## Facts

- National Starch and Chemical Corp. (later INDOPCO, Inc.) became the target of a friendly acquisition by Unilever in 1977–1978.
- Company counsel advised the board that Delaware fiduciary duties required ensuring fairness to shareholders, prompting retention of Morgan Stanley to evaluate shares, issue a fairness opinion, and assist in takeover-related matters.
- Morgan Stanley billed about $2.2 million plus expenses; outside counsel billed about $505,000; the corporation also incurred other acquisition-related costs.
- The acquisition closed in 1978, converting National Starch from an independent public corporation into a wholly owned Unilever subsidiary.
- On its 1978 return, INDOPCO deducted the investment banking fee and later sought to deduct the related legal and other costs as “ordinary and necessary” business expenses under I.R.C. § 162(a).
- The Commissioner disallowed the deductions, treating the expenditures as capital under I.R.C. § 263; the Tax Court and Third Circuit agreed.

## Issues

1. Whether a target corporation’s investment banking, legal, and related costs incurred in a friendly takeover are currently deductible as “ordinary and necessary” business expenses under I.R.C. § 162(a).
2. Whether capitalization under I.R.C. § 263 requires the creation or enhancement of a “separate and distinct” asset, or may rest on significant benefits extending beyond the tax year.

## Decision

- The Supreme Court unanimously affirmed the Third Circuit.
- The Court held the takeover-related professional fees and related costs were nondeductible capital expenditures under § 263, not deductible expenses under § 162(a).
- The Court rejected the view that capitalization requires creation or enhancement of a separate and distinct asset; significant long-term benefits can require capitalization.

## Legal Principles

- Deductions are exceptions to capitalization and are allowed only when clearly authorized; the taxpayer bears the burden of proving entitlement to a deduction.
- Section 162(a) must be applied in light of § 263, which bars current deductions for capital expenditures; classification turns on the duration and extent of expected benefits.
- Creating or enhancing a separate and distinct asset can be sufficient for capitalization, but it is not a necessary condition.
- Benefits extending beyond the year of expenditure are an important indicator of capital character; more than incidental future benefits can require capitalization.
- Transaction costs that facilitate corporate structural changes yielding lasting advantages are generally capital in nature.

## Conclusion

The Court held that a target corporation’s professional and related costs incurred in a friendly acquisition must be capitalized when the transaction yields significant benefits beyond the taxable year, even if the expenditures do not create or enhance a separately identifiable asset.


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