Wells Fargo & Company v. Commissioner of Internal Revenue, PETITIONER-APPELLANT
| Decision Date | 12 June 2000 |
| Docket Number | No. 99-3307,PETITIONER-APPELLANT,RESPONDENT-APPELLEE,99-3307 |
| Parties | (8th Cir. 2000) WELLS FARGO & COMPANY AND SUBSIDIARIES,, v. COMMISSIONER OF INTERNAL REVENUE, Submitted: |
| Court | U.S. Court of Appeals — Eighth Circuit |
Page 874
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT-APPELLEE.
Filed: August 29, 2000
Appeal from the United States Tax Court.
Page 875
Page 876
Before Loken and Bright, Circuit Judges, and Hand 1,District Judge.
Hand, District Judge.
This case is before the Court on appeal from the Tax Court, which determined that $150,000 worth of salaries paid to Davenport's corporate officers must be capitalized, rather than deducted fully during the year in which the salaries were paid. The Tax Court also held that $111,270 of fees and disbursements paid to Davenport's attorneys must capitalized. The Tax Court determined that the United States Supreme Court case, INDOPCO, Inc. v. Commissioner, required capitalization of these expenses. 503 U.S. 79 (1992). It is this Court's determination that the Tax Court is due to be REVERSED IN PART.
For the purposes of this decision, the Court hereby adopts most of the facts found by the Tax Court. The following are the facts, as found by the Tax Court, with only minor changes (noted in brackets), which are made to facilitate continuity within this opinion.
1. General Information
Norwest is a bank holding company that was incorporated in 1929. It is the parent corporation of an affiliated group of corporations (Norwest consolidated group) that files consolidated Federal income tax returns. Its affiliates include 79 commercial banks in 12 States and numerous other corporations which provide financial services. Norwest's stock is traded on the New York and Midwest Stock Exchanges.
Bettendorf Bank, National Association ([Bettendorf]), is a member of the Norwest consolidated group. [Bettendorf] is a national banking association operating under a charter granted by the Office of the Comptroller of the Currency (OCC). [Bettendorf] conducts a general banking business from its main office in Bettendorf, Iowa, and from two branches, one in Bettendorf and the other in Davenport, Iowa.
[Davenport] is an Iowa State bank that was incorporated in 1932. Before the transaction (defined below), it provided banking and related services in the four-city area that consists of Davenport, Bettendorf, Rock Island, Illinois, and Moline, Illinois (Quad Cities area). Its main office was in Davenport, and it had four branches, three in Davenport and one in Donahue, Iowa. It filed a consolidated Federal income tax return with two wholly owned subsidiaries.
[Davenport]'s only class of stock was thinly traded in the Davenport over-the-counter market. It had 1.2 million shares outstanding, and [Davenport]'s founder (V.O. Figge) and his five children (collectively, the Figges) owned, collectively and beneficially, the following numbers and percentages of these shares:
Number Percentage
V.O. Figge 41,843 3.5
John K. Figge 61,140 5.1
James K. Figge 63,450 5.3
Thomas K. Figge 71,855 6.0
Ann Figge Brawley 77,890 6.5
Marie Figge Wise 69,655 5.8
385,833 32.2
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[Davenport]'s directors and executive officers, other than the Figges, owned another 69,727 (5.8 percent) of these shares on September 18, 1991.
2. The Transaction
In 1989, Iowa adopted interstate banking legislation that allowed, for the first time, the acquisition of Iowa banks by banking institutions located in States which were contiguous with Iowa and which had enacted reciprocal legislation. [Davenport]'s management expected that national banking would follow and that many large banks, including some from outside Iowa, would be competing in the Quad Cities area. [Davenport]'s management was concerned that banks of [Davenport]'s size (i.e., larger than the small community banks and smaller than the large regional banks) would be unable to compete in the future.
During 1990, Norwest began talking to [Davenport] about joining their businesses, and these discussions intensified in early 1991. [Davenport] retained the law firm of Lane & Waterman (L & W) to assist it in these discussions. L & W investigated whether [Davenport] would strategically fit with Norwest and its affiliates, and whether a reorganization between [Davenport] and Norwest would be good for the community.
On June 10, 1991, [Davenport]'s board of directors met to consider merging [Davenport] into Norwest. Over V.O. Figge's objection to the merger, the board authorized John K. Figge, James K. Figge, and Thomas K. Figge, in their capacities as executive officers, to negotiate with Norwest and to hire legal and other representatives with the intent to recommend to [Davenport]'s board a letter of intent between [Davenport] and Norwest on a plan of reorganization. The board also appointed an ad hoc committee (special committee) consisting of four outside directors to perform an independent due diligence review, to obtain professional advice, and to report to [Davenport]'s board as to the fairness and appraisal of the proposed transaction. Norwest's board of directors, on the same day, authorized using up to 10 million shares of Norwest common stock to effect a transaction with [Davenport].
[Davenport] retained J.P. Morgan & Co., Inc., as its financial adviser for any transaction with Norwest and to render an opinion as to the fairness of the consideration that [Davenport]'s shareholders might receive in the transaction. [Davenport] retained KPMG Peat Marwick to render opinions primarily on whether the proposed transaction would be a reorganization for Federal income tax purposes, and whether the proposed transaction would qualify for a desired method of accounting.
On July 22, 1991, [Davenport]'s board met to consider a transaction (transaction) whereby [Davenport] and [Bettendorf] would be consolidated to form a national bank (New Davenport) which would be wholly owned by Norwest. At the meeting, the special committee recommended that the transaction be approved, and J.P. Morgan opined that the transaction was fair to [Davenport]'s shareholders from a financial point of view. [Davenport]'s board approved the transaction. On the same day, [Bettendorf]'s board approved the transaction.
Four other events also occurred on July 22, 1991, with respect to the transaction. First, Norwest, [Bettendorf], and [Davenport] entered into an agreement (agreement) whereby they agreed to the transaction subject to regulatory approval, approval of [Davenport]'s and [Bettendorf]'s shareholders, and the satisfaction of certain conditions which included: (1) The receipt of regulatory approvals, including the approval of the OCC, without any requirement or condition that Norwest would consider unduly burdensome, and (2) the receipt of Peat Marwick's opinions that the transaction would qualify for the desired method of accounting and as a tax-free reorganization.
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Second, Norwest entered into voting agreements with certain [Davenport] shareholders. These shareholders held 24.5 percent of [Davenport]'s stock and included John Figge, James Figge, Thomas Figge, and other members of the Figge family. The voting agreements provided that these shareholders would vote their shares in favor of the transaction and that they would help Norwest complete the transaction.
Third, [Bettendorf] entered into employment agreements with V.O. Figge, John Figge, James Figge, Thomas Figge, and Richard R. Horst. The employment agreements provided that the five listed people would be employed as officers of New Davenport for 1 year at the same salaries they were receiving from [Davenport]. The parties to the transaction contemplated that John Figge, James Figge, and Thomas Figge would become senior vice presidents of New Davenport and that the members of [Davenport]'s board would become members of New Davenport's board. Norwest agreed to cause John Figge to be elected to its board.
Fourth, Norwest issued a press release announcing that it had agreed with [Davenport] to acquire [Davenport]. The release, quoting V.O. Figge, stated in part:
After extensive deliberations, the Board [of [Davenport] has determined that it is in the best interests of Davenport Bank and its stockholders, customers, employees, and the community it serves, to become part of a larger and more diversified financial institution that offers local, national and international resources through what might be termed a personal hometown presence * * *
* * * * * *
It is for these reasons that the board has given careful consideration to a merger with an organization that competes aggressively on a regional and national basis, and can provide the Quad-Cities with a broader array of banking products and services.
Following the signing of the agreement, Norwest commenced a due diligence review on [Davenport] and on [Davenport]'s business activities. [Davenport] employees and L & W helped Norwest perform the review, which lasted throughout August. L & W primarily acted as the contact for both Norwest and [Davenport].
On or about August 29, 1991, Norwest applied to the OCC for approval to consolidate [Davenport] and [Bettendorf]. At or about the same time, a prospectus was filed with the Securities and Exchange Commission (SEC) for the issuance to [Davenport] shareholders of up to 10 million shares of Norwest common stock upon the consummation of the transaction. The prospectus also served as the proxy statement for a special meeting (special meeting) of [Davenport]'s shareholders to be held on November 26, 1991, for the purpose of voting on the transaction. The SEC approved the proxy statement, and it became effective on October 23, 1991. On the effective date, [Davenport] notified its shareholders of the special meeting, advised them that its board recommended voting in favor of the transaction, and mailed them a copy of the proxy statement.
On November 20, 1991, [Bettendorf]'s board called a special shareholder...
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