Tax File Memorandum

Tax File Memorandum

To: Inez Butler

From: ***

RE: Can legal fees relate to the acquisition of inventory can be added to inventory?

Due: May 15, 2013

Conclusion: Legal fees relate to the acquisition of inventory can be deductible.

Reasoning: Section 1060 states that “for purposes of determining both the transferee's basis in the assets acquired and the gain or loss of the transferor, ‘the consideration received for such assets shall be allocated among such assets acquired in such acquisition in the same manner as amounts are allocated to assets under section 338(b)(5).’” Section 1060 further states that, “if the transferee and transferor ‘agree in writing as to the allocation of any consideration, or as to the fair market value of any of the assets, such agreement shall be binding on both the transferee and transferor unless the Secretary determines that such allocation (or fair market value) is not appropriate.’”

In this particular research problem, Section 1060 does not apply to this situation because the Transferee made an agreement to purchase assets of $12 million dollars based on their fair market value from the Transferor, therefore there is no need to try and determine the transferee’s basis since it is apparent, as is the gain of the transferor with respect to the acquisition.

From the similar case, West Covina Motors, Inc. v. Commissioner, The taxpayer took a motion to see if the court can reconsider and allow some of his legal fees that related to the cost of goods sold. However, “the taxpayer's legal fees were attributable to inventory and therefore deductible as a cost of goods sold.” Moreover, the court stated, “the Remaining Legal Fees were more properly associated with the capital assets regarding which they were incurred.” So, the section 1060 limitations did not apply.

The IRS has concluded that Pelican Inc, cannot add the legal fee of $200,000 as the basis of the inventory under the section 1060 limitation. However, from the case West...