Opinion ID: 775137
Heading Depth: 2
Heading Rank: 2

Heading: Corporate Restructuring

Text: 47 UDF argues that its accounting expenses should have been deducted, rather than capitalized, because the expenses only related to the making of an S election, achieved by means that obtained an additional, one-time tax benefit, being the avoidance of the LIFO recapture tax. 48 The district court found that under INDOPCO, the accounting fees related to a corporate reorganization, and thus must be capitalized. UDF attempts to distinguish INDOPCO by arguing that INDOPCO applies only to reorganization expenses that produce significant benefits . . . beyond the year in question, INDOPCO, 503 U.S. at 87, rather than reorganization expenses that merely produce a one-time benefit. Moreover, UDF argues that under Wells Fargo & Co. v. Commissioner of Internal Revenue, 224 F.3d 874 (8th Cir. 2000), INDOPCO only addressed costs that were directly related to the transaction which produced a long term benefit, and that costs only indirectly related to such a transaction need not be capitalized. Wells Fargo, 224 F.3d at 886. UDF contends that because its accounting fees were only indirectly related to its corporate reorganization, under Wells Fargo those fees are deductible. Alternatively, UDF contends that because the accounting fees were only attributable to the investigatory stage of its corporate reorganization, the fees were deductible investigatory costs. Id. at 888-89. 49 First, UDF's investigatory stage argument is unavailing. The Eighth Circuit in Wells Fargo agreed with the IRS position that any investigatory expenses which post-date the final decision to engage in a capital transaction must be capitalized. Id. at 889. A final decision on a capital transaction is made when the question of whether to go ahead with the transaction is made. 6 Id. The UDF merger occurredon December 31, 1992. UDF offers no analysis of when the final decision for that merger occurred. Nearly all of the Ernst & Young invoices for the fees at issue were dated in 1993. Even if these invoices reflected services rendered prior to the final decision to reorganize, it is UDF's burden to provide such analysis, which UDF has not done. 50 Second, as to the indirectly related work itself, even if this Court were to adopt the Eighth Circuit's reading of INDOPCO, the relationship between the employer and its salaried employees in Wells Fargo is distinguishable from the relationship between UDF and Ernst & Young in this case. 51 The indirectly related costs at issue in Wells Fargo were salary expenses paid to employees who had worked on a corporate acquisition. The Eighth Circuit found that payments made by an employer are deductible when they are made to employees, are compensatory in nature, and are directly related to the employment relationship (and only indirectly related to the capital transaction, which provides the long term benefit). Wells Fargo, 224 F.3d at 887. Wells Fargo applied the origin of the claim doctrine when determining whether an expense was deductible or capital in nature; because the payments originated from the employment relationship, rather than from the capital transaction, the payments were deductible. 7 Id. The court then noted, when distinguishing the case from Acer Realty Co. v. Commissioner of Internal Revenue, 132 F.2d 512, 513 (8th Cir. 1942), that there was no increase in [the employees] salaries attributable to the acquisition, and [the employees] would have been paid the salaries whether or not the acquisition took place. Wells Fargo, 224 F.3d at 888. 52 The first obstacle for UDF is that Ernst & Young employees are not salaried employees of UDF. That issue aside, the question becomes whether UDF has met its burden in demonstrating that the reorganization had no effect on the Ernst & Young fees. 53 UDF offers little evidence in support of the claim that with or without a reorganization, the Ernst & Young fees would have remained unchanged. We find this lack of evidence particularly suspect, given that the very idea of a reorganization originated from Ernst & Young. Specifically, Lindner testified that the merger was upon the advice of Ernst & Young and other accountants, advising us based upon tax ramifications as well as other issues, that companies similar to ours, it was advisable to seek S election. (J.A. at 406.) UDF now speaks of a clear divide between the S election and the reorganization. However, UDF identifies no record evidence in support of such a divide. As noted above, UDF stated that [t]he purpose of the merger was to simplify the corporate structure of United Dairy Farmers, Inc., and affiliated companies. The merger was also consummated in order to permit the making of an S election under Section 1362(a). (J.A. at 330.) Our review of the record does not indicate a clear divide between the S election and the reorganization, or between the amount of Ernst & Young fees and the reorganization. UDF fails to identify record evidence to the contrary. 54 Moreover, UDF has not even addressed the significant legal issue of how and why the indirectly related rule of Wells Fargo should be extended to include unsalaried, independent advisers, when the court in Wells Fargo expressly noted that its finding was based on the employer/employee relationship in that case. Wells Fargo, 224 F.3d at 887. However, we need not reach that issue, because UDF has not provided evidence supporting the more basic issue of whether the fees were indirectly related to the reorganization on grounds that there was no relationship between the reorganization and the amount of Ernst & Young's fees. Further, even assuming UDF's reading of INDOPCO, that reorganization expenses which do not produce a significant benefit beyond the year in question are deductible, UDF has provided no evidence that its simplification of corporate structure did not produce a significant benefit beyond the year in question. Accordingly, the district court did not err when finding that UDF's accounting fees must be capitalized under INDOPCO.