Academic journal article Journal of Accountancy

Deducting Severance Payments

Academic journal article Journal of Accountancy

Deducting Severance Payments

Article excerpt

In two technical advice memoranda (TAMs), the Internal Revenue Service ruled that an acquiring company can deduct (on a current basis) post-acquisition severance payments made to the acquired company's employees.

In TAM 9721002, a buyer, which had purchased a target's stock in a transaction it had elected to treat as an asset acquisition, terminated employees whose severance rights had been established in preacquisition plans. The IRS concluded the liability for severance payments had arisen after the acquisition because the buyer had been free to decide after the acquisition whether to terminate the employees. Thus, the severance payments were not a preacquisition liability assumed by the buyer and did not have to be treated as part of the purchase price or the basis. The IPS also concluded the severance payments did not have to be capitalized because they were "coincidental" and originated in the termination of the target company's employees.

In TAM 9731001, the acquiring company had agreed as part of a stock acquisition to make severance payments in excess of those required under the acquired company's premerger plan. …

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