Unilever was trying to buy
INDOPCO. INDOPCO's board thought this was a good idea, and so in order to
prepare to be bought out, they hired a financial advisor to help with the
The fees for the financial
advisor came to about $2.2M.
INDOPCO deducted the $2.2M as
a business expense on their taxes.
Business expenses are generally deductible under 26 U.S.C.
The IRS denied the deduction.
The IRS argued that only ordinary
and necessary expenses are deductible
The Tax Court affirmed.
The Appellate Court affirmed.
The US Supreme Court affirmed
and denied the deduction.
The US Supreme Court found
that expenses incurred in a friendly takeover do not qualify for tax
deduction as ordinary and necessary
expenses under §162(a).
The Court found that
expenses incurred the purpose of changing the corporate structure for the
benefit of future operations is not an ordinary and necessary business expense. Instead, those costs are
more like a capital expenditure.
A capital expenditure is like when you buy a new building. That is
not immediately deductible as a business expense, but instead must be written off over several
years as depreciation (see
26 U.S.C. §263(a)).
INDOPCO argued that they
didn't acquire anything, so how could it be a capital expenditure? However the Court found that the purpose of
the expenditures was to benefit the company for years to come, not to
simply continue their present level of business. So even though no
specific asset was acquired in the transaction, it was still more like a capital
expenditure than a business expense.