Woodward v. Commissioner, 397 U.S. 572 (1970)

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

Syllabus

Petitioner taxpayers, majority stockholders of an Iowa corporation, voted for perpetual extension of the corporate charter, and, under Iowa law, became obliged to purchase at its "real value" the stock of a minority shareholder who had voted against the extension. On the parties’ failure to agree on the "real value" of the minority interest, petitioners brought an appraisal action in state court, and thereafter bought the minority stock at a value fixed by the court. In their federal income tax returns, petitioners claimed deductions as "ordinary . . . expenses paid . . . for the management, conservation, or maintenance of property held for the production of income" for attorneys’, accountants’, and appraisers’ fees in connection with the appraisal litigation. The Commissioner of Internal Revenue disallowed the deductions "because the fees represent capital expenditures in connection with the acquisition of capital stock of a corporation," a determination sustained by the Tax Court and the Court of Appeals. Petitioners contend that current deductibility is justified on the ground that the "primary purpose" of the litigation was not for defense or perfection of title (a nondeductible capital expenditure) but to determine the stock’s value.

Held: The expenses incurred by petitioners must be treated as part of their cost in acquiring the stock, rather than as ordinary expenses, since the appraisal proceeding was merely the substitute provided by state law for the process of negotiation to fix the price at which the stock was to be purchased. The appropriate standard here is the origin of the claim litigated, rather than the taxpayers’ "primary purpose" in incurring the appraisal litigation expenses. Pp. 575-579.

410 F.2d 313, affirmed.