UNITED STATES V. HILTON HOTELS CORP.
| Citation | 397 U. S. 580 |
| Decision Date | 20 April 1970 |
| Court | United States Supreme Court |
CERTIORARI TO THE UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT
Respondent corporation (Hilton), which owned close to 90% of the stock of Waldorf, determined to merge the two companies. The merger was formally opposed by the holders of about 6% of Waldorf shares, title to whose stock under New York law thereupon passed to Waldorf, the dissenters becoming Waldorf's creditors for its fair value. On December 28, 1953, Hilton voted its Waldorf stock approving the merger, which was consummated in accordance with New York law on December 31. The dissenting Waldorf shareowners thereafter rejected a Hilton cash offer and began appraisal proceedings in the New York courts. Hilton retained a consultant to value the Waldorf stock as of the day before the Waldorf shareholders' merger vote, and also obtained legal and other services in connection with the appraisal litigation, which ultimately ended in a settlement. Hilton deducted the consulting and other professional fees on its income tax return as ordinary and necessary business expenses, which the Commissioner of Internal Revenue disallowed on the ground that the payments were capital expenditures. Hilton paid the tax and brought this refund suit in District Court, which held that the payments related to the appraisal proceeding were deductible. The Court of Appeals, applying the "primary purpose" test, affirmed, noting that the proceeding was not necessary to effect the merger, but that its paramount purpose was to determine the fair value of the dissenting shareholders' share in Waldorf.
Held:
1. Litigation costs arising out of the acquisition of a capital asset are capital expenses whether or not the taxpayer incurred them for the purpose of defending or perfecting title to property, Woodward v. Commissioner, ante, P. 572, and the functional nature of the appraisal remedy as a forced purchase of the dissenters' stock is the same, regardless of whether title passed before or after the price of their stock was determined. P P. 583-584.
2. The debt that Hilton inherited from Waldorf of paying the dissenter for their share retained its capital character through the merger, as did the expenditure for fixing the amount of that debt. P P. 584-585.
410 F.2d 194, reversed and remanded.
This is the companion case to Woodward v. Commissioner, ante, P. 572, and presents a similar question involving the tax treatment of appraisal litigation expenses.
In 1953, taxpayer Hilton Hotels Corporation, which owned close to 90% of the common shares of the Hotel Waldorf-Astoria Corporation, determined to merge the two companies. Hilton retained a consulting firm to prepare a merger study to determine a fair rate of exchange between Hilton stock and Waldorf stock. After this study was completed, on November 12, 1953, Hilton and Waldorf entered into a merger agreement under which Hilton would be the surviving corporation, and 1.25 shares of Hilton stock would be offered for each outstanding Waldorf share not already held by Hilton. On December 28, Hilton voted its Waldorf stock to approve the merger by the requisite majority. Prior to the vote, the holders of about 6% of the Waldorf shares had filed with Waldorf their written objections
to the merger, and demanded payment for their stock, pursuant to § 91 of the New York Stock Corporation Law.
On December 31, 1953, Hilton filed the merger agreement and the certificate of consolidation with the Secretary of State of New York, thus consummating the merger under New York law. On January 7, 1954, Hilton made a cash offer to the dissenting Waldorf shareholders, which they rejected. The dissenters then began appraisal proceedings in the New York courts, pursuant to § 21 of the New York Stock Corporation Law.
Between January and May, 1954, Hilton asked its consulting firm to value the Waldorf stock as of December 27, 1953, the day prior to the Waldorf shareholders' vote approving the merger. Hilton also obtained the services of lawyers, and other professional services, in connection with the appraisal litigation. The appraisal proceeding was finally terminated in June, 1955, when the state court approved a settlement agreed to by the parties.
Hilton deducted the fees paid to the consulting firm, and the cost of legal and other professional services arising out of the appraisal proceeding, as ordinary and necessary business expenses under § 162 of the Internal Revenue Code of 1954, 26 U.S.C. § 162. The Commissioner of Internal Revenue disallowed the deduction on the ground that the payments were capital expenditures. Hilton paid the tax and sued for a refund in the District Court. In the course of that suit, Hilton conceded, and the court held, that the payments to the consulting firm for the pre-merger determination of fair value were a nondeductible capital outlay. But the District Court held that the fees and costs related to the post-merger appraisal proceeding itself were deductible. 285 F.Supp. 617 (D.C.N.D.Ill.1968). The Court of Appeals
affirmed, 410 F.2d 194 (C.A. 7th Cir.), and we granted certiorari, 396 U.S. 954 (1969). We reverse.
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