INDOPCO Inc. v. Commissioner: The Background
The case of INDOPCO Inc. v. Commissioner was a landmark decision of the United States Supreme Court Case in which the Court ruled that expenditures incurred by a target corporation during a friendly takeover are taxed as nondeductible capital expenditures.
The case of INDOPCO Inc. v. Commissioner was argued on November 12th of 1991 and decided a few months later in February of 1992. The Chief Justice in INDOPCO Inc. v. Commissioner was William Rehnquist and the Associate Justices were as follows:
· Harry Blackmun; Byron White; John Stevens; Sandra Day O’Connor; Antonin Scalia; Anthony Kennedy; Clarence Thomas; and David Souter.
INDOPCO Inc. v. Commissioner: The Question
The question of INDOPCO Inc. v. Commissioner asked whether certain professional expenses incurred by target corporations during the course of friendly takeovers are deductible by that corporation as “necessary and ordinary” business expenses under section 162 of the Internal Revenue Tax Code.
INDOPCO Inc. v. Commissioner: Facts of the Case
The core of INDOPCO Inc. v. Commissioner deals with a 1977 matter when a Delaware corporation expressed interest in acquiring INDOPCO. To adequately prepare for being brought out, the Delaware Company (National Starch) hired Morgan Stanley as its investment banker. The fees charged by Morgan Stanley amounted to over 2 million dollars and an additional $7,586 for out-of-pocket expenses and another $18,000 in legal fees.
The National Starch Company tried to claim these fees as tax deductible; however, the Commissioner of the Internal Revenue Service barred the claimed deductions. Subsequent appeals in the Tax Court and the court of Appeals for the Third Circuit upheld the Commissioner’s decision. The courts believed that the amount spent towards the investment bank Morgan Stanley added to the long-term betterment of the National Starch Company.
INDOPCO Inc. v. Commissioner: The Supreme Court Case
The key in INDOPCO Inc. v. Commissioner is that the Supreme Court ruled that the National Starch Company did not demonstrate that the legal, investment banking and other costs it incurred in relation to the acquisition are deductible as ordinary and mandatory business expenses according to section 162 of the tax code.
In addition to the opinions provided by the two previous courts, the United States Supreme Court in INDOPCO Inc. v. Commissioner cited the fact that there is a lengthy history of finding that the purpose of changing the corporate structure for the good of future operations is not a necessary or ordinary business expense.
Therefore, the United Supreme Court in INDOPCO Inc. v. Commissioner ruled that expenses incurred in a friendly takeover will not qualify for tax deductions as ordinary and necessary expenses under section 162 of the Tax Code.