INDOPCO v. Commissioner, 503 U.S. 79

Case citation

Case citation is the system used in many countries to identify the decisions in past court cases, either in special series of books called reporters or law reports, or in a 'neutral' form which will identify a decision wherever it was reported...

 (1992), was a case heard before the United States Supreme Court.

Question presented

Are certain professional expenses incurred by a target corporation in the course of a friendly takeover deductible by that corporation as "ordinary and necessary" business expenses under § 162(a) of the Internal Revenue Code

Internal Revenue Code

The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...

?

Key facts

IN 1977, Unilever

Unilever

Unilever is a British-Dutch multinational corporation that owns many of the world's consumer product brands in foods, beverages, cleaning agents and personal care products....

 (a Delaware

Delaware

Delaware is a U.S. state located on the Atlantic Coast in the Mid-Atlantic region of the United States. It is bordered to the south and west by Maryland, and to the north by Pennsylvania...

 corporation) expressed interest in acquiring INDOPCO (formerly named National Starch and Chemical Corporation). In order to adequately prepare for being bought out, National Starch hired Morgan Stanley

Morgan Stanley

Morgan Stanley is a global financial services firm headquartered in New York City serving a diversified group of corporations, governments, financial institutions, and individuals. Morgan Stanley also operates in 36 countries around the world, with over 600 offices and a workforce of over 60,000....

 to be its investment banker

Investment banking

An investment bank is a financial institution that assists individuals, corporations and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities...

 on this transaction. The fees charged by Morgan Stanley amounted to $2,200,000, in addition to $7,586 for out-of-pocket expenses

Out-of-pocket expenses

Out-of-pocket expenses are direct outlays of cash which may or may not be later reimbursed.In operating a vehicle, gasoline, parking fees and tolls are considered out-of-pocket expenses for the trip...

 and $18,000 in legal fees. National Starch tried to claim all of these fees as deductions. The Commissioner of the Internal Revenue Service

Internal Revenue Service

The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...

 disallowed the claimed deduction. The Tax Court

United States Tax Court

The United States Tax Court is a federal trial court of record established by Congress under Article I of the U.S. Constitution, section 8 of which provides that the Congress has the power to "constitute Tribunals inferior to the supreme Court"...

 and the Court of Appeals for the Third Circuit

United States Court of Appeals for the Third Circuit

The United States Court of Appeals for the Third Circuit is a federal court with appellate jurisdiction over the district courts for the following districts:* District of Delaware* District of New Jersey...

 affirmed the Commissioner’s decision. The courts held that the amount spent towards Morgan Stanley added to the long-term betterment of National Starch.

Supreme Court analysis

The key here is that National Starch did not demonstrate that the investment banking, legal, and other costs it incurred in connection with Unilever’s acquisition of its shares are deductible as ordinary and necessary business expenses under §162(a). In addition to the analysis provided by the two previous courts, the Supreme Court cited the fact that there is a long history of finding that the purpose of changing the corporate structure for the benefit of future operations is not an ordinary and necessary business expense. General Bancshares Corp. v. Commissioner, 326. F.2d, at 715.

Holding

The expenses incurred in a friendly takeover do not qualify for tax deduction as “ordinary and necessary” expenses under § 162(a).

INDOPCO Treasury Regulations

Treasury Regulation 1.263(a)-4(b) requires the taxpayer to capitalize listed intangible assets.

Specifically, the taxpayer must capitalize

1. Amounts paid to acquire or create intangible assets.
2. Amounts paid to create or enhance separate and distinct intangible assets – i.e. property interests with ascertainable value protected under state, federal, and foreign law, that are capable of being sold, transferred, or pledged, and are separate from a trade or business. Amounts to create computer software or package design are not included.
3. Amounts paid to create or enhance future benefits identified as intangibles requiring capitalization under the Federal Register or Internal Revenue Bulletin.
4. Amounts facilitating the acquisition or creation of intangible assets.

To simplify application, Treasury Regulation 1.263-4(f)(1) enacts a “12-month rule” allowing the taxpayer a current deduction for amounts paid to create rights or benefits that last beyond one year of the taxpayer realizing the right or benefit if that benefit doesn’t last beyond the taxable year following the tax year the initial payment is made.

See also

• List of United States Supreme Court cases, volume 503
• List of United States Supreme Court cases
• Lists of United States Supreme Court cases by volume
• List of United States Supreme Court cases by the Rehnquist Court