United States v. Hilton Hotels Corp., 397 U.S. 580 (1970)

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

Syllabus

Respondent corporation (Hilton), which owned close to 90% of the stock of Waldorf, determined to merge the two companies. The merger was formally opposed by the holders of about 6% of Waldorf shares, title to whose stock under New York law thereupon passed to Waldorf, the dissenters becoming Waldorf’s creditors for its fair value. On December 28, 1953, Hilton voted its Waldorf stock approving the merger, which was consummated in accordance with New York law on December 31. The dissenting Waldorf shareowners thereafter rejected a Hilton cash offer and began appraisal proceedings in the New York courts. Hilton retained a consultant to value the Waldorf stock as of the day before the Waldorf shareholders’ merger vote, and also obtained legal and other services in connection with the appraisal litigation, which ultimately ended in a settlement. Hilton deducted the consulting and other professional fees on its income tax return as ordinary and necessary business expenses, which the Commissioner of Internal Revenue disallowed on the ground that the payments were capital expenditures. Hilton paid the tax and brought this refund suit in District Court, which held that the payments related to the appraisal proceeding were deductible. The Court of Appeals, applying the "primary purpose" test, affirmed, noting that the proceeding was not necessary to effect the merger, but that its paramount purpose was to determine the fair value of the dissenting shareholders’ share in Waldorf.

Held:

1. Litigation costs arising out of the acquisition of a capital asset are capital expenses whether or not the taxpayer incurred them for the purpose of defending or perfecting title to property, Woodward v. Commissioner, ante, p. 572, and the functional nature of the appraisal remedy as a forced purchase of the dissenters’ stock is the same, regardless of whether title passed before or after the price of their stock was determined. Pp. 583-584.

2. The debt that Hilton inherited from Waldorf of paying the dissenter for their share retained its capital character through the merger, as did the expenditure for fixing the amount of that debt. Pp. 584-585.

410 F.2d 194, reversed and remanded.