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(1993); Hertz Corp. v. United States, 364 U.S. 122, 126 (1960);
Ellis Banking Corp. v. Commissioner, 688 F.2d 1376, 1379 (11th
Cir. 1982), affg. in part and remanding in part on an issue not
relevant herein T.C. Memo. 1981-123; Liddle v. Commissioner,
103 T.C. 285, 289 (1994), affd. 65 F.3d 329 (3d Cir. 1995); Simon
v. Commissioner, 103 T.C. 247, 253 (1994), affd. 68 F.3d 41 (2d
Cir. 1995).
In INDOPCO, Inc. v. Commissioner, supra, the Supreme Court
set forth its most recent elucidation on the subject of
capitalization. There, the taxpayer was a public corporation,
the two largest shareholders of which were approached in October
1977 about selling their stock in a friendly transaction. The
shareholders indicated that they would part with their stock if a
transaction was structured under which they could do so tax free.
A tax-free acquisition plan was formulated under which the
shareholders could transfer their stock to the acquirer. Shortly
thereafter, the taxpayer's board of directors retained an
investment banking firm to evaluate the formal offer for the
stock, render a fairness opinion, and generally assist in the
event of the emergence of a hostile tender offer. The
transaction was consummated in August 1978.
The Commissioner determined that section 162(a) did not let
the taxpayer deduct the direct costs that it incurred to
facilitate the transaction; namely: (1) Investment banking fees
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