Court Opinion

ID: 4472701
Source: CourtListenerOpinion
Date Created: 2020-01-14 19:34:51.735703+00
Date Added: 2024-06-11T11:51:19.929615
License: Public Domain

Cohen, J., dissenting: As indicated in the majority opinion note 1, the facts stated in that opinion are those found by me as the trial judge. I respectfully dissent from the legal analysis and the result reached by the majority. I believe that the facts distinguish this case from INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992), and Victory Mkts., Inc. & Subs. v. Commissioner, 99 T.C. 648 (1992). The majority attempts to mask the factual distinctions between this case and INDOPCO, Inc. and Victory Mkts., Inc. by substituting its judgment as to long-term benefits for that of petitioner’s board of directors and by placing unwarranted reliance on the benefits sought by Tate & Lyle in its takeover efforts. In addition, the majority adopts, and the concurring opinion of Judge Beghe highlights, a rule that any expenses relating to a change in corporate ownership are not deductible. That is not the rule applied in INDOPCO, Inc. or Victory Mkts., Inc.; it is a more stringent rule not supported by those cases, the authorities on which they rely, or any other decision. The distinguishing factual circumstances herein are shown by a brief recapitulation of INDOPCO, Inc., Victory Mkts., Inc., and this case. In INDOPCO, Inc., representatives of the Unilever Group indicated an interest in making a tender offer for all of the stock of the taxpayer, then known as National Starch & Chemical Corp. (National Starch), at a meeting with two of the taxpayer’s largest shareholders and the chairman of the taxpayer’s board of directors. In subsequent discussions, the Unilever Group indicated that it would proceed with the tender offer only if the taxpayer favored the acquisition of its stock. The National Starch directors retained an investment banking firm to value the stock, to render a fairness opinion, and to stand ready to assist if there were a hostile tender offer. The investment bankers concluded that the terms of the proposed transaction were fair and equitable to the taxpayer’s shareholders from a financial point of view. In National Starch & Chem. Corp. v. Commissioner, 93 T.C. 67 (1989), we held that the investment banking fees were not deductible under section 162(a). We set forth the following basis for that holding: We base our holding upon our judgment that petitioner’s directors determined that it would be in petitioner’s long-term interest to shift ownership of the corporate stock to Unilever. The expenditures in issue were incurred incident to that shift in ownership and, accordingly, lead [sic] to a benefit “which could be expected to produce returns for many years in the future.” * * * The reason for the capitalization of such expenditures is “that the purpose for which the expenditure is made has to do with the corporation’s operations and betterment, sometimes with a continuing capital asset, for the duration of its existence or for the indefinite future or for a time somewhat longer than the current taxable year, in contrast to being devoted to the income production or other needs of the more immediate present.” General Bancshares Corp. v. Commissioner, supra [326 F.2d 712] at 715 [(8th Cir. 1964)] * * * [Id. at 75-76; emphasis added.] Our holding in National Starch that the expenditures at issue had to be capitalized and our findings that, in fulfilling its fiduciary obligation to the corporation and its shareholders, the board of directors must have determined that it was in the National Starch long-term interest to shift ownership of the stock to Unilever; that the taxpayer’s 1978 annual report stated that the taxpayer would benefit from the availability of the enormous resources of the Unilever Group; that the investment bankers stated that the taxpayer’s affiliation with Unilever would create the opportunity for “synergy”; and that the taxpayer’s opportunities were broadened because of Unilever’s resources properly focused on the purposes for which the expenditures were made. The Court of Appeals for the Third Circuit affirmed our decision. National Starch & Chem. Corp. v. Commissioner, 918 F.2d 426 (3d Cir. 1990). The Supreme Court granted certiorari, and, in INDOPCO, Inc. v. Commissioner, supra, the Supreme Court focused its opinion primarily on rejecting the taxpayer’s argument that separate and distinct assets must be created or enhanced by the expenditures in order to be capitalized under section 263. However, the Supreme Court also applied the rule we applied in National Starch and cited with approval one of the decisions from which that rule is derived and on which we relied in National Starch. The Supreme Court stated: courts more frequently have characterized an expenditure as capital in nature because “the purpose for which the expenditure is made has to do with the corporation’s operations and betterment, sometimes with a continuing capital asset, for the duration of its existence or for the indefinite future or for a time somewhat longer than the current taxable year.” General Bancshares Corp. v. Commissioner, 326 F.2d at 715. * * * [INDOPCO, Inc. v. Commissioner, 503 U.S. at 90; emphasis added.] With the foregoing rule in mind, the Supreme Court emphasized that the fees were capital expenditures because they were incurred for the purpose of facilitating a merger that created significant long-term benefits to National Starch. Citing statements in reports made by National Starch and its investment bankers, the Supreme Court held that the record supported our finding that the fees were incurred for the purpose of producing significant long-term benefits for National Starch as a result of the merger. The Supreme Court did not indicate in INDOPCO, Inc. that its decision was dependent on whether the transaction was a friendly merger or a hostile takeover. In Victory Mkts., Inc. v. Commissioner, supra, the taxpayer incurred professional service fees in connection with the acquisition of its stock and claimed that it was entitled to deduct such expenses because, unlike the taxpayer in INDOPCO, Inc., it was acquired in a hostile takeover. We expressly declined to decide whether INDOPCO, Inc. required capitalization of expenses incurred in hostile takeovers, however, because we concluded that the nature of the takeover there was not hostile and that the facts were generally indistinguishable from those in INDOPCO, Inc. Before discussing those facts and reaching our conclusion in Victory Mkts., Inc., we made the following observations about the Supreme Court’s decision in INDOPCO, Inc.: The Court, quoting General Bancshares Corp. v. Commissioner, 326 F.2d 712, 715 (8th Cir. 1964), concluded that the rationale behind the “well-established rule” that expenses incurred in reorganizing or restructuring a corporate entity are not deductible under section 162(a) because the purpose for which they are made “ ‘has to do with the corporation’s operations and betterment * * * for the duration of its existence or for the indefinite future or for a time somewhat longer than the current taxable year’” applies equally in the context of a friendly takeover to the expenditures for professional services at issue [there]. * * * [99 T.C. at 661; emphasis added.] Applying the foregoing rule, we concluded in Victory Mkts., Inc. that the expenses at issue were not incurred for the purpose of defending against a hostile takeover because: (1) The initial contact letter from the acquiring corporation expressed a hope that the transaction could be completed on a mutually acceptable and friendly basis and indicated that the acquiring corporation intended to preserve the continuity of the taxpayer’s management without closing or consolidating the taxpayer’s facilities or operations; (2) the written offer was subject to the approval of the taxpayer’s board of directors and reiterated the desire of the acquiring corporation to proceed in a friendly and mutually acceptable manner; (3) at no time did the acquiring corporation attempt to circumvent the taxpayer’s board of directors by making a tender offer directly to the taxpayer’s shareholders; (4) the actions of the acquiring corporation were not perceived by the taxpayer’s board of directors as hostile; and (5) the board of directors did not activate the dividends rights plan that it had adopted. Id. at 662. Following the analysis in INDOPCO, Inc., we held in Victory Mkts., Inc. that the taxpayer made the expenditures at issue for the purpose of deriving long-term benefits that it expected to result from its acquisition and that, therefore, those expenditures were capital in nature and not deductible under section 162. Id. at 662-665. We found that the directors of the taxpayer determined that it would be in the long-term interest of Victory Markets to accept the takeover offer because the taxpayer’s press release announcing the merger touted the benefits of the acquisition; because the announcement to the taxpayer’s shareholders stated that, in approving the merger, the board of directors concluded that a merger would strengthen the taxpayer and put it in an excellent position for further expansion; and because, in approving the takeover, the taxpayer’s directors, exercising their duty of care, must have determined that the takeover was in the best interests of the taxpayer and its shareholders. Id. at 664-665. We also noted that the taxpayer received long-term benefits from the availability of the acquiring corporation’s resources and as a result of its conversion from a publicly held corporation to a wholly owned subsidiary. In contrast to the circumstances in Victory Mkts., Inc., in this case Tate & Lyle bypassed the management and board of directors of SCI and made its offer directly to the SCI shareholders. Tate & Lyle was publicly critical of SCI management and its diversification strategy and commenced litigation against SCI. Tate & Lyle did not seek to proceed primarily in a friendly and mutually acceptable manner. Tate & Lyle retained the right to waive any of the conditions of the tender offer. Thus, the Tate & Lyle “threat” was not eliminated by the court rulings upholding the shareholder rights plan adopted by SCI and the Delaware antitakeover statute. The ultimate decision of the SCI board to negotiate with Tate & Lyle was made only after an attempt to find an alternative failed and the board members had no choice. The uncontradicted testimony of board members was that the board “reluctantly” chose to merge with Tate & Lyle without activating the shareholder rights plan because such an action would have resulted in “endless litigation” that “wouldn’t have served really a useful purpose at that point because the shares in all probability would have been tendered.” The parties disagree as to when the SCI board became subject to the duties discussed in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986), and in the majority and concurring opinions. The parties agree, however, that, as of May 10, 1988, when the investment bankers informed SCI that they could not find a viable alternative to the Tate & Lyle offer, the sale of SCI was inevitable and the SCI board of directors was obligated to obtain the maximum value for the shareholders. When the board of directors became subject to the duties discussed in Revlon, the board changed “from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company.” Id. at 182. The record indicates that the directors ultimately recommended the Tate & Lyle offer because it provided a greater value for the SCI shareholders than any of the alternatives that were considered. As a result, in contrast to National Starch and Victory Mkts., Inc., we have no reason to conclude that, acting in furtherance of their fiduciary duties, the SCI directors approved the revised Tate & Lyle offer because of long-term benefits for SCI. The only benefits to the future operations of petitioner discussed in the majority opinion are those perceived by the offeror, Tate & Lyle, and not by the management that incurred the expenses. The majority also states: “Positive consequences of a nonoperational nature resulting to SCI from the acquisition include a consolidation of stock ownership and relief from shareholder-related expenses and duties.” Majority op. p. 183. The majority seems to believe that it is always better for a corporation to be privately held rather than publicly held — a questionable assumption considering this nation’s economy. In any event, the transformation from a publicly held corporation to a wholly owned subsidiary was one of the results considered to be a significant benefit to the taxpayers in INDOPCO, Inc. and Victory Mkts., Inc. because the acquired corporations there indicated that, such results were benefits of the takeovers that they expected and sought. For example, in INDOPCO, Inc., the Supreme Court noted that a National Starch progress report stated that the company would benefit from the availability of Unilever’s “enormous resources”; that a Morgan Stanley report indicated that National Starch management believed that “some synergy may exist with the Unilever organization”; and that National Starch management “viewed the transaction as ‘swapping approximately 3500 shareholders for one’” as a benefit. INDOPCO, Inc. v. Commissioner, 503 U.S. at 88-89 (quoting 918 F.2d at 427). Similarly, in Victory Mkts., Inc., the Victory Markets press release that announced the merger recounted the vast holdings of the acquiring corporation, its skill and expertise, and its familiarity with the line of business of Victory Markets. Also, Victory Markets represented to its shareholders that, in approving the merger, the board of directors “concluded that a merger with LNC [Industries Pty. Ltd.] would strengthen Victory [Markets] and put the company in an excellent position for further expansion.” Victory Mkts., Inc. v. Commissioner, 99 T.C. at 664. Here, the record contains no evidence that the SCI management or board of directors thought or indicated that a combination with Tate & Lyle would produce any benefits for SCI. Instead,. the record indicates that SCI management believed that a Tate & Lyle takeover would not be in the best interests of SCI because Tate & Lyle had nothing to offer in terms of capital, marketing, or research and development and also because Tate & Lyle sought to abandon the SCI long-term strategic plan of diversifying into the food service business. While petitioner has the burden of proving its right to the deduction in issue, Rule 142(a); INDOPCO, Inc. v. Commissioner, supra at 84, here the contemporaneous documentation supports the testimony presented by petitioner concerning the viewpoint of its board. The majority assertion that the viewpoint reflected only the “directors’ subjective reasons for making the expenditure” that “are not significant to the analysis”, majority op. p. 194, is unwarranted. In a letter to the SCI shareholders, Nordlund stated that the SCI board recommended the Tate & Lyle offer because it was “fair to and in the best interests of shareholders” of SCI but made no mention of any benefits for SCI that might occur as a result of the merger. The May 5, 1988, Merrill Lynch memorandum stated that Merrill Lynch and First Boston were retained by the SCI board of directors “in its defense against a proposed hostile acquisition of Staley by Tate & Lyle”, and the record as a whole indicates that the primary focus of the investment bankers’ work was the pursuit of alternatives in an effort to prevent the Tate & Lyle tender offer from succeeding. The majority disallows the deductions claimed under section 162 because “the investment bankers’ fees and the disallowed portion of the printing costs were incurred in connection with a change in the ownership of SCI.” Majority op. p. 200. The holding of INDOPCO, Inc. is that “expenses * * * incurred for the purpose of changing the corporate structure for the benefit of future operations” are not deductible. INDOPCO, Inc. v. Commissioner, 503 U.S. at 89 (quoting General Bancshares Corp. v. Commissioner, 326 F.2d 712, 715 (8th Cir. 1964), affg. 39 T.C. 423 (1962)) (emphasis added). I am persuaded by petitioner that the expenses in dispute were incurred by Staley for the purpose of preventing a change that the duly existing management believed would not benefit future operations and satisfying the fiduciary obligations of the corporation’s directors. I do not agree that such expenditures are inherently capital and not deductible. I have other disagreements with assumptions made in the majority opinion and in Judge Beghe’s concurring opinion. For example, there is the assertion that the fees paid to SCl’s investment bankers necessarily increased the price of the stock. Majority op. p. 183. This analysis confuses the simple sequence of events with the purpose for which the expenditure was incurred, or the cause and effect relationship between an expenditure and a change in the price of the stock. The initial Tate & Lyle offer was $32 per share, about 15 percent or $5 less than the closing price of the stock on the day bidding commenced. Tate & Lyle certainly had its own reasons for desiring the purchase and was independently evaluating the acquisition in relying on its own advisers. The Tate & Lyle decision to increase the price caused the expense of subsequent analysis on behalf of Staley and was not necessarily or even probably induced by the initial analysis provided to Staley’s board. In any event, benefits to the shareholders were not a factor addressed in INDOPCO, Inc. When it tried this case, petitioner had the benefit of the opinions of the Supreme Court in INDOPCO, Inc. and of this Court in Victory Mkts., Inc. It undoubtedly tailored its evidence and arguments to distinguish those cases. The evidence was credible because of the contemporaneous documentation that preceded the opinions in INDOPCO, Inc. and Victory Mkts., Inc. The majority and the concurring judges have now applied a more stringent rule. That rule may create more certainty by requiring capitalization of all expenses relating to restructuring of stock ownership. However, Congress did not provide such a rule, although it could have. The Supreme Court did not state such a rule in INDOPCO, Inc., although it could have. Notwithstanding the extensive and scholarly citation of authority by the majority and concurring opinions, the rule they adopt has not previously been adopted by Congress or by any court. I would not do so here. I would hold that the investment bankers’ fees in dispute were deductible under section 162(a) as ordinary and necessary business expenses. Chabot, Jacobs, Chiechi, and Laro, JJ., agree with this dissent.