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Indopco, Inc. v. Comm'r

Supreme Court of the United States

November 12, 1991, Argued ; February 26, 1992, Decided

No. 90-1278


 [*80]  [***231]  [**1041]    JUSTICE BLACKMUN delivered the opinion of the Court.

 In this case we must decide whether certain professional [****4]  expenses incurred by a target corporation in the course of a friendly takeover are deductible by that corporation as "ordinary and necessary" business expenses under § 162(a) of the Internal Revenue Code.

Most of the relevant facts are stipulated. See App. 12, 149. Petitioner INDOPCO, Inc., formerly named National Starch and Chemical Corporation and hereinafter referred to as National Starch, is a Delaware corporation that manufactures and sells adhesives, starches, and specialty chemical products. In October 1977, representatives of Unilever United States, Inc., also a Delaware corporation (Unilever), 2 expressed interest in acquiring National Starch, which was one of its suppliers, through a friendly transaction. National Starch at the time had outstanding over 6,563,000 common shares held by approximately 3,700 shareholders. The stock was listed on the New York Stock Exchange. Frank and Anna Greenwall were the corporation's largest shareholders and owned approximately 14.5% of the common. The Greenwalls, getting along in years and concerned about  [*81]  their estate plans, indicated that they would transfer their shares to Unilever only if a transaction [****5]  tax free for them could be arranged.

Lawyers representing both sides devised a "reverse subsidiary cash merger" that they felt would satisfy the Greenwalls' concerns. Two new entities would be created -- National Starch and Chemical Holding Corp. (Holding), a subsidiary of Unilever, and NSC Merger, Inc., a subsidiary of Holding that would have only a transitory existence. In an exchange specifically designed to be tax free  [***232]  under § 351 of the Internal Revenue Code, 26 U. S. C. § 351, Holding would exchange one share of its nonvoting preferred stock for each share of National Starch common that it received from National Starch shareholders. Any National Starch common that was not so exchanged would be converted into cash in a merger of NSC Merger, Inc., into National Starch.

In November 1977, National Starch's directors were formally advised [****6]  of Unilever's interest and the proposed transaction. At that time, Debevoise, Plimpton, Lyons & Gates, National Starch's counsel, told the directors that under Delaware law they had a fiduciary duty to ensure that the proposed transaction would be fair to the shareholders. National Starch thereupon engaged the investment banking firm of Morgan Stanley & Co., Inc., to evaluate its shares, to render a fairness opinion, and generally to assist in the event of the emergence of a hostile tender offer.

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503 U.S. 79 *; 112 S. Ct. 1039 **; 117 L. Ed. 2d 226 ***; 1992 U.S. LEXIS 1374 ****; 60 U.S.L.W. 4173; 92-1 U.S. Tax Cas. (CCH) P50,113; 69 A.F.T.R.2d (RIA) 92-694; 92 Cal. Daily Op. Service 1598; 92 Daily Journal DAR 2556; 6 Fla. L. Weekly Fed. S 31

INDOPCO, Inc., Petitioner v. Commissioner of Internal Revenue.


Disposition: 918 F.2d 426, affirmed.


Starch, deductible, capital expenditures, Savings, expenditures, expenses, capitalization, business expense, shareholders, enhance, merger, stock, Chemical, benefits, incurred expenses, acquisition, subsidiary, shares, necessary expenses, taxable year

Tax Law, Business Expenses, Disallowed Deductions, Capital Expenditures, Federal Income Tax Computation, General Overview, Amortization, Depletion & Depreciation, Entertainment & Trade Expenses, Individuals, Business Deductions, Constitutional Law, Congressional Duties & Powers, Spending & Taxation, Evidence, Burdens of Proof, Governments, Federal Government, US Congress