LOCATION: 17th Judicial Circuit Green County Alabama Jury Commission
DOCKET NO.: 412
DECIDED BY: Burger Court (1969-1970)
LOWER COURT: United States Court of Appeals for the Eighth Circuit
CITATION: 397 US 572 (1970)
ARGUED: Feb 26, 1970
DECIDED: Apr 20, 1970
Facts of the case
Media for Woodward v. Commissioner
Audio Transcription for Oral Argument - February 26, 1970 in Woodward v. Commissioner
Warren E. Burger:
Number 412, Woodward against the Commissioner of Internal Revenue.
Mr. Cooney you may proceed whenever you're ready.
Donald P. Cooney:
Thank you, Your Honor.
This case is here on certiorari to the Eighth Circuit.
It is an income tax case involving the question of whether the cost of a stock appraisal proceeding held in connection with the extension of a corporation's charter are ordinary and necessary expenses incurred for the production -- excuse me, ordinary and necessary expenses incurred for the management of property held for the production of income and are thus deductible, or in the alternative whether they are capital expenditures paid relevant to the acquisition of title to corporate stock and thus nondeductible.
In other words, this Court is asked to characterize for income tax purposes money spent by the taxpayers as majority shareholders for professionals services rendered in a litigation arising under a state appraisal statute wherein the only issue in the equitable action was the real value and in some states its fair value of the dissenting shareholders stock.
The character of this deduction so far as the taxpayers maintain is to be determine under Section 212 (2) of the present code.
This is a successor to the so-called nonbusiness deduction section that was added by the 1942 Revenue Act which this Court in 1965 was called upon to interpret in the Gilmore case.
Mechanical, Section 212 (2) deduction would have been taken on last year's income tax return that would be the one for 1968 on page 2 of 1040 under itemized deductions under this Section entitled Miscellaneous.
This year under the new forms it would be a deduction on the schedule entitled Itemized Deductions under Miscellaneous Deductions.
In this particular instance the taxpayer are majority shareholders.
The majority shareholders are people the petitioners if this are otherwise in the companion case.
The factual situation involved herein was precipitated and it is completely controlled by the Iowa renewal statute.
If you want wish to refer to it like at this particular time if you refer turn into page 23 of the appendix there are excerpts of the opinion of the Iowa Supreme Court and the last paragraph on that particular page contains the perhaps of the statute.
This is a little bit different in most case.
This is not by way of the apology but Iowa's corporate law link to something to be desired relative to speed in adopting changes.
What would happen in Iowa if the stockholders did not purchase the stock to the dissenters?
Donald P. Cooney:
They -- that is the State of Iowa has adopted the partnership theory of the corporation.
This is a corporation for a term of years -- a term of 20 years at the end of 20 years it would have been dissolved because this is a contract.
As I understand it, it goes back to the case that Dartmouth College case versus Woodward and the case is subsequent thereto that hold that it is the corporate charter is a contract between the stockholders and between the corporation and the state, and between the state and the stockholders, a three-way type contract.
This is important because at that particular time if the dissenting shareholder had not purchased the time had not -- I beg your pardon, under the common law if this statute wasn't here because of the unanimity of consent rule.
In other words, this was a contract based upon a partnership law and everybody had to agree to terminate the corporation because she had entered the dissenting shareholder.
He had entered the agreement, the contract, the business venture to go for 20 years and it could not be stock unless there was some reason relative to it was better -- it would be better for the investment to terminate it.
Then there is law that would indicate that you could then but she had agreed, everybody had agreed to go to 20 years and this is what the Iowa statute has been for me is initially from 1851 until the middle of the decade of 40's but that was just immediately prior to the last renewal for 20 years of this corporation.
The context this Iowa law the taxpayers are residents of Iowa.
The corporation happens to be a newspaper corporation, that once a radio station.
The taxpayers control approximately 70% of the shares of stock.
The dissenter owned approximately 30%.
The evidence shows that there hadn't been an offer or a sale of this stock at least to 1950 that is the evidence in the valuation case, the petitioner of which in the Supreme Court decision are included in the appendix.
So the corporate charter was due to run out in December of 1961 having been renewed for a term of years in December 1941.