INDOPCO, Inc. v. Commissioner
503 U.S. 79 (1992)

  • 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 transaction.
    • 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. 162(a).
  • The IRS denied the deduction. INDOPCO appealed.
    • The IRS argued that only ordinary and necessary expenses are deductible under 162(a).
  • The Tax Court affirmed. INDOPCO appealed.
  • The Appellate Court affirmed. INDOPCO appealed.
  • 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.