Woodward v. Commissioner of Internal Revenue, No. 412

• Court: United States Supreme Court
• Writing for the Court: MARSHALL
• Citation: 25 L.Ed.2d 577,397 U.S. 572,90 S.Ct. 1302
• Docket Number: No. 412
• Decision Date: 20 April 1970
• Parties: Fred W. WOODWARD et al., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE

25 L.Ed.2d 577 90 S.Ct. 1302 397 U.S. 572 Fred W. WOODWARD et al., Petitioners,

v.

COMMISSIONER OF INTERNAL REVENUE.

No. 412. Argued Feb. 26, 1970. Decided April 20, 1970.

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

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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

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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

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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-

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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...