the target’s net assets.     See 3 Ginsburg & Levin,

Mergers, Acquisitions, and Buyouts, par. 1703.4.     If a

transaction does not qualify for pooling of interests accounting

treatment, purchase accounting rules apply.     Goodwill may be

created when purchase accounting rules apply.     This purchase

goodwill, considered a new asset, is shown on the acquirer’s

books as the excess of the acquirer’s cost for the target over

the fair market value of the target’s identifiable assets.        Id.

par. 1703.2.1.    Creation of goodwill is undesirable from the

acquirer’s standpoint because the goodwill might have to be

written off.     Id.   Goodwill is required to be written off to the

extent it becomes impaired.     Id.   Goodwill is impaired when “‘the

carrying amount of goodwill exceeds its implied fair value.’”

Id. par. 1703.2.1.3 (quoting FASB Statement No. 142, par. 18).

The determination of impairment, if any, is made on a case-by-

case basis pursuant to accounting rules.      Id. par. 1703.2.1.3.      A

company considering an acquisition would prefer pooling of

interests accounting, thereby avoiding the effects of purchase

accounting.

     Pooling of interests accounting treatment was prohibited

with respect to acquisitions of a company within 2 years of the

time that the company was a subsidiary of another company.

Accordingly, for 2 years Santa Fe would not be able to take
                                 - 8 -

advantage of pooling of interests accounting treatment for any

business combination it took part in.    Pooling of interests

accounting treatment would be available if Santa Fe were to enter

into a transaction that would otherwise qualify for pooling of

interests accounting treatment after October 1, 1996.

     1.   Initial Corporate Strategy

     On January 1, 1995, Santa Fe’s president, Pat James (Mr.

James), took over as chief executive officer and chairman of

Santa Fe’s board of directors.    Santa Fe management had set as

one of its goals reaching first-tier status.    In order to do so,

management set an initial production goal of 1 million troy

ounces of gold per year and hoped to reach that goal by 1997.

Santa Fe reached this goal by the end of 1996.    Management also

developed a 5-year business plan that was later expanded to a 10-

year business plan.   Once Santa Fe had accomplished its goal of 1

million troy ounces per year, the company planned on increasing

production to 2 million troy ounces per year.

     2.   Becoming Poolable

     Towards the end of 1995 Santa Fe began to investigate

possible three-way combinations with TVX Gold, Inc. (TVX), and

Battle Mountain Gold Co. (Battle Mountain).    Both TVX and Battle

Mountain were significant companies in the mining industry but

were smaller than Santa Fe.   At this time Santa Fe’s management

recognized the value of its large land positions and understood
                                - 9 -

that this made the company a prime takeover target.      The

impossibility of qualifying for pooling of interests accounting

treatment, however, protected Santa Fe from takeover because the

prospect of being forced to account for the transaction under

purchase accounting rules made Santa Fe a less attractive target.

Recognizing that the prohibition against pooling was going to end

soon, however, Santa Fe realized that it would need a new

strategy to avoid takeover.    Santa Fe viewed a possible three-way

merger as a defense against a possible hostile takeover.

However, the prospective deals with TVX and Battle Mountain were

unsuccessful.

E.   Initial Contacts

      On January 19, 1996, Santa Fe’s board of directors (the

Santa Fe board) engaged S.G. Warburg & Co., Inc. (S.G. Warburg),

as the board’s financial advisers.      The engagement letter

indicated that S.G. Warburg would act as strategic financial

advisers to Santa Fe, advising the company regarding

acquisitions, mergers of equals, and takeover defenses.        Santa

Fe’s management was interested in exploring possible acquisitions

by Santa Fe and was targeting companies both smaller than and

equal in size to Santa Fe.    Management’s strategy was that

acquisitions would help to defeat a takeover attempt because any

acquisition would increase Santa Fe’s value, requiring a suitor

to pay a higher price.
                               - 10 -

F.   Initial Contact With Newmont and Homestake

      On April 1, 1996, at a meeting of the Gold Institute, a

mining industry association, Ron Cambre (Mr. Cambre), chief

executive officer of Newmont, contacted Mr. James about a

business combination.    Mr. James was not surprised.    Newmont was

two to three times larger than Santa Fe and was one of the

biggest companies in the mining industry.    Mr. Cambre did not

provide a specific proposal but informally mentioned that Newmont

and Santa Fe should be looking at some sort of combination of the

two companies.   Newmont’s interest in a combination with Santa Fe

centered on Santa Fe’s land position.    At that time Santa Fe had

a larger land position in Nevada than Newmont did.      Mr. James

viewed any hypothetical business combination with Newmont as a

takeover of Santa Fe because of their relative sizes.      Mr. James

rebuffed Mr. Cambre’s attempts, informing Mr. Cambre that Santa

Fe wanted to continue as an independent firm.

      At that time Santa Fe’s management realized that it had to

act before the 2-year prohibition on pooling of interests

accounting expired in order for Santa Fe’s business and long-term

plans to be protected.    On July 17, 1996, Mr. Cambre wrote to Mr.

James reiterating his desire to explore a possible business

combination of Newmont and Santa Fe.

      At a July 25, 1996, meeting of the Santa Fe board, Mr. James

discussed Santa Fe’s strategic alternatives.      S.G. Warburg
                              - 11 -

provided a more detailed review of these options, while counsel

from the law firm of Skadden, Arps, Slate, Meagher & Flom made a

presentation on the Santa Fe board members’ fiduciary duties in

considering any strategic alternatives.

     On July 26, 1996, the Homestake board of directors (the

Homestake board) met.   The minutes of that meeting reflected that

during the meeting Homestake’s president and chief executive

officer Jack Thompson (Mr. Thompson) informed the Homestake board

that he had recently spoken with Mr. James regarding Santa Fe’s

interest in a possible business combination with Homestake.    The

minutes further indicated that Mr. James told Mr. Thompson that

Santa Fe “would prefer to act on its own at this point”.

     Sometime around the beginning of August 1996 Mr. James

informed Mr. Cambre that Santa Fe was not interested in pursuing

a combination with Newmont.   On August 8, 1996, Mr. Cambre sent a

letter to Mr. James expressing his disappointment that Santa Fe

had decided to stay the course and not consider a business

combination with Newmont.   The letter also stated that with Santa

Fe’s nonpooling period coming to a close, Mr. Cambre knew that

Santa Fe and Santa Fe’s board would “be concerned about hostile

interlopers” who would disrupt Santa Fe’s strategic plans, and

that a combination with Newmont would protect Newmont’s and Santa

Fe’s ability to work towards their strategic goals.
                               - 12 -

     Mr. James and Mr. Batchelder, a Santa Fe director, did not

view Mr. Cambre’s letter as a positive development.    Rather, they

viewed Mr. Cambre’s letter as a warning that Santa Fe was

vulnerable to a takeover.    Mr. James and Mr. Batchelder viewed

Newmont as one of the companies that could take Santa Fe over if

Santa Fe resisted their friendly overtures.    Mr. Batchelder had

experience dealing with mergers and acquisitions and hostile

takeovers in the mining industry before joining Santa Fe as a

director.   On August 22, 1996, Mr. James responded to Mr.

Cambre’s August 8, 1996, letter and reiterated Santa Fe’s

position that it was not interested in a business combination

with Newmont at that time.

     On September 18, 1996, the Newmont board of directors (the

Newmont board) met.   Before the meeting, Mr. Cambre sent the

board members a letter detailing his beliefs that Santa Fe was a

good strategic fit and that Newmont should pursue a transaction

with Santa Fe.   It also detailed Mr. Cambre’s discussions with

Mr. James and passed along Mr. James’s message of August 22,

1996, that Santa Fe was not interested in a transaction with

Newmont.    Attached to the letter was a presentation prepared by

Goldman, Sachs & Co. (Goldman Sachs) about Project North.3   The


     3
      Parties to merger or acquisition transactions often refer
to themselves and other entities involved with code words that
begin with the same letter as the name of the entity. Newmont
was referred to as “North”, while Santa Fe was referred to as
                                                   (continued...)
                               - 13 -

presentation listed the positive and negative aspects of doing

either a friendly or hostile deal with Santa Fe.    Specifically

listed as a potential negative consequence of an unfriendly deal

was that a negative attempt might “drive South into the hands of

another party”.    The presentation also included steps North could

take to “turn up the heat” on South and a review of South’s

structural defenses.    The presentation included a slide which

showed the following:

     Turning up the Heat
     Levels of Unsolicited/Hostile Activity

     1.    Target CEO Private Conversation
     2.    Target Board Member Private Conversation
     3.    Target CEO Private Letter
     4.    [Acquire Stock Secretly (<5%)]
     5.    Target Board Member “On the Record” Conversation
     6.    Non-disclosable Bear-Hug Letter
     7.    Public Expression of Interest
     8.    Disclosed Bear-Hug Letter
     9.    [Acquire Stock Publicly (>5% or announce)]
     10.    Proxy Fight/Special Meeting/Written Consent
     11.    Public Tender/Exchange Offer

     The steps are ordered in increasing levels of hostility.

Steps 1 through 4 were considered private because they would not

trigger any duty of Santa Fe management or the Santa Fe board

that would require management or the board to announce to Santa

Fe’s shareholders and the public at large that Santa Fe and

Newmont were in discussions.    For example, should a Newmont board

member contact a Santa Fe board member, as described in step 3,


     3
      (...continued)
“South”.
                              - 14 -

the contact could be structured such that the Santa Fe board was

not required to inform Santa Fe’s shareholders.    Likewise, step 6

would be a letter to Santa Fe’s management and board from Newmont

that would not trigger a duty of disclosure to shareholders.

Step 8, however, would be a public letter that would alert Santa

Fe’s shareholders and the public to Newmont’s interests.      Steps 9

through 11 would be a clear, public, hostile takeover of Santa Fe

by Newmont.

     In the months leading up to Santa Fe’s becoming poolable,

Santa Fe’s management began to consider its strategic options.

At that time Homestake was unable to discuss any combinations

with Santa Fe because Homestake was dealing with a regulatory

issue, and Battle Mountain was currently engaged in finishing a

prior acquisition; this left Newmont.    The Santa Fe board

recognized that if they did not reach out to Newmont first,

Newmont was sure to reach out to them.    The board and the

management felt that by initiating contact they would be able to

maintain control over any due diligence or meetings between Santa

Fe and Newmont personnel.   Also, meeting with Newmont in a

friendly manner might allow Santa Fe to learn more about

Newmont’s thought processes and goals.

     On September 26, 1996, the Santa Fe board met again and

instructed Mr. James and Mr. Batchelder to approach Newmont

concerning possible strategic plans.    At the time, Santa Fe
                               - 15 -

management was afraid of having the company put in play because

that would effectively mean the company was for sale to the

highest bidder.   Mr. James hoped that if Santa Fe was able to

remain in control during the process, it might be able to delay

Newmont long enough to allow Homestake to become available.

Santa Fe viewed Homestake as a possible “white knight” and hoped

that an agreement with Homestake would prevent Newmont from

acquiring Santa Fe.    Also, an agreement and merger with Homestake

would provide benefits to Santa Fe that its management viewed as

absent in any merger with Newmont, including in part:   (1) Shared

board control; (2) shared management; (3) greater retention of

Santa Fe employees; and (4) an opportunity to continue Santa Fe’s

business objectives.

     Mr. James felt that a merger with Homestake would be much

better for Santa Fe because he viewed it as an opportunity to

merge two undervalued companies.   The merger would also result in

more Santa Fe employees keeping their jobs as a result of a

fairer selection process.

     Santa Fe management recommended to the Santa Fe board that

the board talk to Newmont but leave their options open in case

Homestake became available.   Mr. James and Mr. Batchelder met

with Mr. Cambre on October 1, 1996, at Mr. Cambre’s home in New

Mexico.   Also present was Wayne Murdy (Mr. Murdy), who was

serving as Newmont’s chief financial officer at the time.
                              - 16 -

     About 6 weeks later, Santa Fe and Newmont held what appeared

to Newmont to be initial due diligence meetings.    During these

meetings Mr. James came to realize further that a deal with

Newmont would not be in the best interests of Santa Fe and its

shareholders because it appeared to him that many Santa Fe

employees would be fired and the work Santa Fe’s management had

done to develop the company would be lost.

     While these meetings were ongoing, Santa Fe attempted to get

Newmont to enter into a standstill agreement.4   A standstill

agreement would have prevented Newmont from launching a hostile

bid for Santa Fe if Santa Fe and Newmont were unable to come to

an agreement.   Newmont refused to enter into a standstill

agreement for just this reason; it specifically wanted to reserve

its right to launch a hostile bid and go directly to the Santa Fe

shareholders if that was what was necessary to get a deal done.

Mr. James understood Newmont’s refusal of a standstill provision

to be an indicator of Newmont’s reserving its right to begin a

hostile takeover.

     Shortly thereafter Mr. James learned that Homestake’s

regulatory issue had been resolved.    Mr. James called Mr.

Thompson and set up a lunch in the hope of convincing Homestake


     4
      A standstill agreement is defined as “Any agreement to
refrain from taking further action; esp., an agreement by which a
party agrees to refrain from further attempts to take over a
corporation (as by making no tender offer) for a specified
period”. Blacks Law Dictionary (8th ed. 2004).
                               - 17 -

to enter into a merger with Santa Fe.   Santa Fe’s management

hoped that a combination with Homestake would derail Newmont’s

acquisition attempt.   On November 6, 1996, Mr. Thompson sent a

letter to Mr. James indicating his belief that a merger between

Santa Fe and Homestake would be good for their investors.    The

letter further stated that Mr. Thompson was prepared to recommend

to the Homestake board that Homestake and Santa Fe merge on the

basis of a “‘pooling of interests,’ combining our management and

shareholders as partners.”

      Mr. James and Mr. Thompson met shortly thereafter.   Mr.

Thompson was interested in quickly pursuing due diligence, which

began the following week.    Santa Fe and Homestake moved quickly

to investigate a possible merger.

G.   November 21, 1996, Santa Fe Board Meeting

      On November 21, 1996, Newmont submitted its offer to the

Santa Fe board.   The next day Homestake submitted its offer.    At

the time both Homestake and Newmont had suspicions that other

parties were involved in negotiations with Santa Fe, but neither

knew for sure nor knew the identities of any other possible

bidders.

      Santa Fe’s management recommended the Santa Fe-Homestake

deal to the Santa Fe board.   The Santa Fe board discussed the

pending offers and chose to proceed with Homestake.   Mr. James

and Mr. Batchelder called Mr. Cambre to inform him that Newmont’s
                                - 18 -

offer had been rejected.    Mr. James did not ask for a higher

offer nor tell Mr. Cambre about Santa Fe’s and Homestake’s

agreement when the two spoke.    After that call ended, Mr. Cambre

spoke with Mr. Murdy and expressed his displeasure at being

rejected and not having a chance to discuss a higher offer.      The

two also came to the conclusion that Newmont would have to, in

Mr. Murdy’s words, “turn up the heat” on Santa Fe.

H.   Newmont Responds to Santa Fe’s Rejection

      The Santa Fe board met on December 5, 1996.   Along with its

normal duties the Santa Fe board discussed the pending Santa Fe-

Homestake merger.    During the meeting Newmont sent a fax to Santa

Fe’s offices.    The fax stated that at 10 a.m. that morning

Newmont was going to issue a press release detailing the offer

that Newmont had submitted and Santa Fe had rejected.    The press

release provided details on the offer.5   The offer described in

the press release, although similar to the previous offer, was

not identical.    Because the offer contained in the press release

was so similar to Newmont’s earlier offer, the Santa Fe board did

not feel that it triggered any fiduciary duty to investigate and

consider the offer any more than they had already.    Accordingly,

the Santa Fe board was able to, and did, reject it outright.




      5
      This is a type of public bear hug letter, as described in
step 8 of the Goldman Sachs presentation discussed supra.
                              - 19 -

      Mr. James and the other members of Santa Fe’s management and

board viewed this press release sent directly to its shareholders

as a hostile tactic.   Newmont had not increased its offer, did

not take into account whether there were any third parties

involved, and did not make any attempt, until 15 minutes before

the press release was issued, to contact Santa Fe about the press

release.   Newmont could have kept the offer private, rather than

issue it publicly.   Had it been kept private, Santa Fe’s

management and board would have had the option of keeping it

private or announcing it to the public.   However, because the

press release was sent directly to the Santa Fe shareholders,

Newmont’s interest in Santa Fe, and Santa Fe’s rejection of

Newmont, were both made public.   At that time Santa Fe and

Homestake had not yet executed a merger agreement.

      The next day as word of Newmont’s offer spread several

lawsuits were filed against the Santa Fe board for allegedly

violating its fiduciary duties to the Santa Fe shareholders.     The

lawsuits alleged that Santa Fe’s directors had abused their

fiduciary duties by thwarting Newmont’s attempts to acquire Santa

Fe and by attempting to entrench themselves in their positions.

I.   December 8, 1996, Santa Fe Board Meeting

      Over the next week Santa Fe and Homestake continued to work

out a merger agreement.   On December 8, 1996, the Santa Fe board

met again to consider the Santa Fe-Homestake merger.   After
                              - 20 -

discussions the Santa Fe board unanimously approved the proposed

agreement.   As the basis for this approval the Santa Fe board

resolved that an agreement between Santa Fe and Homestake was

fair to and in the best interests of Santa Fe and its

shareholders.   The Homestake board also met that day to discuss

and consider the Santa Fe-Homestake proposal.    After discussions,

the Homestake board decided to enter into the merger transaction

with Santa Fe, finding that it was both fair and in the best

interests of the corporation and its shareholders.

     Santa Fe and Homestake executed a merger agreement which

contained a termination fee clause.    The clause provided for a

payment should the agreement be terminated by either party.     The

termination fee clause provided in pertinent part that should

Santa Fe receive an offer from a third party, and should the

Santa Fe-Homestake agreement be breached because of that third

party offer, then Santa Fe would be required to pay Homestake $65

million.

     Termination fees are included in merger agreements for a

variety of reasons, some of which may benefit the target, the

acquirer, or both.   From the bidder’s (Homestake’s) perspective,

a termination fee could serve a number of purposes, including:

(1) To test the seriousness of the potential target; (2) to serve

as insurance for the bidder and compensate the bidder for

information provided to the target and lost opportunity costs if
                              - 21 -

its bid is rejected or a rival bidder emerges and wins a contest

for the target; and (3) to serve to deter a competing bidder who

might not be willing or able to pay the additional expense of the

termination fee in order to win the contested merger.    See Swett,

“Merger Terminations After Bell Atlantic: Applying A Liquidated

Damages Analysis to Termination Fee Provisions”, 70 U. Colo. L.

Rev. 341, 356 (1999).   A target may benefit by the inclusion of a

termination fee because the fee may:    (1) Be necessary to attract

a serious bidder by showing the target’s willingness to enter

into due diligence and negotiations; (2) allow the target’s board

to preserve its fiduciary duties at a known cost; and (3) protect

the target by requiring a reciprocal termination fee in case the

acquirer terminates the agreement.     Id. at 356-357.

     The Santa Fe-Homestake merger agreement also contained what

is known as a fiduciary-out clause.    A fiduciary-out clause is a

contract clause that would allow a party to the agreement to

consider superior offers if not doing so would cause it to

violate its fiduciary duties to its shareholders.

     On December 9, 1996, Mr. James held a press conference to

announce the Santa Fe-Homestake merger agreement.    The assembled

reporters asked Mr. James a number of questions, including some

relating to the termination fee and whether the termination fee

was included in the merger agreement in order to keep Santa Fe’s

management and board in place.
                               - 22 -

      In the days after this announcement a number of lawsuits

were filed in the State of Delaware, alleging that the Santa Fe

board violated its fiduciary duties to Santa Fe’s shareholders

and that individual board members had abused their positions by

accepting the Homestake offer rather than negotiate with Newmont.

The suits alleged that the merger agreement with Homestake was

entered into in order to entrench Santa Fe’s management.

J.   Newmont Reacts to the Santa Fe-Homestake Agreement

      On December 18, 1996, Mr. Cambre circulated a memorandum to

Newmont’s board discussing the prospects of a Newmont-Santa Fe

business combination in the light of the Santa Fe-Homestake

agreement.    The memorandum provided that Newmont’s original

valuation of Santa Fe was based upon Newmont’s belief that Santa

Fe’s board and management were in agreement on a merger with

Newmont.    The memorandum goes on to note that, instead of

supporting a Newmont-Santa Fe merger, Santa Fe was talking to

other parties and decided to enter into a transaction with

Homestake.

      Mr. Cambre also speculated that the Santa Fe board was more

inclined to support a merger with Homestake because any

combination with Homestake would result in a more favorable

treatment of the Santa Fe board and management, rather than a

deal with Newmont in which Santa Fe was effectively being

acquired.    On the basis of this speculation, Mr. Cambre stated
                              - 23 -

that the Newmont board should recognize that any action taken by

Newmont would probably be opposed by the Santa Fe board because

the Santa Fe board would stand to benefit more from a Santa Fe-

Homestake merger than a Santa Fe-Newmont combination.    Lastly,

Mr. Cambre discussed the Santa Fe-Homestake termination fee.     Mr.

Cambre pointed out that when adding the cost of a proxy fight to

the $65 million termination fee, Newmont would be facing an

incremental cost of $85 million to “fight and win this battle.”

     On January 3, 1997, the Newmont board met to discuss the

Santa Fe situation.   At the meeting, Goldman Sachs presented

reports on Newmont’s initial offer, the market’s reaction to that

offer, and Newmont’s options going forward, including:    (1) Doing

nothing; (2) renewing the offer at its current price level; (3)

matching Homestake’s offer; or (4) making an offer higher than

Homestake’s.   After discussion, the Newmont board resolved to

increase Newmont’s offer to the Santa Fe shareholders to 0.40

share of Newmont common stock for each share of Santa Fe stock.

     Between December 31, 1996, and January 6, 1997, a wholly

owned subsidiary of Newmont, Midtown One Corp., privately

acquired about 4,800 shares of Santa Fe stock.   These

acquisitions allowed Newmont to demand a shareholder list from

Santa Fe, which was provided to Newmont on January 6, 1997.

     On January 7, 1997, Mr. Cambre sent a letter on behalf of

the Newmont board to the Santa Fe board.   This was the second
                              - 24 -

“bear hug letter” Newmont had sent Santa Fe and was one of the

steps described in the Goldman Sachs presentation as a tool that

could be used to “turn up the heat” on Santa Fe.   The letter

informed the Santa Fe board of Newmont’s increased offer and

stated that if Santa Fe did not terminate its proposed merger

with Homestake, Newmont would solicit proxies against the

Homestake merger proposal pursuant to proxy solicitation

materials filed with the Securities and Exchange Commission

(SEC).   Also on January 7, 1997, Newmont filed a registration

statement with the SEC along with a preliminary proxy statement

and assorted materials attempting to persuade Santa Fe

shareholders to vote against the Santa Fe-Homestake merger

agreement.   In addition, Newmont directly contacted Santa Fe

shareholders in an attempt to convince them to vote against the

merger agreement.

     On January 7, 1997, Homestake was advised of Newmont’s

increased offer as required by the Homestake-Santa Fe merger

agreement.   Mr. Thompson responded to this notification by

requesting an opportunity to address the Santa Fe board at such

time as it would be considering the increased Newmont offer.     Mr.

Thompson’s letter indicated his belief that the Santa Fe-

Homestake merger remained superior to the increased Newmont offer

and provided greater value to the Santa Fe shareholders; the

letter reiterated that the Newmont offer should be rejected.
                              - 25 -

K.   Santa Fe Reacts to Newmont’s Increased Offer

      On January 12, 1997, the Santa Fe board met to discuss the

increased Newmont offer.   The Santa Fe board heard presentations

from Santa Fe’s legal and financial advisers and discussed the

implications of Newmont’s increased offer.    The Santa Fe board

then determined that a decision not to investigate the Newmont

offer would be a breach of the board’s fiduciary duties to Santa

Fe’s shareholders.   This determination satisfied the fiduciary-

out clause, section 4.02(a)(ii)(A), of the Homestake-Santa Fe

merger agreement.

      Before Santa Fe began considering the Newmont and Homestake

offers, the makeup of Santa Fe’s investor base began to shift.

Over the preceding year Santa Fe’s long-term shareholders and

investors had slowly been replaced by larger institutional

shareholders and investors.   These new investors brought their

own distinct views as to what Santa Fe should do when deciding

between the Homestake and Newmont offers.    This change in

shareholder makeup was going to have an effect on Santa Fe’s

decision regarding the two offers.

      On January 17, 1997, Mr. Cambre sent a letter to Newmont’s

board apprising the board of the Santa Fe situation.    Mr. Cambre

noted that Newmont was getting good responses from large

institutional shareholders who preferred Newmont stock to

Homestake.   Mr. Cambre also informed Newmont’s board that he had
                              - 26 -

requested an opportunity to speak with the Santa Fe board during

its meetings on January 22 and 23, 1997, when it was anticipated

that the Santa Fe board would be considering Newmont’s offer.

     While the Santa Fe board was considering its next steps,

there arose a question of whether the $65 million termination fee

would, pursuant to accounting rules, prevent a combination with

Newmont from being accounted for as a pooling of interests.

Newmont contacted the SEC, hoping to obtain assurances that

payment of the termination fee would not prevent a takeover of

Santa Fe by Newmont from qualifying for pooling of interests

accounting treatment.

     On January 23, 1997, the Santa Fe board met.   Mr. James and

Mr. Batchelder discussed the upcoming negotiations with Newmont,

the major questions to ask of Newmont, and a strategy for Santa

Fe to follow in investigating the Newmont offer while fulfilling

its obligations to Homestake under the merger agreement.    Mr.

James and Mr. Batchelder hoped to complete their investigation

and prepare a comparison of the two options by February 12, 1997,

which would then be presented to the full Santa Fe board.

     On January 29, 1997, the Newmont board met for a regular

meeting and was updated on the attempt to acquire Santa Fe.     The

Newmont board was also given a presentation by Goldman Sachs

which included market reaction to Newmont’s offer and a time line

of Newmont’s next steps.   The next day Mr. Cambre sent Mr. James
                               - 27 -

a letter confirming the teams assigned to various due diligence

issues concerning Newmont and Santa Fe before the meeting of the

Santa Fe board to consider the Newmont and Homestake offers.

     On February 4, 1997, Mr. James wrote to Mr. Thompson.    The

letter confirmed to Mr. Thompson that Homestake would have an

opportunity to present its case to the Santa Fe board in February

1997.   The letter also requested that the merger agreement be

amended such that any termination fee would not be paid until

another business combination had been consummated and that the

termination fee would not be paid at all to the extent that it

prevented Santa Fe from engaging in a pooling of interests

merger.   The letter went on to state that the Santa Fe board

would consider Homestake’s refusal of the above requests as a

negative factor when evaluating Homestake’s offer.   Mr. James

sent a similar letter to Mr. Cambre on February 4, 1997,

confirming that Newmont would be presenting its offer to the

Santa Fe board as well.   The letter also requested that Newmont

pay the Santa Fe-Homestake termination fee if Santa Fe’s board

chose Newmont’s offer.    Newmont refused, as Mr. Cambre viewed the

termination fee as Santa Fe’s obligation and not Newmont’s.

     On February 7, 1997, Homestake wrote to Wayne Jarke (Mr.

Jarke), Santa Fe’s general counsel, requesting that the Santa Fe

board reaffirm its recommendation of the Homestake offer in

accordance with the Santa Fe-Homestake merger agreement.
                             - 28 -

     On February 13, 1997, Mr. Cambre wrote to the Newmont board

to inform the board of the results of Newmont’s due diligence.

Due diligence was more productive than it had been when performed

for the meetings conducted in October and November of 1996

because Santa Fe’s management had to engage in legitimate due

diligence regarding the pending offers of Homestake and Newmont

in order to allow the Santa Fe board members to make an informed

decision and satisfy their fiduciary duties.   Mr. Cambre

described the synergies to be taken advantage of in the event of

a combination and discussed the upcoming Santa Fe board meeting.

     On February 20, 1997, the Santa Fe board met to consider

Homestake’s requested reaffirmation as to the Homestake offer.

The Santa Fe board decided to reaffirm its commitment to the

Homestake offer even though Newmont had increased its offer.

Notice that Homestake’s offer had been reaffirmed was sent on

February 20, 1997.

     While preparations for the presentations were ongoing, Santa

Fe and Newmont were still facing the prospect that payment of the

termination fee to Homestake would prevent Newmont from

qualifying for pooling of interests accounting treatment.    On or

about February 26, 1997, the SEC advised Newmont that payment of

the termination fee would not prevent a Santa Fe-Newmont

combination from qualifying for pooling of interests accounting

treatment.
                                - 29 -

L.   The March 7-8, 1997, Santa Fe Board Meeting

      1.   Newmont Offer

      The Santa Fe board met in Albuquerque, New Mexico, on March

7 and 8, 1997, to discuss the competing business proposals.      The

board held four sessions over 2 days.      Newmont made the first

presentation.    When it was finished, a Santa Fe director informed

Mr. Cambre that the Santa Fe board was going to listen to

Homestake’s presentation but that during that time Newmont should

prepare its best and final offer.     In response to this request,

Mr. Cambre made an offer of .43 share of Newmont stock for each

share of Santa Fe stock.     The Newmont board held a special

meeting to discuss this increased offer and approved the .43-

share offer.     Mr. Cambre reported to the Santa Fe board that the

Newmont board had approved this higher offer.

      2.   Homestake Offer

            a.   Initial Homestake Offer

      Homestake raised its offer before the presentation to the

Santa Fe board.    Mr. Thompson informed Mr. James by letter that

the Homestake board had approved an increased offer of 1.25

shares of Homestake common stock for each share of Santa Fe

common stock.    Newmont’s .43-share offer, however, provided a

higher value to Santa Fe than Homestake’s 1.25-share offer.
                                - 30 -

            b.   Attempts To Obtain a Higher Offer

       After Newmont increased its offer to .43 share, Santa Fe

held out hope that Homestake would be able to raise its offer

further.     Mr. James visited Mr. Thompson, informed him that

Newmont had raised its offer, and asked if Homestake could beat

it.    Mr. Thompson informed Mr. James that Homestake was unable to

raise its offer again.     At this point it became clear to Santa Fe

that its agreement with Homestake would not prevent Newmont’s

acquisition.     Delaware fiduciary duties laws required Santa Fe’s

board to obtain the highest value for the company’s shareholders.

       3.   Newmont Wins Out

       The Santa Fe board decided that Newmont’s offer was superior

in value to Homestake’s offer.     In order to fulfill the fiduciary

duties imposed on directors by Delaware State law, the Santa Fe

board was required to accept the offer.     Accordingly, the Santa

Fe board unanimously resolved to accept Newmont’s offer.

M.    The Santa Fe-Newmont Agreement

       On March 10, 1997, the Santa Fe board met again.   That same

day Mr. James formally notified Homestake that Santa Fe would be

terminating the Santa Fe-Homestake agreement and would be paying

the termination fee.     Santa Fe paid $65 million to Homestake by

wire transfer on March 10, 1997.     Santa Fe would not receive a

refund if the Newmont merger was rejected by its shareholders.

Nor would Newmont reimburse Santa Fe for the termination fee if
                                - 31 -

the combination was rejected.    On March 10, 1997, Mr. Cambre

advised the Newmont board by letter that Newmont and Santa Fe had

executed a merger agreement.

      On April 4, 1997, the Santa Fe shareholders received an

invitation to a meeting on May 5, 1997.    At that meeting the

Santa Fe shareholders voted to approve the merger with Newmont.

N.   Santa Fe Post Merger

      After the Santa Fe-Newmont agreement was executed, Newmont

attempted to capitalize on the synergies of the two companies

that formed the impetus for Newmont’s approaching Santa Fe.

Although described by Mr. Cambre as shared synergies between

Santa Fe and Newmont, the synergy in reality came from Newmont’s

ability to mine Santa Fe’s land without need of Santa Fe’s

executives and management.   For the most part synergy was

effected by cutting Santa Fe staff, shuttering all Santa Fe

offices since they duplicated Newmont offices, and putting any

remaining Santa Fe employees under the control of Newmont

employees.   Almost all of the employees terminated were employees

and managers who came to Newmont from Santa Fe.    All of Santa

Fe’s board members resigned on or before May 5, 1997.    Santa Fe’s

headquarters was closed shortly thereafter in August 1997.

Newmont also abandoned Santa Fe’s 5- and 10-year plans.

      On January 15, 1998, Santa Fe timely filed its Form 1120,

U.S. Corporation Income Tax Return, for the short period January
                               - 32 -

1 to May 5, 1997.    Santa Fe claimed a deduction of $68,660,812,

of which $65 million was the termination fee paid pursuant to the

merger agreement between Santa Fe and Homestake.

       On August 15, 2005, respondent issued to Newmont USA Limited

(petitioner), as Santa Fe’s successor in interest, a statutory

notice of deficiency which determined in relevant part that

petitioner was not entitled to a deduction for the termination

fee.    The notice stated in pertinent part:

       7.a.3 Abandonments (Termination Fee)

            It is determined that are allowed $-0- as a deduction
       for abandonments under section 165 of the Internal Revenue
       Code rather than the $65,000,000 shown on your return for
       the tax year ended May 5, 1997. The amount of $65,000,000
       is not allowed as a deduction because it was a capital
       expenditure under section 263 of the Internal Revenue Code.
       Therefore, your taxable income for the tax year ended May 5,
       1997 is increased $65,000,000.

       On November 9, 2006, petitioner filed a petition with this

Court, alleging in part that respondent erred in disallowing the

claimed deduction for $65 million.      A trial was held from

December 10 to 14, 2007, during a special session of the Court in

Atlanta, Georgia.    Petitioner presented a number of fact

witnesses, and both petitioner and respondent presented expert

testimony.    Petitioner argues that Santa Fe is entitled to deduct

the $65 million paid to Homestake.      Respondent argues that Santa

Fe is required to capitalize the $65 million.
                               - 33 -

                               OPINION

I.    Burden of Proof

       We must decide whether Santa Fe may deduct the termination

fee or must capitalize it as an expenditure to be deducted in

later years.    The Commissioner’s determinations in the notice of

deficiency are presumed correct, and the taxpayer bears the

burden of proving,6 by a preponderance of the evidence, that

these determinations are incorrect.      Rule 142(a)(1); Welch v.

Helvering, 290 U.S. 111, 115 (1933).

II.    Deductibility vs. Capitalization

       For Federal income tax purposes the principal difference

between classifying a payment as a deductible expense or a

capital expenditure concerns the timing of the taxpayer’s

recovery of the cost.    As the Supreme Court observed in INDOPCO,

Inc. v. Commissioner, 503 U.S. 79, 83-84 (1992):

            The primary effect of characterizing a payment as
       either a business expense or a capital expenditure
       concerns the timing of the taxpayer’s cost recovery:
       While business expenses are currently deductible, a
       capital expenditure usually is amortized and
       depreciated over the life of the relevant asset, or
       where no specific asset or useful life can be
       ascertained, is deducted upon dissolution of the


       6
      Petitioner argues that respondent should bear the burden of
proving that the termination fee should be capitalized because
the notice of deficiency did not adequately describe the basis
for disallowance under Shea v. Commissioner, 112 T.C. 183 (1999).
We decline to address petitioner’s argument. Petitioner
presented its case as if it bore the burden of proof, and the
record supports our decision regardless of whether the burden is
on petitioner or respondent.
                              - 34 -

     enterprise. * * * Through provisions such as these, the
     Code endeavors to match expenses with the revenues of
     the taxable period to which they are properly
     attributable, thereby resulting in a more accurate
     calculation of net income for tax purposes. * * *

     Section 162(a) allows as a deduction “all the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business”.    To qualify for a deduction,

“an item must (1) be ‘paid or incurred during the taxable year,’

(2) be for ‘carrying on any trade or business,’ (3) be an

‘expense,’ (4) be a ‘necessary’ expense, and (5) be an ‘ordinary’

expense.”   Commissioner v. Lincoln Sav. & Loan Association, 403

U.S. 345, 352 (1971).   Section 165(a) allows as a deduction “any

loss sustained during the taxable year and not compensated for by

insurance or otherwise.”

     An expense may be ordinary even if it rarely occurs or

occurs only once within the lifetime of the taxpayer.     Welch v.

Helvering, supra at 114.   Although the transaction may be unique

to the individual taxpayer, the question is whether the

transaction is ordinary in the “life of the group, the community,

of which * * * [the taxpayer] is a part.”    Id.   An expense is

necessary if it meets “the minimal requirement that the expense

be ‘appropriate and helpful’ for ‘the development of the

[taxpayer’s] business.’”   Commissioner v. Tellier, 383 U.S. 687,

689 (1966) (quoting Welch v. Helvering, supra at 113).     A

deduction is generally allowed for expenses incurred in defending
                              - 35 -

a business and its policies from attack.    INDOPCO, Inc. v.

Commissioner, supra at 83; Commissioner v. Tellier, supra;

Commissioner v. Heininger, 320 U.S. 467 (1943); see also Locke

Manufacturing Cos. v. United States, 237 F. Supp. 80 (D. Conn.

1964) (permitting corporation to deduct expenses incurred in

successful defense to proxy fight).    The underlying reasoning in

this line of cases is that the expenses were incurred to protect

corporate policy and structure, not to acquire a new asset.    See,

e.g., United States v. Federated Dept. Stores, Inc., 171 Bankr.

603, 610 (S.D. Ohio 1994), affg. In re Federated Dept. Stores,

Inc., 135 Bankr. 950 (Bankr. S.D. Ohio 1992).

     Section 263(a)(1) generally provides that a deduction is not

allowed for “Any amount paid out for new buildings or for

permanent improvements or betterments made to increase the value

of any property or estate.”

     The determination of whether an expenditure is deductible

under section 162(a) or must be capitalized under section

263(a)(1) is a factual determination.   When an expense creates a

separate and distinct asset, it usually must be capitalized.

See, e.g., Commissioner v. Lincoln Sav. & Loan Association,

supra.   When an expense does not create such an asset, the most

critical factors to consider in passing on the question of

deductibility are the period over which the taxpayer will derive

a benefit from the expense and the significance of that benefit.
                              - 36 -

See INDOPCO, Inc. v. Commissioner, supra at 87-88; United States

v. Miss. Chem. Corp., 405 U.S. 298, 310 (1972); FMR Corp. & Subs.

v. Commissioner, 110 T.C. 402, 417 (1998); Conn. Mut. Life Ins.

Co. v. Commissioner, 106 T.C. 445, 453 (1996).   Expenses must

generally be capitalized when they either:   (1) Create or enhance

a separate and distinct asset, or (2) otherwise generate

significant benefits for the taxpayer extending beyond the end of

the taxable year.   Metrocorp, Inc. v. Commissioner, 116 T.C. 211,

222 (2001).   Under the required test, capitalization is not

always required when an incidental future benefit is generated by

an expense.   INDOPCO, Inc. v. Commissioner, supra at 87.

“Whether a benefit is significant to the taxpayer who incurs the

underlying expense rests on the duration and extent of the

benefit, and a future benefit that flows incidentally from an

expense may not be significant.”   Metrocorp, Inc. v.

Commissioner, supra at 222.

     A.   INDOPCO, Inc. v. Commissioner

     The Supreme Court considered fees incurred during a friendly

business combination in INDOPCO, Inc. v. Commissioner, supra.

The focus of the Supreme Court’s opinion was the taxpayer’s

argument that the fees at issue were deductible because no

separate and distinct asset was created.   The taxpayer attempted

to argue that under the Court’s opinion in Commissioner v.

Lincoln Sav. & Loan Association, supra, only fees that led to the
                              - 37 -

creation of a separate and distinct asset were subject to

capitalization.   The Court rejected the taxpayer’s argument.

INDOPCO, Inc. v. Commissioner, supra at 86-87.   The Court held

that the fees at issue were to be capitalized because they

provided for benefits extending past the tax year at issue.

     B.   Victory Mkts., Inc. & Subs. v. Commissioner

     In Victory Mkts., Inc. & Subs. v. Commissioner, 99 T.C. 648

(1992), we were confronted with facts similar to those of

INDOPCO, Inc. v. Commissioner, supra.   The taxpayer argued that

it incurred professional service fees in connection with the

acquisition of its stock by an acquirer and claimed that it was

entitled to deduct those expenses because, unlike the taxpayers

in INDOPCO, Inc., it was acquired in a hostile takeover.     We

declined to decide whether INDOPCO, Inc., required capitalization

of expenses incurred incident to a hostile takeover, however,

because we concluded that the nature of the takeover in Victory

Mkts. was not hostile and that the facts were generally

indistinguishable from those in INDOPCO, Inc.

     C.   United States v. Federated Dept. Stores, Inc.

     United States v. Federated Dept. Stores, Inc., supra,

addressed breakup fees paid to “white knights” in the aftermath

of failed merger attempts undertaken to avoid undesired corporate

takeovers.   The District Court sustained the bankruptcy court’s

holdings that deductions were allowable under either section 162
                                - 38 -

or section 165.    The District Court relied on the bankruptcy

court’s findings that no benefit accrued beyond the year in which

the expenditures were made and, on that basis, distinguished

INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992).       The

bankruptcy judge had found explicitly that the provisions for the

payment of the breakup fees did not enhance the amounts that the

debtors’ shareholders actually received in the takeover

transactions.     The District Court also agreed with the bankruptcy

court that the failed merger transactions with white knights were

separate transactions from the successful takeovers and thus

could be treated as abandoned transactions eligible for a loss

deduction under section 165.

     D.   Staley I & II

     In A.E. Staley Manufacturing Co. & Subs. v. Commissioner,

105 T.C. 166 (1995) (Staley I), revd. 119 F.3d 482 (7th Cir.

1997) (Staley II), we were again faced with a situation similar

to that of INDOPCO, Inc. and Victory Mkts.       In Staley I, we were

asked to consider the proper characterization of fees paid by a

corporation to investment bankers shortly before the corporation

was acquired.     We held that the fees be capitalized rather than

deducted under section 162 or 165.       We disallowed the deductions

on the basis of the Supreme Court’s opinion in INDOPCO, Inc.       We

also held that the taxpayer was not allowed to deduct the costs

as an abandonment loss.    We distinguished the situation in Staley
                               - 39 -

I from that of Federated Dept. Stores because unlike the

situation in Federated Dept. Stores, there was no white knight

transaction present in Staley I.

       The U.S. Court of Appeals for the Seventh Circuit reversed.

The Court of Appeals discussed the law concerning the

deductibility of expenses to resist changes in corporate control

before INDOPCO, Inc., then stated that INDOPCO, Inc. neither

abrogated nor even discussed those cases.      The Court of Appeals

then stated that the issue for decision in determining the

deductibility of the fees was “whether the costs incurred * * *

are more properly viewed as costs associated with defending a

business or as costs associated with facilitating a capital

transaction.”    Staley II, 119 F.3d at 489.   The court allowed a

deduction in part, remanding to this Court to allocate the costs

between those that were incurred to prevent the takeover and

those that facilitated the takeover.

III.    Origin of the Claim Doctrine

       The issue of whether expenses are deductible or must be

capitalized may be resolved by the origin of the claim test.

Woodward v. Commissioner, 397 U.S. 572 (1970); United States v.

Gilmore, 372 U.S. 39 (1963).    Under this test, the substance of

the underlying claim or transaction out of which the expenditure

in controversy arose governs whether the item is a deductible

expense or a capital expenditure, regardless of the motives of
                              - 40 -

the payor or the consequences that may result from the failure to

defeat the claim.   See Woodward v. Commissioner, supra at 578;

Newark Morning Ledger Co. v. United States, 539 F.2d 929, 935 (3d

Cir. 1976); Clark Oil & Ref. Corp. v. United States, 473 F.2d

1217, 1220 (7th Cir. 1973); Anchor Coupling Co. v. United States,

427 F.2d 429, 433 (7th Cir. 1970).     The origin of the claim test

does not involve a “mechanical search for the first in the chain

of events” but requires consideration of the issues involved, the

nature and objectives of the litigation, the defenses asserted,

the purpose for which the amounts claimed as deductions were

expended, and all other facts relating to the litigation.     Boagni

v. Commissioner, 59 T.C. 708, 713 (1973).     The Supreme Court, in

adopting the origin of the claim test, chose in favor of

     the view that the origin and character of the claim
     with respect to which an expense was incurred, rather
     than its potential consequences upon the fortunes of
     the taxpayer, is the controlling basic test of whether
     the expense was “business” or “personal” and hence
     whether it is deductible or not under § 23(a)(2). * * *

United States v. Gilmore, supra at 49.

     The origin of the claim doctrine can help determine whether

the termination fee should be deducted or capitalized by

determining whether it is more closely tied to the Santa Fe-

Homestake deal or the Santa Fe-Newmont deal.
                                  - 41 -

IV.    Petitioner’s Arguments

       A.   Significant Benefit

       Petitioner argues that Santa Fe did not receive a

significant benefit from payment of the termination fee.     First,

petitioner argues that payment of the fee reduced Santa Fe’s net

worth by $65 million.     Second, petitioner focuses on the effects

of the Santa Fe-Newmont merger on Santa Fe.     Petitioner points to

the removal of Santa Fe’s management team, the removal of Santa

Fe’s board of directors, the abandonment of Santa Fe’s 5- and 10-

year plans, and the termination of more than half of Santa Fe’s

employees.     Lastly, petitioner argues that Newmont closed a

disproportionate number of Santa Fe facilities after the merger

was consummated.

       B.   Origin of the Claim

       Petitioner argues that the origin of the claim doctrine

requires us to find that the origin of the termination fee lies

with the Santa Fe-Homestake agreement, and not the Santa Fe-

Newmont combination.     Petitioner points to the fee’s origin in

the Santa Fe-Homestake agreement and to the fact that the Santa

Fe-Newmont agreement also included its own separate termination

fee.    Petitioner also points to the fact that the obligation to

pay the termination fee arose before Santa Fe’s later agreement

with Newmont.
                              - 42 -

     Petitioner attempts to rely on 12701 Shaker Blvd Co. v.

Commissioner, 36 T.C. 255 (1961), affd. 312 F.2d 749 (6th Cir.

1963), in support of its argument.     In that case the Court

determined the deductibility of fees paid by a corporation to

retire bonds before issuing new bonds.     In rejecting the

taxpayer’s argument that the fee should be tied to the new bond

issue, we stated that the new financing was not so closely tied

to the paying off of the old indebtedness that the two

transactions cannot properly be deemed as separate and

independent transactions.   Id. at 258.    Petitioner analogizes the

issue in Shaker Blvd. Co. to the present issue.

     Petitioner next contends that under Wells Fargo Co. & Subs.

v. Commissioner, 224 F.3d 874 (8th Cir. 2000), affg. in part and

revg. in part Norwest Corp. & Subs. v. Commissioner, 112 T.C. 89

(1999), the termination fee is more directly related to the Santa

Fe-Homestake agreement than the Santa Fe-Newmont agreement.

Therefore, because the fee is only indirectly related to the

Santa Fe-Newmont deal, capitalization is not required under the

origin of the claim doctrine and the termination fee is

deductible.

     Petitioner further argues that a finding that Newmont acted

in a hostile manner supports its position.     Petitioner points to

language in Staley II and United States v. Federated Dept.

Stores, Inc., 171 Bankr. 603 (S.D. Ohio 1994), where the courts
                                  - 43 -

stated that costs incurred to defend a business from attack are

deductible.   Petitioner contends that these cases, along with

respondent’s concession that costs incurred to defend a business

are deductible, resolve the instant proceeding in favor of

deductibility.

     Lastly, petitioner argues that the termination fee should be

deducted because it served to frustrate, rather than facilitate,

the merger between Santa Fe and Newmont.     In petitioner’s view,

this finding–-that the fee frustrated Newmont’s attempts--brings

the facts of the present case out of the INDOPCO, Inc. line of

cases and into the Staley II and Federated Dept. Store cases.

     C.    Petitioner’s Experts

     Petitioner put forth two experts.     Petitioner’s first

expert, W. Eugene Seago (Mr. Seago), has worked in the accounting

field for more than 30 years and is a professor of accounting at

Virginia Polytechnic Institute and State University.     Mr. Seago’s

expert report focused on the termination fee as it related to

public accounting principles, including whether inclusion of the

fee in Santa Fe’s income would fairly represent Santa Fe’s income

for 1997.

     Petitioner’s second expert, Gilbert E. Matthews (Mr.

Matthews), has more than 45 years of experience in investment

banking.    Mr. Matthews’s report made the following conclusions:

(1) That the termination fee frustrated Newmont’s attempts to
                                - 44 -

acquire Santa Fe; (2) that Newmont, although first acting

friendly, was clearly attempting a hostile takeover; (3) that

Santa Fe as an entity did not benefit from the Newmont takeover;

and (4) that although short-term shareholders benefited from

Newmont’s takeover, that benefit did not last for more than a

year (i.e., the takeover did not benefit long-term holders of

Santa Fe stock).

V.   Respondent’s Arguments

     A.   Significant Benefit

     It is respondent’s position that the termination fee should

be capitalized under section 263(a) and not deducted under

section 162(a).    Respondent argues that petitioner paid the

termination fee in order to enter into the Newmont offer.

Respondent argues that Santa Fe was not facing a hostile takeover

but instead wanted to overhaul its capital structure.    Respondent

further argues that Santa Fe’s entering into an agreement with

Homestake was merely a negotiating tactic aimed at convincing

Newmont to increase its offer.    Respondent points to Santa Fe’s

contacting Newmont in September 1996 as the beginning of Santa

Fe’s search for a business combination.    Respondent’s expert

argues that at that time Santa Fe was “in play” and any action

taken afterwards was done to secure the highest possible value

for Santa Fe’s shareholders.
                              - 45 -

     As evidence of this significant benefit, respondent points

to the March 28, 1996, report prepared by S.G. Warburg that

advised Santa Fe that Santa Fe would not become a first-tier gold

company without “strategic acquisitions, mergers or alliances.”

Respondent also points to the Santa Fe board’s decision of

September 26, 1996, to investigate a possible merger with

Newmont.   In respondent’s view this statement is indicative of a

decision by Santa Fe to proceed with a merger or sale of the

company.   Respondent also points to statements by the Santa Fe

board contained in the March 10, 1997, board minutes and in the

April 4, 1997, SEC Form S-4, Joint Proxy Statement.   Both

documents indicated that the Santa Fe board viewed the merger

with Newmont as fair and in the best interests of Santa Fe

stockholders:

     In the Form S-4, the board of directors indicates that
     it unanimously concluded that the merger is fair and in
     the best interests of the Santa Fe shareholders, and
     accordingly, unanimously approved the merger agreement
     and unanimously resolve to recommend that the Santa Fe
     shareholders approve and adopt the merger agreement.

Respondent also points to press releases issued by Santa Fe and

Newmont at the time of the merger generally touting the perceived

benefits of the merger.

     In respondent’s view the termination fee was paid in order

to enter into an agreement with Newmont and thus led to any

benefits gained by entering into the agreement with Newmont.
                                - 46 -

Therefore, the presence of these benefits requires that the

termination fee be capitalized under section 263.

     B.   Origin of the Claim

     Respondent argues that the origin of the claim doctrine

requires the capitalization of the termination fee.     Respondent

argues that Santa Fe’s payment of the termination fee was

directly related to the merger with Newmont.   Respondent

maintains that Santa Fe was actively seeking a business merger.

     Respondent points to Acer Realty Co. v. Commissioner, 132

F.2d 512, 513 (8th Cir. 1942), affg. 45 B.T.A. 333 (1941), and

similar cases.   In Acer Realty Co., the Court of Appeals had to

determine the deductibility of large salary payments related to a

capital transaction.   The court found that because the large

salaries were directly related to a capital transaction, the

salaries were required to be capitalized as part of that

transaction.   In Wells Fargo Co. & Subs. v. Commissioner, 224

F.3d 874 (8th Cir. 2000), however, the Court of Appeals found

that salaries paid to employees who worked on a restructuring of

the corporation were deductible because they were not

extraordinary like the salaries in Acer Realty Co.    Respondent

distinguishes Wells Fargo on the grounds that while the salaries

in Wells Fargo would have been paid whether the subject

transactions were entered into or not, the termination fee at

issue in the instant case would not have been paid unless Santa
                               - 47 -

Fe entered into a transaction with Newmont.    Respondent points to

the fact that payment of the termination fee was conditioned on a

“Company Takeover Proposal” and argues that this proposal is

extraordinary and thus like the salaries in Acer Realty Co.

     Respondent also argues that petitioner’s application of the

origin of the claim doctrine is improper because petitioner is

simply applying the doctrine in a mechanical way according to

which agreement was entered into first.    Respondent argues that

we have previously rejected this application of the doctrine in

Boagni v. Commissioner, 59 T.C. at 713.    Respondent argues that

the Santa Fe-Newmont agreement triggered the termination fee and

that the termination fee was paid so Santa Fe could enter into an

agreement with Newmont.    Therefore, the termination fee was

directly associated with and facilitated the merger, unlike the

salary expenses in Wells Fargo.

     Respondent also disputes petitioner’s claimed reliance on

Staley II and United States v. Federated Dept. Stores, Inc., 171

Bankr. 603 (S.D. Ohio 1994).    Regarding Staley II, respondent

frames the issue in the present case as whether the termination

fee facilitated the merger that took place and argues that Staley

II in fact requires capitalization of the termination fee.

Respondent argues that Santa Fe faced one decision in March 1997:

to proceed with Homestake and not pay a fee or proceed with

Newmont and pay a fee.    Under respondent’s view, Santa Fe’s
                                - 48 -

decision to proceed with Newmont means that the termination fee

became a cost to Santa Fe of fulfilling its overall objective of

combining with another large mining company.    Therefore, the

termination fee “facilitated” the Santa Fe-Newmont merger and

should be capitalized.

     Respondent argues that Federated Dept. Stores is

distinguishable.    In Federated Dept. Stores, the District Court

based its holding on the fact that “the subject hostile takeovers

could not, and did not provide Federated or Allied with the type

of synergy found in INDOPCO.” United States v. Federated Dept.

Stores, Inc., supra at 609.    Respondent argues that in the

present case, the synergies found in INDOPCO, Inc. are present;

therefore, Federated Dept. Stores does not apply.    Respondent

also argues that Federated Dept. Stores is distinguishable

because there the targets engaged in defensive tactics that

respondent argues are not present here.    The District Court

stated that “The bankruptcy court specifically found that the

‘[d]ebtors engaged in protracted and strenuous defensive tactics

when faced, involuntarily, with the threat of Campeau’s hostile

acquisition.’”     United States v. Federated Dept. Stores, Inc.,

supra at 610 (quoting In re Federated Dept. Stores, 135 Bankr. at

961).   Respondent argues that Santa Fe did not engage in any

hostile defenses, even though there were a number of possible
                                 - 49 -

defensive tactics at its disposal (such as poison pills or

shareholder rights plans).

      C.   Respondent’s Expert

      Respondent produced one expert witness, William H. Purcell

(Mr. Purcell), a senior director at a Washington, D.C. investment

banking firm.    Mr. Purcell has over 40 years of experience in the

investment banking business.

      Mr. Purcell made a number of findings in support of

respondent’s arguments, including:        (1) That the Santa Fe-Newmont

transaction was not hostile; (2) that Santa Fe put itself into

play as of October 1, 1996; and (3) that Santa Fe used the

termination fee as a tool to maximize value for Santa Fe’s

shareholders.    In Mr. Purcell’s view, Santa Fe entered into an

agreement with Homestake because Santa Fe wanted to send a

message to Newmont that Newmont would have to raise its bid in

order to acquire Santa Fe.

VI.   Analysis

      As discussed above, we must determine whether payment of the

termination fee “[generated] significant benefits for * * *

[Santa Fe] extending beyond the end of the taxable year.”

Metrocorp. Inc. v. Commissioner, 116 T.C. at 222.        As we stated

in Metrocorp: “Expenses must generally be capitalized when they

either:    (1) Create or enhance a separate and distinct asset or

(2) otherwise generate significant benefits for the taxpayer
                              - 50 -

extending beyond the end of the taxable year.”    Id. at 221-222.

However, we must take care not to interpret every benefit

received after payment of the termination fee as being caused by

or related to the termination fee.

     We note at the outset that this was clearly a hostile

takeover of Santa Fe by Newmont.   The management, board of

directors, and investment bankers of Santa Fe considered Newmont

hostile.   Although initial contacts between the two entities were

informal, Newmont went directly to Santa Fe’s shareholders once

it learned that Santa Fe and Homestake had entered into an

agreement.   The presentations Goldman Sachs made to Newmont

executives clearly foresaw a hostile takeover.    Mr. Cambre’s

letters to the Newmont board anticipated a fight and warned the

board that this would lead to higher costs.

     Executives of Santa Fe, Newmont, and Homestake all testified

credibly that this was a hostile takeover.    Further, we find

credible petitioner’s expert Mr. Matthews’s conclusion that this

was a hostile takeover.   Respondent’s expert’s contention that

this was a friendly transaction is at odds with the record as a

whole and is not credible.

     Although the merger was described in terms of “shared

synergies”, the only synergy found in the transaction benefited

Newmont.   By acquiring Santa Fe, Newmont was able to obtain Santa

Fe’s land while disregarding most of Santa Fe’s annual expenses.
                               - 51 -

The record makes clear that Newmont was primarily interested in

obtaining Santa Fe’s land position, and the only way for Newmont

to acquire Santa Fe’s land was to purchase the entire company.

Because Newmont was primarily interested in Santa Fe’s land, it

quickly terminated Santa Fe’s employees and discarded the

business plans of Santa Fe’s management.     Although Santa Fe the

entity continued to exist on paper, it was nothing more than a

shell owning valuable land.

     Santa Fe did not reap the types of benefits present in

INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992).      After the

merger was completed, Newmont shut down Santa Fe’s headquarters

and let go most of its management.      The Supreme Court’s decision

in INDOPCO, Inc. to require capitalization of the fees at issue

therein relied on findings of this Court and the Court of Appeals

for the Second Circuit that the expenditures at issue benefited

the operations of the taxpayer incurring the fees.     Santa Fe’s

operations did not benefit from payment of the termination fee.

     Santa Fe’s executives testified credibly that Santa Fe did

not have as a strategic goal a business merger with any other

mining company.   Newmont was a hostile acquirer.    In attempting

to avoid Newmont’s overtures, Santa Fe sought a white knight:

Homestake.   Santa Fe was defending against an unwanted

acquisition in an effort to maintain and protect its growing

business.    The termination fee was contracted for in an attempt
                               - 52 -

to salvage its business plan and employees through a white knight

combination.   See United States v. Federated Dept. Stores, Inc.,

171 Bankr. at 610.

      The termination fee was intended to protect the Santa Fe-

Homestake agreement, to deter competing bids, and to reimburse

Homestake for its time and effort in the event that the deal was

terminated.    Although Santa Fe had structural defenses in place,

its major defensive strategy was to engage in a capital

transaction with a third party that would prevent Newmont’s

acquisition.   This attempt failed.     The record does not support a

finding, and we do not find, that paying the termination fee

produced any long-term benefit.   See id.     Respondent argues that

Federated Dept. Stores is distinguishable on the facts because

Santa Fe allegedly did not engage in defensive measures; however,

the District Court in Federated Dept. Stores stated that the

targets “engaged in defensive measures--the white knight

proposals with DeBartolo and Macy respectively.”      Id.   The white

knight transactions in Federated Dept. Stores were in fact viewed

by the court as defensive measures meant to prevent the

respective takeovers.   The Santa Fe-Homestake agreement was a

defensive measure meant to prevent Newmont’s takeover of Santa

Fe.   The termination fee was a part of the Santa Fe-Homestake

agreement and served as a defense against Newmont.     Any benefit

as a result of incurring the termination fee died along with the
                                - 53 -

Santa Fe-Homestake agreement.    Had Santa Fe’s shareholders

rejected the Santa Fe-Newmont agreement, or had some exigent

circumstance arisen that required termination of the Santa Fe-

Newmont agreement, Santa Fe would not have recovered the $65

million.

     Although the fact that National Starch became a subsidiary

as a result of its merger was viewed as a benefit supporting

capitalization in INDOPCO, Inc., we do not find Santa Fe’s

becoming a subsidiary to be a significant benefit.    In INDOPCO,

Inc., National Starch’s management viewed becoming a subsidiary

as a positive aspect of the acquisition because it relieved

National Starch of its shareholder responsibilities.    The Supreme

Court relied on this change of ownership in support of its

decision to require capitalization precisely because the change

in ownership structure served to benefit National Starch’s

operations.   In the instant case, Santa Fe did not become a

subsidiary which functioned much as Santa Fe had before the

merger.    Santa Fe no longer functioned as an autonomous business

after the merger.   Santa Fe viewed Homestake as a potential white

knight to avoid just this result.    Santa Fe management sought an

agreement with Homestake to avoid being absorbed by Newmont, but

the results of the Newmont merger confirm the accuracy of their

concerns that Santa Fe would lose its operating identity in a

merger with Newmont.
                               - 54 -

     As stated above, the record does not support a finding that

Santa Fe had as an overarching goal a business combination.      The

fact that the Santa Fe board had hired investment advisers and

knew the state of the industry before initiating contact with

Newmont does not mean that Santa Fe had decided on a corporate

restructuring.   Santa Fe executives testified credibly that Santa

Fe’s first contact with Newmont was meant to be preventative and

meant to enable Santa Fe to remain in control of any

investigation and agreement.   The Santa Fe-Newmont agreement was

not a modified form of the Santa Fe-Homestake agreement.    Payment

of the termination fee and subsequent signing of the Santa Fe-

Newmont agreement was not, in substance, a continuation of the

Santa Fe-Homestake agreement in some modified form.    The two

transactions were separate:    (1) A white knight transaction; and

(2) a hostile takeover.   See United States v. Federated Dept.

Stores Inc., supra at 611.

     Santa Fe viewed Newmont’s overtures as hostile; and in an

attempt to defeat Newmont’s takeover, Santa Fe sought out

Homestake as a white knight.   Because Newmont’s offer was higher

than Homestake’s, the Santa Fe board believed that in order to

fulfill its fiduciary duties the board had to terminate its

agreement with Homestake and accept Newmont’s higher offer.      The

facts do not support respondent’s contention that the termination

fee was paid to restructure Santa Fe in hopes of some future
                                 - 55 -

benefit.   See id.   The termination fee was paid to Homestake to

compensate it for whatever expenses it incurred.    See id.     As the

District Court concluded in Federated Department Stores:        “in the

instant case, the white knight mergers were abandoned.    Any

effect that this merger had on the later merger with Campeau is

irrelevant.”   Id. at 611-612.

     This Court’s holdings in Staley I and Norwest Corp. & Subs.

v. Commissioner, 112 T.C. 89 (1999), are distinguishable.

     In Norwest Corp. & Subs. v. Commissioner, supra at 102, we

required the taxpayer to capitalize salaries paid to bank

executives for work performed in relation to a friendly merger

that provided the bank with significant long-term benefits.

Because of a change in State banking law, the taxpayer, a small

local bank, sought out a merger with a larger national bank.       The

taxpayer merged with Norwest because doing so would allow the

bank to continue operating competitively.   After the transaction,

the bank remained in operation and offered a wider array of

services than the bank had offered previously.     Id. at 95.

     Relying on INDOPCO, Inc., we required capitalization because

the disputed expenses “enabled * * * [the taxpayer] to achieve

the long-term benefit that it desired from the transaction”.

Norwest Corp. & Subs. v. Commissioner, supra at 100.     Although

the expenses were not directly related to the benefit, we
                                - 56 -

required capitalization because “the costs were essential to the

achievement of that benefit.”    Id. at 102.

     In Staley I, as discussed above, we required the taxpayer to

capitalize fees paid to investment bankers incident to a

takeover.    The taxpayer was a producer of food sweeteners and

faced a takeover.    The taxpayer hired and paid advisers who

counseled the taxpayer before the takeover.    Ultimately, the

board of the taxpayer decided to accept the acquirer’s offer.     We

held that the expenses had to be capitalized because they were

incurred incident to the taxpayer’s change of ownership, from

which it derived significant long-term benefits.

     Unlike Staley I, the present case features a white knight--

Homestake.    Further, the acquirer in Staley I had long-term plans

for the target corporation.    Although the acquirer’s plans

diverged from those of the target’s management, they were plans

that nonetheless involved the target’s operation as an ongoing

company.    After the takeover, the taxpayer existed and operated

as a business.    In the present case, Newmont did not have any

plans for Santa Fe’s continued operation, and Santa Fe did not

operate post takeover.

     In contrast to Norwest Corp. & Subs., the instant

transaction was not friendly.    Newmont proceeded in a hostile

manner once its initial contacts were rebuffed.    Newmont’s board

and management planned for and effected a hostile takeover.
                                - 57 -

Secondly, Santa Fe did not reap the type of benefits present in

Norwest Corp. & Subs.     Santa Fe was not able to operate in an

improved manner once the transaction was completed.    Santa Fe did

not have access to wider services as a result of the merger, and

Santa Fe was not able to operate competitively once taken over.

Santa Fe, unlike the taxpayer in Norwest Corp. & Subs.,

effectively ceased to exist.

     Both Norwest Corp. & Subs. and Staley I focused on

corporations whose operations benefited from the respective

payments at issue.    In the present case, Santa Fe’s operations

did not improve as a result of payment of the termination fee.

As a result of the combination Santa Fe ceased operation.

Although the merger was described in terms of synergies between

the two companies, the result of the transaction was that Newmont

was able to mine Santa Fe’s land while cutting any duplicate

costs.   In INDOPCO, Inc. the taxpayer’s operations improved

because it gained access to National Starch’s large distribution

network.   In Norwest Corp. & Subs., the taxpayer benefited

because it was both able to remain in competition in a much more

competitive market and able to offer a wider range of services

than it had before.     In Staley I, the taxpayer benefited because

as a result of its combination it moved away from recent

strategic expansions into new industries back to its core

business lines.
                                  - 58 -

       Payment of the termination fee did not lead to significant

benefits for Santa Fe extending past the year at issue.

Accordingly, petitioner is entitled to deduct the amount of the

termination fee pursuant to section 162.       In the light of our

reasoning as stated above, we do not reach petitioner’s argument

concerning the origin of the claim doctrine.

VII.    Conclusion

       On the basis of the foregoing, petitioner is entitled to

deduct the termination fee pursuant to section 162.

VIII.    Section 165

       Section 165 allows current deductions of any “loss sustained

during the taxable year and not compensated for by insurance or

otherwise.”    Section 165 allows a current deduction for costs

associated with an abandoned capital transaction.       Sibley,

Lindsay & Curr Co. v. Commissioner, 15 T.C. 106 (1950).        These

principles have been applied even though the abandoned

transaction, if consummated, would be a capital transaction and

the associated costs would have to be capitalized.       See

Doernbecher Manufacturing Co. v. Commissioner, 30 B.T.A. 973

(1934), affd. on other grounds 80 F.2d 573 (9th Cir. 1935).       The

question is whether the subject transaction was actually

abandoned.     United States v. Federated Dept. Stores, Inc., 171

Bankr. at 611.       The loss must be evidenced by a closed and

completed transaction, fixed by identifiable events.       Sec. 1.165-
                               - 59 -

1(b), (d), Income Tax Regs.    The regulations also provide that

the loss must be bona fide and that substance, not mere form,

shall govern in determining a deductible loss.     Sec. 1.165-1(b),

Income Tax Regs.   In Sibley, Lindsay & Curr Co. v. Commissioner,

supra, the taxpayer’s bankers prepared three separate

restructuring plans.    The taxpayers chose one of the three and

attempted to deduct the cost of the other two.     This Court

allowed a deduction for the cost of the other two restructuring

plans because they were separate plans distinct from the

restructuring that was carried out.      Id. at 110.

     The District Court in United States v. Federated Dept.

Stores, Inc., 171 Bankr. 603 (S.D. Ohio 1994), also found that

the taxpayers were entitled to deduct the termination fees

pursuant to section 165.    The District Court stated that both

targets were presented with two mutually exclusive capital

transactions:   Mergers with the white knights, or mergers with

the hostile acquirer.    Id. at 611.    The District Court reasoned

that each transaction “must be viewed separately” and went on to

state that “Just because a failed capital transaction has some

effect on a later successful capital transaction does not prevent

a deduction for a loss sustained in the failed transaction.”       Id.

     Respondent argues that petitioner is not entitled to claim a

deduction for an abandonment loss.      As stated above, respondent

argues that beginning in October 1996 Santa Fe had as a goal a
                               - 60 -

corporate restructuring.   Respondent views the potential Newmont

and Homestake deals as two mutually exclusive alternatives, each

a part of this goal.   Because Santa Fe could merge with only one,

and because Santa Fe had to terminate the Santa Fe-Homestake

agreement to merge with Newmont, the termination fee should not

be allowed as a deduction under section 165 because Santa Fe

never abandoned its goal of a combination and in fact satisfied

it by merging with Newmont.   Respondent argues Santa Fe’s goal

was a business merger, not that the Homestake and Newmont mergers

were two separate transactions.   Therefore, because (1) Santa Fe

combined with Newmont, (2) the termination fee was paid to

facilitate that merger, and (3) because no transaction was

abandoned, there was no closed transaction with Homestake.

     Respondent argues that caselaw requires the capitalization

of fees paid to extricate a party from one contract in order to

enter into a more favorable contract as part of an integrated

plan or overall objective.    Respondent points to a line of cases

where costs related to mutually exclusive alternatives that were

part of an integrated plan were not allowed as abandonment

losses.   Respondent further argues that Santa Fe made a voluntary

and well-thought-out decision to terminate the Homestake

agreement, pay the termination fee, and merge with Newmont.

     Petitioner argues that Santa Fe was faced with two separate

transactions:   (1) A hostile takeover by Newmont; and (2) a white
                              - 61 -

knight transaction with Homestake.     Santa Fe management, in

petitioner’s view, was not engaged in one overarching plan to

restructure the company’s capital structure.     Santa Fe attempted

to avoid Newmont’s overtures by entering into a deal with

Homestake.   When Newmont increased its offer, the Santa Fe board

had no choice but to abandon the Homestake deal.     Therefore,

petitioner argues, the termination fee paid to Homestake was part

of an abandoned transaction and petitioner is allowed to deduct

the termination fee under section 165.

     Petitioner again analogizes the current case to Federated

Dept. Stores.   Respondent argues that Federated Dept. Stores does

not apply and argues that the key fact underlying the Federated

Dept. Stores decision–-that neither of the targets in that case

had voluntarily terminated their merger agreements in order to

engage in a more favorable merger–-is not present here.

     We agree with petitioner.   The facts in this case do not

show that Santa Fe pursued a corporate restructuring.     It is

clear that the board and management of Santa Fe did not want to

be taken over by a large competitor so shortly after the company

was spun off from its former parent.     Santa Fe viewed Newmont as

hostile and entered into a white knight agreement with Homestake

in order to prevent Newmont’s acquisition.     Later, Santa Fe was

forced to abandon its agreement with Homestake when it became

clear that Newmont’s offer had to be accepted.     When Newmont
                               - 62 -

raised its bid above that of Homestake and Homestake refused to

match it, Santa Fe had no choice.    Delaware law required that the

board members choose the highest value for their shareholders.

This forced Santa Fe to breach the Santa Fe-Homestake agreement

and pay the termination fee.   At that time, the Santa Fe-

Homestake merger was abandoned.    The termination fee was paid as

a result of that abandonment and was therefore a cost of the

abandoned merger with Homestake.

      Accordingly, Santa Fe is alternatively entitled to a

deduction under section 165.   Santa Fe viewed the possible

transactions with Homestake and Newmont as separate and distinct.

The two possible combinations were not part of an overall plan by

Santa Fe to change its capital structure.   The Santa Fe-Homestake

agreement was a closed and completed transaction that Santa Fe

later abandoned when it entered into the Santa Fe-Newmont

agreement.

IX.   Conclusion

      On the basis of the foregoing, petitioner is entitled to a

deduction of $65 million pursuant to sections 162 and 165 for the

termination fee paid to Homestake.

      Accordingly,



                                          Decision will be entered

                                     under Rule 155.
