Historic Tax Case | INDOPCO, Inc. V. Commissioner

• Published date: 23 September 2022
• Subject Matter: Corporate/Commercial Law, Tax, Corporate and Company Law, Directors and Officers, Income Tax
• Law Firm: Freeman Law
• Author: Freeman Law

INDOPCO, Inc. v. Commissioner, 503 U.S. 79 | February 26, 1992 | Justice Blackmun | Docket No. 90-1278

Short Summary:

In October 1977, representatives of Unilever United States, Inc. (Unilever) expressed an interest in acquiring National Starch and Chemical Corporation (National Starch), later named INDOPCO, Inc., through a friendly takeover. In November 1977, National Starch's directors were formally advised of Unilever's interest. At that time, National Starch's counsel, Debevoise, Plimpton, Lyons & Gates (Debevoise), informed its directors that under Delaware law, they had a fiduciary duty to ensure that the takeover was fair to National Starch's shareholders.

As a result, National Starch engaged Morgan Stanley & Co., Inc. to evaluate its shares, to render a fairness opinion, and to assist National Starch in the event of an attempted hostile takeover. In total, Morgan Stanley charged National Starch $2,225,586: $2,200,000 for investment adviser fees, $7,586 for out-of-pocket expenses, and $18,000 for legal fees. Debevoise also charged National Starch a total of $505,069: $490,000 for legal fees and $15,069 for out-of-pocket expenses.

On its federal income tax return for taxable year 1978, which ended early on August 15, 1978 upon consummation of the friendly takeover, National Starch deducted the $2,225,586 paid to Morgan Stanley, but it did not deduct the $505,069 paid to Debevoise, or other expenses it incurred related to the transaction. The Commissioner of Internal Revenue (Commissioner) cited a deficiency worth the total value of payments made by National Starch to Morgan Stanley. National Starch, now INDOPCO, sought redetermination in the United States Tax Court, asserting the right to deduct the investment banking fees and expenses (Morgan Stanley), and the legal and miscellaneous expenses incurred.

The Tax Court ruled that the expenditures were capital in nature and therefore not deductible under IRC ' 162(a) as 'ordinary and necessary expenses.' The primary rationale of the Tax Court centered on the long-term benefits afforded to National Starch as a result of the friendly takeover by Unilever. The United States Court of Appeals for the Third Circuit affirmed the Tax Court's findings that the takeover would benefit National Starch, likely resulting in synergy between the two entities. The Third Circuit rejected National Starch's argument that because the expenses did not 'create or enhance'a separate and distinct additional asset,' they could...