Woodward v. Commissioner of Internal Revenue

Decision Date20 April 1970
Docket NumberNo. 412,412
Citation25 L.Ed.2d 577,397 U.S. 572,90 S.Ct. 1302
PartiesFred W. WOODWARD et al., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE
CourtU.S. Supreme Court

Donald P. Cooney, Dubuque, Iowa, for petitioners.

Mr. Johnnie McK. Walters, for respondent.

Mr. Justice MARSHALL delivered the opinion of the Court.

This case and United States v. Hilton Hotels Corp., 397 U.S. 580, 90 S.Ct. 1307, 25 L.Ed.2d 585, involve the tax treatment of expenses incurred in certain appraisal litigation.

Taxpayers owned or controlled a majority of the common stock of the Telegraph-Herald, an Iowa publishing corporation. The Telegraph-Herald was incorporated in 1901, and its charter was extended for 20-year periods in 1921 and 1941. On June 9, 1960, taxpayers voted their controlling share of the stock of the corporation in favor of a perpetual extension of the charter. A minority stockholder voted against the extension. Iowa law requires 'those (stockholders) voting for such renewal * * * (to) purchase at its real value the stock voted against such renewal.' Iowa Code, § 491.25 (1966).

Taxpayers attempted to negotiate purchase of the dissenting stockholder's shares, but no agreement could be reached on the 'real value' of those shares. Consequently, in 1962 taxpayers brought an action in state court to appraise the value of the minority stock interest. The trial court fixed a value, which was slightly reduced on appeal by the Iowa Supreme Court, Woodward v. Quigley, 257 Iowa 1077, 133 N.W.2d 38, on rehearing, 257 Iowa 1104, 136 N.W.2d 280 (1965). In July 1965, taxpayers purchased the minority stock interest at the price fixed by the court.

During 1963, taxpayers paid attorneys', accountants', and appraisers' fees of over $25,000, for services rendered in connection with the appraisal litigation. On their 1963 federal income tax returns, taxpayers claimed deductions for these expenses, asserting that they were 'ordinary and necessary expenses paid * * * for the management, conservation, or maintenance of property held for the production of income' deductible under § 212 of the Internal Revenue Code of 1954, 26 U.S.C. § 212. The Commissioner of Internal Revenue disallowed the deduction 'because the fees represent capital expenditures incurred in connection with the acquisition of capital stock of a corporation.' The Tax Court sustained the Commissioner's determination, with two dissenting opinions, 49 T.C. 377 (1968), and the Court of Appeals affirmed, 410 F.2d 313 (C.A.8th Cir. 1969). We granted certiorari, 396 U.S. 875, 90 S.Ct. 153, 24 L.Ed.2d 133 (1969), to resolve the conflict over the deductibility of the costs of appraisal proceedings between this decision and the decision of the Court of Appeals for the Seventh Circuit in United States v. Hilton Hotels Corp., supra.1 We affirm.

Since the inception of the present federal income tax in 1913, capital expenditures have not been deductible.2 See Internal Revenue Code of 1954, § 263. Such expenditures are added to the basis of the capital asset with respect to which they are incurred, and are taken into account for tax purposes either through depreciation or by reducing the capital gain (or increasing the loss) when the asset is sold. If an expense is capital, it cannot be deducted as 'ordinary and necessary,' either as a business expense under § 162 of the Code or as an expense of 'management, conservation, or maintenance' under § 212.3

It has long been recognized, as a general matter, that costs incurred in the acquisition or disposition of a capital asset are to be treated as capital expenditures. The most familiar example of such treatment is the capitalization of brokerage fees for the sale or purchase of securities, as explicitly provided by a longstanding Treasury regulation, Treas.Reg. on Income Tax § 1.263(a)—2(e), and as approved by this Court in Helvering v. Winmill, 305 U.S. 79, 59 S.Ct. 45, 83 L.Ed. 52 (1938), and Sprecks v. Commissioner of Internal Revenue, 315 U.S. 626, 62 S.Ct. 777, 86 L.Ed. 1073 (1942). The Court recognized that brokers' commissions are 'part of the (acquisition) cost of the securities,' Helvering v. Winmill, supra, 305 U.S. at 84, 59 S.Ct. at 47, and relied on the Treasury regulation, which had been approved by statutory re-enactment, to deny deductions for such commissions even to a taxpayer for whom they were a regular and recurring expense in his business of buying and selling securities.

The regulations do not specify other sorts of acquisition costs, but rather provide generally that '(t)he cost of acquisition * * * of * * * property having a useful life substantially beyond the taxable year' is a capital ex- penditure. Treas.Reg. on Income Tax § 1.263(a)—2(a). Under this general provision, the courts have held that legal, brokerage, accounting, and similar costs incurred in the acquision or disposition of such property are capital expenditures. See, e.g., Spangler v. Commissioner of Internal Revenue, 323 F.2d 913, 921 (C.A.9th Cir. 1963); United States v. St. Joe Paper Co., 284 F.2d 430, 432 (C.A.5th Cir. 1960). See generally 4A J. Mertens, Law of Federal Income Taxation §§ 25.25, 25.26, 25.40, 25A.15 (1966 rev.). The law could hardly be otherwise, for such ancillary expenses incurred in acquiring or disposing of an asset are as much part of the cost of that asset as is the price paid for it.

More difficult questions arise with respect to another class of capital expenditures, those incurred in 'defending or perfecting title to property.' Treas.Reg. on Income Tax § 1.263(a) 2(c). In one sense, any lawsuit brought against a taxpayer may affect his title to property—money or other assets subject to lien.4 The courts, not believing that Congress meant all litigation expenses to be capitalized, have created the rule that such expenses are capital in nature only where the taxpayer's 'primary purpose' in incurring them is to defend or perfect title. See, e.g., Rassenfoss v. Commissioner of Internal Revenue, 158 F.2d 764 (C.A.7th Cir. 1946); Industrial Aggregate Co. v. United States, 284 F.2d 639, 645 (C.A.8th Cir. 1960). This test hardly draws a bright line, and has produced a melange of decisions, which, as the Tax Court has noted, '(i)t would be idle to suggest * * * can be reconciled.' Ruoff v. Commissioner, 30 T.C. 204, 208 (1958).5

Taxpayers urge that this 'primary purpose' test, developed in the context of cases involving the costs of defending property, should be applied to costs incurred in acquiring or disposing of property as well. And if it is so applied, they argue, the costs here in question were properly deducted, since the legal proceedings in which they were incurred did not directly involve the question of title to the minority stock, which all agreed was to pass to taxpayers, but rather was concerned solely with the value of that stock.6

We agree with the Tax Court and the Court of Appeals that the 'primary purpose' test has no application here. That uncertain and difficult test may be the best that can be devised to determine the tax treatment of costs incurred in litigation that may affect a taxpayer's title to property more or less indirectly, and that thus calls for a judgment whether the taxpayer can fairly be said to be 'defending or perfecting title.' Such uncertainty is not called for in applying the regulation that makes the 'cost of acquisition' of a capital asset a capital expense. In our view application of the latter regulation to litigation expenses involves the simpler inquiry whether the origin of the claim litigated is in the process of acquisition itself.

A test based upon the taxpayer's 'purpose' in undertaking or defending a particular piece of litigation would encourage resort to formalisms and artificial distinctions. For instance, in this case there can be no doubt that legal, accounting, and appraisal costs incurred by taxpayers in negotiating a purchase of the minority stock would have been capital expenditures. See Atzingen-Whitehouse Dairy, Inc. v. Commissioner, 36 T.C. 173 (1961). Under whatever test might be applied, such expenses would have clearly been 'part of the acquisition cost' of the stock. Helvering v. Winmill, supra. Yet the appraisal proceeding was no more than the substitute that state law provided for the process of negotiation as a means of fixing the price at which the stock was to be purchased. Allowing deduction of expenses incurred in such a proceeding, merely on the ground that title was not directly put in question in the particular litigation, would be...

To continue reading

Request your trial
294 cases
  • Waddell v. Comm'r of Internal Revenue
    • United States
    • U.S. Tax Court
    • April 28, 1986
    ...Tax Regs.; Commissioner v. Idaho Power Co., 418 U.S. 1 (1974); Woodward v. Commissioner, 410 F. 2d 313, 318 (8th Cir. 1969), affd. 397 U.S. 572 (1970). Such capital expenditures must be recovered through depreciation or amortization over the asset's useful life, or taken into account in the......
  • Southland Royalty Co. v. US
    • United States
    • U.S. Claims Court
    • July 14, 1978
    ...Expenditures incurred in the acquisition of a capital asset must generally be capitalized. Woodward v. Commissioner of Internal Revenue, 397 U.S. 572, 575, 90 S.Ct. 1302, 25 L.Ed.2d 577 (1970). "Ordinary," as used in I.R.C. § 162, differentiates between those expenses currently deductible v......
  • Blitzer v. United States
    • United States
    • U.S. Claims Court
    • July 14, 1982
    ...appraisal and other ancillary expenses incurred in acquiring or disposing of a capital asset. Woodward v. Commissioner, 397 U.S. 572, 576-77, 90 S.Ct. 1302, 1305-06, 25 L.Ed.2d 577 (1970). They may include compensation for services in connection with the construction or acquisition of a cap......
  • NCNB Corp. v. U.S.
    • United States
    • U.S. Court of Appeals — Fourth Circuit
    • July 13, 1982
    ...249, 88 L.Ed. 171 (1943); Commissioner v. Tellier, 383 U.S. 687, 86 S.Ct. 1118, 16 L.Ed.2d 185 (1966); Woodward v. Commissioner, 397 U.S. 572, 90 S.Ct. 1302, 25 L.Ed.2d 577 (1970); United States v. Hilton Hotels Corp., 397 U.S. 580, 90 S.Ct. 1307, 25 L.Ed.2d 585 (1970); United States v. Mis......
  • Request a trial to view additional results
2 firm's commentaries
  • Tax Treatment of Reorganization Costs
    • United States
    • Mondaq United States
    • January 22, 2004
    ...They further stated that the primary purpose of the transaction is not relevant to such determination. (i) In Woodward v. Commissioner, 397 U.S. 572 (1970), a companion decision to Hilton, the Court noted that a test based upon the taxpayer's purpose in undertaking litigation "would encoura......
  • New Directive Correctly Resolves Use Of Transaction Cost Safe Harbor For Milestone Payments – Questions Nonetheless Linger
    • United States
    • Mondaq United States
    • May 15, 2013
    ...cannot be relied on as a precedent, they indicate the manner in which the Service has applied the law in somewhat similar circumstances. 397 U.S. 572 119 F.3d 482, 491 (7th Cir. 1997). 224 F.3d 874 (8th Cir. 2000). 1999-1 C.B. 32. Treas. Reg. §1.263(a)-5(e)(3). See Treas. Reg. §§1.263(a)-5(......
6 books & journal articles
  • Takeover defense expenditures: deductibility not necessarily precluded by National Starch.
    • United States
    • Tax Executive Vol. 42 No. 3, May 1990
    • May 1, 1990
    ...(28) Id. (29) See e.g., Northwest Industries Inc. v. B.F. Goodrich Co., 301 F.Supp. 706, 712 (N.D.Ill. 1969). (30) See, e.g., Woodward, 397 U.S. 572,575 (1969); General Bancshares Corp., 326 F.2d 712,716 (8th Cir. (31) In justifying the capital nature of expenditures incurred incident to co......
  • The Deductibility of Environmental Cleanup Costs
    • United States
    • Colorado Bar Association Colorado Lawyer No. 23-8, August 1994
    • Invalid date
    ...cost of removing oil pollution from groundwater). 14. Technical Advice Memorandum 9315004 (Dec. 17, 1992). 15. Woodward v. Commissioner, 397 U.S. 572 (1970). 16. INDOPCO, Inc. v. Commissioner, 112 S.Ct. 1039 (1992). 17. Commissioner v. Tellier, 383 U.S. 687 (1966); Commissioner v. Heininger......
  • Corporate Deals, Tax Deductions, and the Wisdom of Solomon
    • United States
    • California Lawyers Association Business Law News (CLA) No. 2015-1, 2015
    • Invalid date
    ...See INDOPCO, Inc. v. Comm'r, 503 U.S. 79 (1992).5. See United States v. Gilmore, 372 U.S. 39 (1963); see also Woodward v. Comm'r, 397 U.S. 572 (1970).6. The Tax Court has described the origin of the claim rule as follows: Quite plainly, the "origin of the claim" rule does not contemplate a ......
  • Tax Court issues split decision on capital vs. deductible expenditures.
    • United States
    • The Tax Adviser Vol. 32 No. 10, October 2001
    • October 1, 2001
    ...INDOPCO, Inc., 503 US 79 (1990), Idaho Power Co., 418 US 1 (1974), Lincoln Savings & Loan Assn., 403 US 345 (1971), and Woodward, 397 US 572 (1970)), no bright-line test exists to resolve the issue. Lychuk, 116 TC No. 27 (2001), illustrates the uncertainties that taxpayers face in this ......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT