A finder’s fee is not deductible if paid by a target company on behalf of the company that acquired it, the US Tax Court said.

The point is to be careful who pays such a fee in an M&A transaction. Any such fee should be paid by the company that hired the investment banker or broker to whom the fee is paid.

The Ontario Teachers’ Pension Plan Board (OTPP) bought Plano Molding Co., an Illinois plastic container manufacturer, for $240 million in 2012. Plano makes such things as plastic fishing tackle boxes, archery and gun cases, and ammunition boxes.

OTPP agreed to pay Robert W. Baird & Co., an investment bank, a finder’s fee of $1.5 million for identifying Plano as a potential acquisition target.

However, Plano ended up paying the fee after the acquisition on behalf of OTPP.

The IRS said the fee could not be deducted and assessed a penalty. The US Tax Court agreed with the IRS.

Robert W. Baird & Co. introduced OTPP to the opportunity and tried unsuccessfully to set up a lunch between the two companies. It was aware Plano was interested in a suitor because it had been retained by Plano two years earlier in an unsuccessful attempt to sell the company.

A taxpayer normally may not deduct a payment of someone else’s expenses.

There is a narrow exception where two things are true: the payment would have to help advance of the business of the person paying it and be an “ordinary and necessary” business expense of that person.

The court said neither requirement was met in this case.

The primary benefit from the payment to Baird was to OTPP. Baird did little work for the fee. Plano had its own outside financial adviser. OTPP wanted to maintain a good relationship with Baird so that Baird would steer other business opportunities to it.

For the same reason, the payment was not an ordinary and necessary business expense of Plano. The court said it could see how it might be such an expense of OTPP had OTPP paid it.

The case is Plano Holding LLC v. Commissioner. The Tax Court released its decision in the case in October.