March 2, 1992
TO: TAX MEMBERS NO. 11-92
ACCOUNTING/TREASURERS MEMBERS NO. 7-92
12b-1 AD HOC COMMITTEE
RE: SUPREME COURT DENIES DEDUCTION FOR EXPENSES INCURRED IN
TAKEOVER
__________________________________________________________
In Indopco, Inc. v. Commissioner, No. 90-1278, February 26,
1992, the Supreme Court held that the investment banking and
legal expenses arising as a result of the acquisition of National
Starch and Chemical Corporation by Unilever United States, Inc.,
were not deductible under Internal Revenue Code section 162(a) as
ordinary and necessary business expenses. The Tax Court had
ruled that because long-term benefits accrued to National Starch
as a result of the acquisition, the expenditures were capital in
nature and non-deductible. The Court of Appeals affirmed.
National Starch argued that in Commissioner v. Lincoln
Savings and Loan Assn. the Supreme Court had set forth the
exclusive test for identifying capital expenditures, in which
creation or enhancement of a separate and distinct additional
asset is a prerequisite for capitalization, and deductibility is
the norm. The Supreme Court, in a sweeping opinion, stated that
deductions are exceptions to the norm of capitalization, and are
allowed only if there is a clear provision for them in the Code
and the taxpayer demonstrates its right to the deduction. The
Court further stated that Lincoln Savings holds only that
creation of a separate asset may be sufficient reason for
classification as a capital expenditure, not that it is a
prerequisite to that finding. National Starch also had argued
that Lincoln Savings prohibited relying on the existence of a
future benefit to distinguish an ordinary expense from a capital
expenditure. The Supreme Court found that while it might not be
proper to capitalize an expenditure merely because of an
incidental future benefit, the existence of a future benefit is
important in deciding whether the proper treatment is expensing
or capitalization.
We will keep you informed of further developments.
David J. Mangefrida Jr.
Assistant Counsel - Tax
Attachment