United States District Court, Northern District of Illinois
January 24, 1968
UNITED STATES OF AMERICA.
The opinion of the court was delivered by: Lynch, District Judge.
MEMORANDUM OF DECISION
One of the two issues in this case has been settled.
Remaining for decision in this case is the plaintiff's claim
for deductions for certain legal services accrued in 1954,
1955, and 1956.
The facts concerning the disputed issue are contained in the
parties' second stipulation and are adopted by this court as
its findings of fact.
It is clear to this court — and taxpayer now concedes in its
brief — that the taxpayer is not entitled to a deduction for
that portion of the 1956 payment to Standard Research which was
for services by Standard Research in determining a fair basis
of merger between Waldorf and Hilton. (Paragraphs 14 and 15 of
the second stipulation). Expenses incurred in reorganizing or
recapitalizing a corporation are not deductible as ordinary and
necessary business expenses. General Bancshares Corp. v.
C.I.R., 326 F.2d 712 (8th Cir., 1964); Gravois Planing Mill
Company v. C.I.R., 299 F.2d 199 (8th Cir., 1962);
Missouri-Kansas Pipe Line Co. v. C.I.R., 148 F.2d 460, 462 (3
The only issue therefore is whether those expenses incurred
by the taxpayer in connection with the appraisal proceeding
In reaching a decision the court must consider the primary
purpose of the expenditures involved, and deductibility must
not be denied merely because a question of title to property
is incidentally involved. Rassenfoss v. C.I.R., 158 F.2d 764
(7th Cir., 1966).
Under Section 91(9) of the New York Stock Corporation Law,
McKinney's Consol. Laws, c. 59, the merger became effective
when the Certificate of Consolidation
was filed in the office of the Secretary of State. Section 91
provides that the objecting shareholders shall have the right
to have their stock appraised and paid for in the manner
provided, and subject to the conditions imposed by Section 21
of the New York Stock Corporation Law.
Section 21(6) provides:
"Any stockholder demanding payment for his stock
shall have no right to receive any dividends or
distributions payable to holders of such stock of
record after the close of business on the day
next preceding the date of the stockholders' vote
in favor of the action to which such objection
was made, and upon such vote shall cease to have
any other rights as a stockholder of the
corporation in respect to such stock, except the
right to receive payment for the value thereof as
in this section provided * * *."
Section 21(7) provides that if the objecting stockholder
demands payment as a result of action taken pursuant to
Section 91, then:
"* * * the shares or other securities of the
resulting or surviving corporation into which the
shares of the objecting stockholder would have
been converted had no objection been made shall,
unless the certificate of merger or consolidation
shall otherwise provide, be deemed to have been
duly issued in accordance with the terms of such
certificate and reacquired by the resulting or
surviving corporation, and may be held or
disposed of by it free of any preemptive rights
This court agrees with the reasoning expressed in Smith
Hotel Enterprises, Inc. v. Nelson, 236 F. Supp. 303
Wisconsin, 1964) wherein Judge Grubb held, in an analogous
situation, that the taxpayer was entitled to a deduction. In
that case the corporation received an offer to purchase
substantially all of its assets. At a stockholders' meeting,
two of the three stockholders voted to accept the offer, but
the third dissented and demanded payment from the corporation
of the fair value of her shares pursuant to the Wisconsin
statutes setting out the rights of dissenting shareholders in
the event of the sale of all or substantially all of the
property and assets of a corporation. The fair value of the
shares was determined by the Circuit Court of Milwaukee, and
the corporation deducted its legal and other expenses incurred
in connection with the litigation. The District Director of
Internal Revenue disallowed the deduction on the grounds that
the expenses incurred in the litigation were capital
expenditures made for the acquisition of the shares owned by
the dissenting shareholder.
The United States District Court in the Smith case held the
expenses deductible as ordinary and necessary business
expenses. Judge Grubb noted that under the Wisconsin law the
corporation was required to purchase the stock of the
dissenting shareholder and that the only purpose of the action
in Circuit Court was to determine the fair value of the
The opinion in the Smith case stated:
"* * * it appears that the primary purpose of the
state litigation in the instant case was a
determination of the fair value of the shares,
and the involvement of title was incidental. The
deduction made by the taxpayer was proper as an
ordinary and necessary business expense."
Under the New York law the objecting stockholders in the
case before this court had no interest other than to receive
payment for their stock. The only purpose of the appraisal
proceeding was to determine the price the dissenting
stockholders were to be paid. The merger was already effective
and the expenses incurred by the corporation in the appraisal
proceeding were not reorganization expenses. It would not be
proper to deny deductibility on the basis that the appraisal
expenditures might have been foreseen as one of the
consequences of the merger, any more than it would be proper
to deny deductibility to expenses
incurred in changing Hilton's advertising brochures to include
the Waldorf-Astoria Hotel.
For the reasons stated herein the court is of the opinion
that the plaintiff should prevail on the issue now being
The court notes that there is some dispute remaining between
the parties as to what portion of the $17,500 payment to
Standard Research was in connection with services relating to
the fair basis of the merger, and what portion was in
connection with services relating to the appraisal proceeding.
The former expenses are not deductible; the latter are.
As stated in the second stipulation, the parties will
compute the amount of any judgment which may be due. When the
parties have reached agreement an appropriate judgment order
should be submitted to the court. If the parties are unable to
agree as to what portion of the payment to Standard Research
is deductible, the issue may then be submitted to the court
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