Hastings, Senior Circuit Judge, and Kiley and Kerner, Circuit Judges.
HASTINGS, Senior Circuit Judge.
The United States appeals from a district court decision in a refund suit brought by taxpayer Hilton Hotels Corporation (Hilton). The sole issue raised by this appeal*fn1 is whether the district court erred, as the Government contends, in holding that expenditures incurred by Hilton in connection with an appraisal proceeding to value the stock of dissenting shareholders in a merged corporation are currently deductible ordinary and necessary business expenses. The Government urges that such expenditures are nondeductible capital outlays.
The relevant facts were stipulated by the parties and adopted by the lower court. They may be summarized in the following manner.
On September 2, 1953, Hilton owned 325,370.5 of the 366,040.75 issued shares of the Hotel Waldorf-Astoria Corporation (Waldorf); the remaining 40,670.25 shares of Waldorf were owned by shareholders other than Hilton or Waldorf.
Contemplating a merger, Hilton retained Standard Research Consultants, Inc. (Standard) to prepare a merger study to determine a fair basis of exchange of Hilton stock for the remaining 40,670.25 shares of Waldorf. Standard concluded that a fair exchange ratio would be 1.25 shares of Hilton common stock for each remaining share of Waldorf stock.
On November 12, 1953, Hilton and Waldorf entered into an agreement of merger which provided that Hilton would be the surviving corporation and that 1.25 of Hilton's shares would be offered for each of the remaining 40,670.25 shares of Waldorf.
The holders of over two-thirds of the stock of Hilton and Waldorf voted in favor of the merger on December 28 and 29, 1953. Prior to this vote of approval, however, the holders of 20,221 shares of Waldorf filed with Waldorf, pursuant to § 91 of the New York Stock Corporation Law,*fn2 McKinney's Consol.Laws, c. 59, their written objections to the proposed merger and demanded payment for their stock.
On December 31, 1953, the merger agreement and the certificate of consolidation were filed and recorded with the Secretary of State of New York in accordance with the relevant provisions of § 91. Thereafter and pursuant to § 21, Subdivision 1, of the New York Stock Corporation Law,*fn3 Hilton offered to the objecting holders of the Waldorf stock a payment of $24.54 for each share of the remaining 20,221 shares. The Hilton offer was rejected, and on February 11, 1954, pursuant to § 21,*fn4 the dissenting holders commenced appraisal proceedings in the Supreme Court for the County of New York to determine the value of their shares of Waldorf. These proceedings continued until June 14, 1955, when the New York court approved the parties' settlement of the valuation dispute and ordered the appraisal proceedings terminated.
This suit presents the problem of characterizing for the purpose of taxation the nature of the expenses incurred by Hilton in connection with the appraisal proceeding.
It is axiomatic that if the Hilton expenditures are deemed to have been incurred, as the Government urges, in corporate reorganization or recapitalization they are not deductible. General Bancshares Corp. v. C.I.R., 8 Cir., 326 F.2d 712, 715, cert. denied, 379 U.S. 832, 85 S. Ct. 62, 13 L. Ed. 2d 40 (1964) and cases cited therein. It is equally true, however, that if such expenditures are held to be ordinary and necessary business expenses they are deductible. Int.Rev.Code of 1954, § 162.
The line of demarcation between the deductible and the nondeductible expenditure is frequently difficult to perceive because the "* * * decisive distinctions [between the two] are those of degree and not of kind." Welch v. Helvering, 290 U.S. 111, 114, 54 S. Ct. 8, 9, 78 L. Ed. 212 (1933). The applicable rule generally held to govern in such situations is the primary purpose test. Rassenfoss v. Commissioner of Internal Revenue, 7 Cir., 158 F.2d 764, 767 (1946); Manufacturers Hanover Trust Co. v. United States, 160 Ct.Cl. 582, 312 F.2d 785, 789, cert. denied, 375 U.S. 880, 84 S. Ct. 150, 11 L. Ed. 2d 111 (1963).
In the instant case, we are satisfied the district court appropriately considered and applied the primary purpose doctrine and affirm its decision which held that the Hilton expenditures, arising out of the appaisal proceedings, were deductible as ordinary and necessary business expenses. Hilton Hotels v. United States, D.C.N.D.Ill., 285 F. Supp. 617 (1968).
In reaching its decision, the district court found that the Hilton-Waldorf merger became effective under New York law upon filing the Certificate of Consolidation with the Secretary of State.*fn5 It further found under New York law that the objecting Waldorf holders had no interest other than to receive payment of the fair value of their stock*fn6 and that the sole purpose of the appraisal proceedings was to determine the fair value of the objecting holders' shares in Waldorf. As a result of such findings, the court concluded that the expenses experienced by Hilton in ...