The impact of INDOPCO on subsequent rulings.

• Author: Wise, Spence L.
• Position: Deducting friendly takeover expenses

In its 1992 INDOPCO decision, the Supreme Court ruled that investment banking and legal fees paid by a target corporation in a friendly takeover were to be treated as nondeductible capital expenditures and not as currently deductible business expenses. Perhaps more significant than the narrow ruling relating to friendly takeovers was the direction the Court took in deciding INDOPCO. Rather than developing a general test to solve the "capital versus deductible expense" problem, it adopted a facts-and-circumstances approach. The Court determined that the investment banking and legal fees would provide the target corporation with significant benefits beyond the current tax year and thus were capital in nature. It rejected the argument that a separate and distinct asset must be created by the expenditures in order to require capitalization. The Court further emphasized that a tax deduction is a matter of legislative grace and is an exception to the norm of capitalization.

Many commentators have questioned whether INDOPCO would lead to the required capitalization of common expenditures that arguably have at least some general future benefit. These categories would include advertising, business expansion, employee training, recapitalization, reorganization and other similar expenditures. It has been over a year now since INDOPCO was decided; in that time the INDOPCO decision has influenced many rulings and court decisions.

Letter Ruling 9237006

In Letter Ruling (TAM) 9237006, the IRS reached a conclusion that allowed the current deductibility of expenses. A public utility was building a nuclear facility. The utility was required to hire accountants to conduct an audit to determine if the costs were reasonable before requesting rate increases that reflected the cost of construction. On examination, the Service disallowed the deduction of the cost of the audit on the grounds that the audit allowed for future rate increases that would extend beyond the current tax year.

The IRS National Office, however, did not see the audit as being responsible for the rate increases. It contended that the cost of the nuclear facility itself was the basis for rate increases (rather than the audit) and the cost of the nuclear facility had been capitalized.

Letter Ruling 9240004

In Letter Ruling (TAM) 9240004, a taxpayer's plant contained processing and manufacturing equipment insulated with asbestos. There were two alternatives that would have allowed the taxpayer...