When one corporation acquires another, the legal, advisory and facilitation costs can be significant. Not only must the taxpayers determine to what extent those transaction costs are currently deductible, but they must also determine whether those costs are allocable to the target corporation immediately before the transaction or to the affiliated group after the transaction. Those determinations may impact tax attributes that pass to the affiliated group as well as who benefits from those tax deductions.
When a target corporation ("Target") is acquired and becomes part of the consolidated group of an acquiring corporation ("Acquiring"), Target's tax year ends on the date of acquisition and it must file a short-year tax return. Its short tax year closes at the end of the day of its status change (known as the "end of the day rule"). Subsequent to the date of acquisition, its activity becomes includible in the tax year of the common parent. The taxpayers may make an election under the consolidated return regulations to ratably allocate general items of income, gain, deduction, loss and credit between the two periods.