Legal Document

25 United States Supreme Court Reports Lawyer’s Edition 2d Series KF101.8 U54 577 90 Reporter 1302 397 U.S. 572 Fred W. WOODWARD et al., Petitioners,v.COMMISSIONER OF INTERNAL REVENUE. Number 412. Argued Feb. 26, 1970. Decided April 20, Donald Pacific KF135 P2 Cooney, Dubuque, Iowa, for petitioners. Mr. Johnnie McK. Walters, respondent. Justice MARSHALL delivered the opinion of Court. 1 This case and versus Hilton Hotels Corp., 580, 1307, 585, involve tax treatment expenses incurred in certain appraisal litigation. 2 Taxpayers owned or controlled a majority common stock Telegraph-Herald, an Iowa publishing corporation. The Telegraph-Herald was incorporated 1901, its charter extended 20-year periods 1921 1941. On June 9, 1960, taxpayers voted their controlling share corporation favor perpetual extension charter. A minority stockholder against extension. law requires 'those (stockholders) voting such renewal * (to) purchase at real value renewal.' Code, § 491.25 (1966). 3 attempted to negotiate dissenting stockholder's shares, but no agreement could be reached on 'real value' those shares. Consequently, 1962 brought action state court appraise interest. trial fixed value, which slightly reduced appeal by Court, Woodward Quigley, 257 1077, 133 North Western Reporter, 2nd 38, rehearing, 1104, 136 280 (1965). In July 1965, purchased interest price court. 4 During 1963, paid attorneys', accountants', appraisers' fees over $25,000, services rendered connection with 1963 federal income returns, claimed deductions these expenses, asserting that they were 'ordinary necessary management, conservation, maintenance property held production income' deductible under 212 Internal Revenue Code 1954, 26 KF62 212. Commissioner disallowed deduction 'because represent capital expenditures acquisition corporation.' Tax sustained Commissioner's determination, two opinions, 49 KF6280 A2 U55 377 (1968), Appeals affirmed, 410 Federal 313 (C.A.8th Cir. 1969). We granted certiorari, 396 875, 153, 24 (1969), resolve conflict deductibility costs proceedings between this decision Seventh Circuit supra.1 affirm. 5 Since inception present 1913, have not been deductible.2 See 263. Such are added basis asset respect incurred, taken into account purposes either through depreciation reducing gain (or increasing loss) when is sold. If expense capital, it cannot deducted as necessary,' business 162 'management, maintenance' 212.3 6 It has long recognized, general matter, disposition treated expenditures. most familiar example capitalization brokerage sale securities, explicitly provided longstanding Treasury regulation, Treas.Reg. Income 1.263(a)—2(e), approved Helvering Winmill, 305 79, 59 45, 83 L.Ed. 52 (1938), Sprecks Revenue, 315 626, 62 777, 86 1073 (1942). recognized brokers' commissions 'part (acquisition) cost securities,' supra, 84, 47, relied had statutory re-enactment, deny even taxpayer whom regular recurring his buying selling securities. 7 regulations do specify other sorts costs, rather provide generally '(t)he having useful life substantially beyond taxable year' expenditure. 1.263(a)—2(a). Under provision, courts legal, brokerage, accounting, similar acquision See, e.g., Spangler 323 913, 921 (C.A.9th 1963); St. Joe Paper Co., 284 430, 432 (C.A.5th 1960). 4A Judge Mertens, Law Taxation §§ 25.25, 25.26, 25.40, 25A.15 (1966 rev.). hardly otherwise, ancillary acquiring disposing much part it. 8 More difficult questions arise another class expenditures, 'defending perfecting title property.' 1.263(a) 2(c). one sense, any lawsuit may affect property—money assets subject lien.4 courts, believing Congress meant all litigation capitalized, created rule nature only where taxpayer's 'primary purpose' incurring them defend perfect title. Rassenfoss 158 764 (C.A.7th 1946); Industrial Aggregate company States, 639, 645 test draws bright line, produced melange decisions, which, noted, '(i)t would idle suggest can reconciled.' Ruoff Commissioner, 30 204, 208 (1958).5 9 urge test, developed context cases involving defending property, should applied well. And if so applied, argue, here question properly deducted, since legal did directly stock, agreed pass taxpayers, concerned solely stock.6 10 agree application here. That uncertain best devised determine more less indirectly, thus calls judgment whether fairly said title.' uncertainty called applying regulation makes 'cost acquisition' expense. our view latter involves simpler inquiry origin claim litigated process itself. 11 based upon 'purpose' undertaking particular piece encourage resort formalisms artificial distinctions. For instance, there doubt negotiating Atzingen-Whitehouse Dairy, Incorporated 36 173 (1961). whatever might clearly cost' stock. supra. Yet proceeding than substitute negotiation means fixing purchased. Allowing proceeding, merely ground put litigation, anomalous. 12 Further, standard comports Court's recent ruling characterization 372 39, 623, 570 L.Ed.id (1963). divorce suit nondeductible personal expense, though outcome holdings, reputation. rejected looked consequences consider motives defense examined character taxpayer, found arose out relationship marriage. 13 pronounced may, like standard, borderline cases, lies acquisition.7 case. Here required 'purchase' dissenter. absence made, fix price. Where acquired purchase, nothing establishment price.8 Thus acquired. 14 Affirmed. Other decisions point conflict. Compare Boulder Building Corporation 125 F.Supp. 512 (D.C.W.D.Okl.1954) (holding expenditures), Smith Hotel Enterprises, Nelson, 236 303 (D.C.E.D.Wis.1964) ordinary expense). see Walter S. Heller, 371 (1943), aff'd, Heller 147 376 1945) predecessor 212). also Naylor 203 346 1953), sold pursuant option net date IIB Act 38 Statutes-at-Large 167. sections pari materia capital-ordinary distinction, differing allows nonbusiness profitmaking activities. Gilmore, 44—45, 626—627, n. 1, premise permitted some capitalized incured conduct trade business. Hochschild 161 817, 820 (C.A.2d 1947) (Frank, J., dissenting). large number collected 25.24, 25A.16. argue length passed before proceeding. viewed differently, seems us correct doing. U.S., 583—584, 2, S.Ct., 1309. But resolution difference case, since, we hold Hotels, sequence passes determined irrelevant involved Petschek 335 734 1964), property. analysis situation, because transaction involuntary from view—an argument District Enterprises 1. first place, sense voluntary, holders know will buy dissenters. fundamentally, however, wherever transferred new owner exchange fair quid pro quo, payment itself expenditure, reason why determining amount considered negotiated yet law. Isaac G. Johnson & 149 851 (expenses litigating compensation condemnation expenditures).

Classification Label: 11