Opinion ID: 2996789
Heading Depth: 2
Heading Rank: 3

Heading: Staley’s Application

Text: Finally, Staley does not warrant a different outcome, as ITW insists. In Staley, this Court reversed the tax court’s 12 No. 02-1239 determination that fees paid to investment bankers to unsuccessfully ward off a hostile takeover had to be capitalized by the defending company, rather than deducted as an ordinary business expense. 119 F.3d at 483. The tax court, in determining that these incidental fees were part of the capital transaction ultimately resulting in the taxpayer’s hostile acquisition by a corporate raider, purported to follow the Supreme Court’s decision in INDOPCO v. Commissioner, 503 U.S. 79 (1992). Id. at 485. The INDOPCO case also involved investment banking fees, but in the context of a friendly, as opposed to hostile, takeover of National Starch by Unilever. There the Court found that the money paid to the investment bankers by National Starch was for the purpose of facilitating a favorable merger with Unilever, thus changing the corporate structure for the benefit of future operations—a capital expense. INDOPCO, 503 U.S. at 88-90. In disagreeing with the tax court’s application of INDOPCO, we found it significant that the majority of the fees paid in Staley were for the purpose of defending against what the company perceived to be an unfavorable, hostile takeover. Staley, 119 F.3d at 491. Because defending a company against attack is considered a necessary and ordinary business expense, designed to benefit current operations, id. at 487, we remanded the case to the tax court. We asked it to allocate the fees paid between those activities that were considered in defense of the company, an ordinary expense immediately deductible, and those that facilitated the ultimate merger, a capital expense meant to benefit the company into the future. Id. at 492-493. Our analysis in Staley was based on the recognition that distinguishing between ordinary expenses and those that must be capitalized can sometimes be difficult. Id. at 487 (“As the Supreme Court has noted, ‘the cases sometimes appear difficult to harmonize,’ and ‘each case turns on its No. 02-1239 13 special facts.’ ” (quoting INDOPCO, 503 U.S. at 86)). When faced with this challenge, we observed that “distinguishing between ordinary and capital costs often requires a rather pragmatic approach.” Id. Staley was such a case, with its factual similarities to the INDOPCO decision and turning on incidental, rather than direct, costs of an acquisition. Therefore, we specifically applied a “pragmatic assessment” to the underlying facts in order to decipher whether the fees incident to the hostile takeover were for current defense of the company or for an ultimate corporate change with benefits lasting into the future. See id. at 487-92. Our task here is easier than in Staley. The taxpayer points us to no decision in conflict with Webb, where payments made to satisfy an obligation directly assumed as part of a bargained-for acquisition have not been capitalized as part of the purchase price of the asset. Regardless, applying the pragmatic approach called for in Staley results in the same outcome, and is implicit, if not explicit, in the tax court’s opinion.4 The record consists of three sets of stipulated facts with dozens of attendant exhibits and a day-long trial transcript in which ITW presents seven witnesses. The tax court’s opinion coalesced that testimony 4 We find it curious that ITW would choose to attack Judge Cohen for failing to engage in the appropriate open-minded, fact-based inquiry advocated in Staley. Judge Cohen, who served as trial