DocketNumber: Docket No. 7497-70
Citation Numbers: 1972 U.S. Tax Ct. LEXIS 5, 59 T.C. 469
Judges: Tannenwald
Filed Date: 12/27/1972
Status: Precedential
Modified Date: 1/13/2023
*5
P corporation was formed in the course of the consolidation of several existing corporations. It incurred legal fees and related expenses in connection with an appraisal proceeding brought against it by shareholders of the consolidating corporations who dissented from the consolidation.
*6 *469 OPINION
Respondent determined a deficiency of $ 138,024.29 in petitioner's income tax for the year ending November 29, 1964. The question presented is whether a corporation, created in a consolidation, is entitled to amortize as organizational expenditures under
*470 All of the facts have been stipulated. The stipulation of facts, together with the exhibits attached thereto, is incorporated*7 herein by this reference.
The petitioner had its principal place of business in New York, N.Y., at the time it filed the petition herein. It is the successor by merger in 1967 to Pacolet Industries, Inc. (hereinafter called Pacolet).
Pacolet was organized as a South Carolina corporation on December 3, 1962, in the course of implementing an agreement to consolidate five existing South Carolina corporations. Some of the stockholders of the consolidating corporations dissented from the consolidation and did not receive any stock of Pacolet. Under sections 12-459 and 12-460 of the South Carolina Code (1962), Pacolet was required to pay such dissenting stockholders the value of their stock in the consolidating corporations as of the date of consolidation. An appraisal proceeding was instituted by the dissenters against Pacolet and was settled in July 1964. Pursuant to the settlement, Pacolet paid the dissenters the appraised value of their stock in the consolidating corporations and interest thereon as required by South Carolina law.
During its fiscal year 1964, Pacolet also paid the dissenters $ 167,035.44 as their attorneys' fees and other costs of the proceeding and $ 7,862.52 *8 to the court-appointed appraisers as their fees and expenses. Other costs incurred by Pacolet in connection with the suit included the fees it paid its own attorneys, appraisers, witnesses, and the court reporter in the amount of $ 14,223.51 in fiscal year 1963 and $ 194,155.51 in fiscal year 1964.
Pacolet began business in December 1962. In a statement attached to its Federal income tax return for the taxable year beginning December 3, 1962, and ending December 1, 1963, Pacolet elected under
On its income tax return for the taxable year beginning December 2, 1963, and ending November 29, 1964, Pacolet claimed as a current deduction the $ 369,053.77 of costs it incurred during that fiscal year in connection with the appraisal proceeding. In computing its net operating loss carryover from the taxable year 1963 and its net operating loss deduction for*9 the taxable year 1964, Pacolet claimed as a current deduction in taxable year 1963 the $ 14,223.51 of costs which it had treated on its previous year's return as organizational expenditures under
*471 Respondent determined that the $ 14,223.51 and $ 369,053.77 amounts were not allowable as current deductions for the taxable years 1963 and 1964 and further determined that such amounts were capital expenditures which did not qualify for amortization under
Petitioner having conceded that the amounts in question are not allowable as current deductions, 2 the sole issue before us is whether they are amortizable as "organizational expenditures" under
*10 Initially, we note that petitioner seeks to prevail on the ground that respondent in his answer conceded its right to amortize the expenditures in question. We are satisfied from our examination of respondent's answer, in the context of the pleadings as a whole, that no such concession occurred.
Organizational expenditures must be incurred "incident to the creation of the corporation."
*11 While we agree with petitioner's articulation of the standards to be applied, we do not agree with the conclusion he asks us to reach. The *472 critical question is "but for" what? In
*12 The Supreme Court put the matter succinctly when it stated in
The standard here pronounced may, like any standard, present borderline cases, in which it is difficult to determine whether the origin of particular litigation lies in the process of acquisition. n7 This is not such a borderline case. Here state law required taxpayers to "purchase" the stock owned by the dissenter. In the absence of agreement on the price at which the purchase was to be made, litigation was required to fix the price. Where property is acquired by purchase, nothing is more clearly part of the process of acquisition than the establishment of a purchase price. n8 Thus the expenses incurred in that litigation were properly treated as part of the cost of the stock that the taxpayers acquired. [Footnotes omitted.]
We think this approach dictates a decision for respondent herein. Under
It is clear to us that the costs of the appraisal proceedings were notmade to bring Pacolet into being. It can not be said that the consolidation would not have taken place "but for" the creation of *473 Pacolet. On the contrary, "but for" the decision to consolidate, Pacolet would not have been created. Thus, as in
In reaching our conclusion, we recognize that the fact that the consolidation constituted a reorganization under section 368(a)(1)(A) does not necessarily preclude the amortization of expenses connected therewith provided they are "directly incident to the creation of a corporation."
*15 Nor can petitioner derive any sustenance from the facts that the assets of the consolidated corporations vested in Pacolet and the rights of the dissenters
Since we have found that the expenditures in question do not qualify as "organizational expenditures" under
1. Unless otherwise indicated, statutory references are to the Internal Revenue Code of 1954, as amended.↩
2.
3.
ORGANIZATIONAL EXPENDITURES.
(a) Election to Amortize. -- The organizational expenditures of a corporation may, at the election of the corporation (made in accordance with regulations prescribed by the Secretary or his delegate), be treated as deferred expenses. In computing taxable income, such deferred expenses shall be allowed as a deduction ratably over such period of not less than 60 months as may be selected by the corporation (beginning with the month in which the corporation begins business).
(b) Organizational Expenditures Defined. -- The term "organizational expenditures" means any expenditure which -- (1) is incident to the creation of the corporation; (2) is chargeable to capital account; and (3) is of a character which, if expended incident to the creation of a corporation having a limited life, would be amortizable over such life.
(c) Time For and Scope of Election. -- The election provided by subsection (a) may be made for any taxable year beginning after December 31, 1953, but only if made not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof). The period so elected shall be adhered to in computing the taxable income of the corporation for the taxable year for which the election is made and all subsequent taxable years. The election shall apply only with respect to expenditures paid or incurred on or after the date of enactment of this title.↩
4.
5. In
6. See