## Facts

- Majority shareholders of an Iowa publishing corporation voted to extend the corporate charter in perpetuity; a minority shareholder dissented.
- Iowa law required the shareholders voting for renewal to purchase the dissenting shareholder’s stock at its “real value.”
- The parties could not agree on value, so the majority shareholders brought a state-court appraisal action to set the price.
- The Iowa courts fixed the value; the majority shareholders purchased the minority shares at the court-determined price.
- The taxpayers incurred over $25,000 in attorneys’, accountants’, and appraisers’ fees connected to the appraisal litigation and claimed deductions under I.R.C. § 212.
- The Commissioner disallowed the deductions as capital expenditures incurred to acquire stock; the Tax Court and the Eighth Circuit affirmed.

## Issues

1. Whether fees for attorneys, accountants, and appraisers incurred in state-law appraisal litigation required to complete a stock purchase are deductible under I.R.C. § 212 as ordinary and necessary expenses.
2. Whether such fees must be capitalized as part of the cost basis of the acquired stock.
3. Whether characterization of litigation expenses turns on the taxpayer’s “primary purpose” or the “origin of the claim” litigated.

## Decision

- The Supreme Court affirmed the judgment for the Commissioner.
- The appraisal-litigation expenses were required to be capitalized as part of the cost of acquiring the dissenting shareholder’s stock.
- The Court applied the “origin of the claim” standard and rejected a “primary purpose” test.
- The appraisal proceeding was treated as a state-law substitute for negotiating the purchase price; therefore, the claim’s origin was the acquisition of a capital asset.

## Legal Principles

- Litigation costs are characterized for federal income tax purposes by the origin and nature of the claim, not by the taxpayer’s asserted motive for litigating.
- If the origin of the claim lies in acquiring, defending, or perfecting title to a capital asset, related expenses are capital expenditures and are not currently deductible.
- Appraisal proceedings that function to determine the purchase price in a compelled stock acquisition produce capitalizable costs that increase basis in the acquired shares.

## Conclusion

Because the appraisal litigation arose directly from a state-law obligation to buy dissenting shareholders’ stock and served only to set the acquisition price, the related professional fees were capital expenditures that had to be added to the stock’s basis rather than deducted under I.R.C. § 212.


Woodward v. Commissioner, 397 U.S. 572 (1970)