INDOPCO, Inc. v. Commissioner,
503 U.S. 79 (1992)

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No. 90-1278. Argued November 12, 1991-Decided February 26,1992

On its 1978 federal income tax return, petitioner corporation claimed a deduction for certain investment banking fees and expenses that it incurred during a friendly acquisition in which it was transformed from a publicly held, freestanding corporation into a wholly owned subsidiary. After respondent Commissioner disallowed the claim, petitioner sought reconsideration in the Tax Court, adding to its claim deductions for legal fees and other acquisition-related expenses. The Tax Court ruled that because long-term benefits accrued to petitioner from the acquisition, the expenditures were capital in nature and not deductible under § 162(a) of the Internal Revenue Code as "ordinary and necessary" business expenses. The Court of Appeals affirmed, rejecting petitioner's argument that, because the expenses did not "create or enhance ... a separate and distinct additional asset," see Commissioner v. Lincoln Savings & Loan Assn., 403 U. S. 345, 354, they could not be capitalized under § 263 of the Code.

Held: Petitioner's expenses do not qualify for deduction under § 162(a).

Deductions are exceptions to the norm of capitalization and are allowed only if there is clear provision for them in the Code and the taxpayer has met the burden of showing a right to the deduction. Commissioner v. Lincoln Savings & Loan Assn., supra, holds simply that the creation of a separate and distinct asset may be a sufficient condition for classification as a capital expenditure, not that it is a prerequisite to such classification. Nor does Lincoln Savings prohibit reliance on future benefit as means of distinguishing an ordinary business expense from a capital expenditure. Although the presence of an incidental future benefit may not warrant capitalization, a taxpayer's realization of benefits beyond the year in which the expenditure is incurred is important in determining whether the appropriate tax treatment is immediate deduction or capitalization. The record in the instant case amply supports the lower courts' findings that the transaction produced significant benefits to petitioner extending beyond the tax year in question. Pp. 83-90.

918 F.2d 426, affirmed.

BLACKMUN, J., delivered the opinion for a unanimous Court.


Richard J. Hiegel argued the cause for petitioner. With him on the briefs were Geoffrey R. S. Brown, Rory O. Millson, and Richard H. Walker.

Kent L. Jones argued the cause for respondent. With him on the brief were Solicitor General Starr, Assistant Attorney General Peterson, Deputy Solicitor General Wallace, Gilbert S. Rothenberg, and Bruce R. Ellisen. *

JUSTICE BLACKMUN delivered the opinion of the Court. In this case we must decide whether certain professional expenses incurred by a target corporation in the course of a friendly takeover are deductible by that corporation as "ordinary and necessary" business expenses under § 162(a) of the Internal Revenue Code.


Most of the relevant facts are stipulated. See App. 12, 149. Petitioner INDOPCO, Inc., formerly named National Starch and Chemical Corporation and hereinafter referred to as National Starch, is a Delaware corporation that manufactures and sells adhesives, starches, and specialty chemical products. In October 1977, representatives of Unilever United States, Inc., also a Delaware corporation (Unilever),1 expressed interest in acquiring National Starch, which was one of its suppliers, through a friendly transaction. National Starch at the time had outstanding over 6,563,000 common shares held by approximately 3,700 shareholders. The stock was listed on the New York Stock Exchange. Frank and Anna Greenwall were the corporation's largest shareholders and owned approximately 14.5% of the common. The Greenwalls, getting along in years and concerned about

*Timothy J. McCormally and Mary L. Fahey filed a brief for the Tax Executives Institute, Inc., as amicus curiae urging reversal.

1 Unilever is a holding company. Its then principal subsidiaries were Lever Brothers Co. and Thomas J. Lipton, Inc.

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