Santa Fe Pacific Gold Company v. Commissioner

Santa Fe Pacific Gold Company (Santa Fe) (plaintiff) was a mining company. Newmont, one of the largest mining companies in the country, wanted to acquire Santa Fe because Santa Fe had a larger operation in Nevada than Newmont did. Santa Fe’s executives feared that Newmont wanted to take over Santa Fe’s business. To avoid a merger with Newmont, Santa Fe’s executives reached a deal with another small mining company, Homestake. Santa Fe’s executives believed that a merger with Homestake would be more beneficial to Santa Fe than a merger with Newmont because Santa Fe and Homestake would share management and board control, and more of Santa Fe’s employees would remain employed after the merger. Santa Fe and Homestake entered into a merger agreement. The agreement contained a termination-fee clause that required any party that breached the merger agreement because of a third-party offer to pay the remaining party a termination fee of $65 million. The fee was meant to protect the agreement between Santa Fe and Homestake. Newmont increased its offer to Santa Fe to merge the companies, and Homestake was unable to match the increase. Fiduciary-duty laws required Santa Fe’s board to accept the highest offer, so Santa Fe accepted Newmont’s offer to merge. As a result, Santa Fe paid the $65 million termination fee to Homestake. After the merger, Newmont closed all of Santa Fe’s offices and fired most of Santa Fe’s employees in a hostile takeover. Santa Fe deducted the termination fee it paid to Homestake from its taxes as a business expense. The Commissioner of Internal Revenue (the Commissioner) (defendant) disallowed the deduction, arguing that the fee was a capital expenditure rather than a business expense. Santa Fe petitioned the United States Tax Court for a redetermination.