Respondent corporation (Hilton), which owned close to 90% of the
stock of Waldorf, determined to merge the two companies. The merger
was formally opposed by the holders of about 6% of Waldorf shares,
title to whose stock under New York law thereupon passed to
Waldorf, the dissenters becoming Waldorf's creditors for its fair
value. On December 28, 1953, Hilton voted its Waldorf stock
approving the merger, which was consummated in accordance with New
York law on December 31. The dissenting Waldorf shareowners
thereafter rejected a Hilton cash offer and began appraisal
proceedings in the New York courts. Hilton retained a consultant to
value the Waldorf stock as of the day before the Waldorf
shareholders' merger vote, and also obtained legal and other
services in connection with the appraisal litigation, which
ultimately ended in a settlement. Hilton deducted the consulting
and other professional fees on its income tax return as ordinary
and necessary business expenses, which the Commissioner of Internal
Revenue disallowed on the ground that the payments were capital
expenditures. Hilton paid the tax and brought this refund suit in
District Court, which held that the payments related to the
appraisal proceeding were deductible. The Court of Appeals,
applying the "primary purpose" test, affirmed, noting that the
proceeding was not necessary to effect the merger, but that its
paramount purpose was to determine the fair value of the dissenting
shareholders' share in Waldorf.
Held:
1. Litigation costs arising out of the acquisition of a capital
asset are capital expenses whether or not the taxpayer incurred
them for the purpose of defending or perfecting title to property,
Woodward v. Commissioner, ante, p.
397 U. S. 572, and
the functional nature of the appraisal remedy as a forced purchase
of the dissenters' stock is the same, regardless of whether title
passed before or after the price of their stock was determined. Pp.
397 U. S.
583-584.
Page 397 U. S. 581
2. The debt that Hilton inherited from Waldorf of paying the
dissenter for their share retained its capital character through
the merger, as did the expenditure for fixing the amount of that
debt. Pp.
397 U. S.
584-585.
410 F.2d 194, reversed and remanded.
MR. JUSTICE MARSHALL delivered the opinion of the Court.
This is the companion case to
Woodward v. Commissioner,
ante, p.
397 U. S. 572, and
presents a similar question involving the tax treatment of
appraisal litigation expenses.
In 1953, taxpayer Hilton Hotels Corporation, which owned close
to 90% of the common shares of the Hotel Waldorf-Astoria
Corporation, determined to merge the two companies. Hilton retained
a consulting firm to prepare a merger study to determine a fair
rate of exchange between Hilton stock and Waldorf stock. After this
study was completed, on November 12, 1953, Hilton and Waldorf
entered into a merger agreement under which Hilton would be the
surviving corporation, and 1.25 shares of Hilton stock would be
offered for each outstanding Waldorf share not already held by
Hilton. On December 28, Hilton voted its Waldorf stock to approve
the merger by the requisite majority. Prior to the vote, the
holders of about 6% of the Waldorf shares had filed with Waldorf
their written objections
Page 397 U. S. 582
to the merger, and demanded payment for their stock, pursuant to
§ 91 of the New York Stock Corporation Law.
On December 31, 1953, Hilton filed the merger agreement and the
certificate of consolidation with the Secretary of State of New
York, thus consummating the merger under New York law. On January
7, 1954, Hilton made a cash offer to the dissenting Waldorf
shareholders, which they rejected. The dissenters then began
appraisal proceedings in the New York courts, pursuant to § 21
of the New York Stock Corporation Law.
Between January and May, 1954, Hilton asked its consulting firm
to value the Waldorf stock as of December 27, 1953, the day prior
to the Waldorf shareholders' vote approving the merger. Hilton also
obtained the services of lawyers, and other professional services,
in connection with the appraisal litigation. The appraisal
proceeding was finally terminated in June, 1955, when the state
court approved a settlement agreed to by the parties.
Hilton deducted the fees paid to the consulting firm, and the
cost of legal and other professional services arising out of the
appraisal proceeding, as ordinary and necessary business expenses
under § 162 of the Internal Revenue Code of 1954, 26 U.S.C.
§ 162. The Commissioner of Internal Revenue disallowed the
deduction on the ground that the payments were capital
expenditures. Hilton paid the tax and sued for a refund in the
District Court. In the course of that suit, Hilton conceded, and
the court held, that the payments to the consulting firm for the
pre-merger determination of fair value were a nondeductible capital
outlay. But the District Court held that the fees and costs related
to the post-merger appraisal proceeding itself were deductible.
285 F.
Supp. 617 (D.C.N.D.Ill.1968). The Court of Appeals
Page 397 U. S. 583
affirmed, 410 F.2d 194 (C.A. 7th Cir.), and we granted
certiorari, 396 U.S. 954 (1969). We reverse.
The Court of Appeals recognized that expenses of acquiring
capital assets are capital expenditures for tax purposes. However,
the court believed that the "primary purpose" test of
Rassenfoss v. Commissioner, 158 F.2d 764 (C.A. 7th
Cir.1946), should be applied to determine whether the appraisal
proceeding was sufficiently related to the merger or the stock
acquisition. Noting that
"the proceeding was not necessary to the consummation of the
merger, nor did it function primarily to permit the acquisition of
the objecting holders' shares,"
the court found that
"the paramount purpose of the appraisal proceeding was to
determine the fair value of the dissenting stockholders' shares in
Waldorf."
410 F.2d at 197.
As we held in
Woodward, supra, the expenses of
litigation that arise out of the acquisition of a capital asset are
capital expenses, quite apart from whether the taxpayer's purpose
in incurring them is the defense or perfection of title to
property. The chief distinction between this case and
Woodward is that, under New York law, title to the
dissenters' stock passed to Waldorf as soon as they formally
registered their dissent, placing them in the relationship of
creditors of the company for the fair value of the stock, [
Footnote 1] whereas, under Iowa law,
passage of title was delayed until after the price was settled in
the appraisal proceeding. [
Footnote
2]
Page 397 U. S. 584
This is a distinction without a difference. The functional
nature of the appraisal remedy as a forced purchase of the
dissenters' stock is the same whether title passes before or after
the price is determined. Determination and payment of a price is no
less an element of an acquisition by purchase than is the passage
of title to the property. In both
Woodward and this case,
the expenses were incurred in determining what that price should be
by litigation, rather than by negotiation. The whole process of
acquisition required both legal operations -- fixing the price, and
conveying title to the property -- and we cannot see why the order
in which those operations occurred under applicable state law
should make any difference in the characterization of the expenses
incurred for the particular federal tax purposes involved here.
Hilton also argues that the appraisal costs cannot be considered
as its own capital expenditures, since Waldorf acquired the shares
(on December 28) before the merger (on December 31). This argument
would carry too far. It is true that title to the dissenters' stock
passed to Waldorf before that corporation was merged into the
surviving corporation, Hilton. But the stock was never paid for by
Waldorf; rather, Hilton assumed all of Waldorf's debts under the
merger agreement, and finally paid for the stock after the
appraisal proceeding was settled. If Waldorf's acquisition of the
minority stock interest was not a capital transaction of Hilton's,
then Hilton's payment for the stock itself, as well as the
expenditures made in fixing that price, would lose its
Page 397 U. S. 585
character as a capital expenditure of Hilton's. But Hilton
concedes that the payment for the stock was a capital expenditure
on its part. The debts that Hilton inherited from Waldorf retained
their capital or ordinary character through the merger, and so did
the expenditures for fixing the amount of those debts.
In short, the distinctions urged between this case and
Woodward are not availing. The judgment of the Court of
Appeals is reversed, and the case is remanded to the District Court
with directions to dismiss the complaint.
It is so ordered.
[
Footnote 1]
Section 91, subd. 9, of the New York Stock Corporation Law
provides that a corporate consolidation becomes effective upon the
filing of the requisite certificate. Section 21, subd. 6, of the
same law provides that, as of the time of a merger vote, a
dissenting shareholder loses all right as such, except the right to
receive payment for the value of his shares.
[
Footnote 2]
Iowa Code § 491.25 (1966) provides that majority
shareholders voting for renewal
"shall have three years from the date such action for renewal
was taken in which to purchase and pay for the stock voting against
such renewal. . . ."
There is no intimation in the statute itself, nor in Iowa cases
construing it cited by petitioners in
Woodward, supra,
that dissenters lose any of their rights as shareholder, or that
title passes to the majority shareholders, prior to the actual
purchase of the dissenters' shares.
