                                                                                 FILED
                                                                     United States Court of Appeals
                                                                             Tenth Circuit
                         UNITED STATES COURT OF APPEALS
                                                                            April 22, 2014
                                       TENTH CIRCUIT
                                                                         Elisabeth A. Shumaker
                                                                             Clerk of Court

 ASH GROVE CEMENT COMPANY,
 and its subsidiaries as a consolidated
 group,

           Plaintiff - Appellant,

 v.                                                          No. 13-3058
                                                    (D.C. No. 2:11-CV-02546-CM)
 UNITED STATES OF AMERICA,                                     (D. Kan.)

           Defendant - Appellee.


                                    ORDER AND JUDGMENT*


Before LUCERO, HARTZ, and GORSUCH, Circuit Judges.


       The Internal Revenue Service (“IRS”) denied a tax refund claim for $7,370,308 to

Ash Grove Cement Company and its subsidiaries, as a consolidated group, in 2010. Ash

Grove sued, seeking a district court order granting the refund. The district court granted

summary judgment to the United States. Exercising jurisdiction pursuant to 28 U.S.C.

§ 1291, we affirm.

       *
         This order and judgment is not binding precedent, except under the doctrines of
law of the case, res judicata, and collateral estoppel. This court generally disfavors the
citation of orders and judgments; nevertheless, an order and judgment may be cited under
the terms and conditions of 10th Cir. R. 32.1.
                                            I

      Many of the facts are stipulated. Ash Grove Cement Company (“Ash Grove”)

manufactures and sells cement. Before December 31, 2000, Vinton Corporation

(“Vinton”) owned approximately two-thirds of the outstanding Ash Grove stock. Vinton

also owned the Lyman-Richey Corporation, a ready-mix cement company. In turn,

Vinton was wholly owned by or for the benefit of the Sunderland family. The rest of the

outstanding stock in Ash Grove was owned by members of the Sunderland family (about

six percent), the company’s employee stock ownership plan (less than two percent), and

approximately 150 other shareholders unrelated to the Sunderlands.

      Under the terms of a reorganization plan, Ash Grove acquired Vinton and Lyman-

Richey, and the Sunderland family received Ash Grove stock in return. In order to

execute the plan and negotiate the proposed transaction, Ash Grove’s board of directors

created a special committee comprised of the two members of the board who were neither

members of the Sunderland family nor employees of Ash Grove. On November 2, 2000,

that committee approved the reorganization, with an exchange rate of 876 shares in Ash

Grove for each share in Vinton. As a result of the transaction, which was completed on

December 31, 2000, Ash Grove owned the Lyman-Richey Corporation and the

Sunderland family members who had owned stock in Vinton became directs owners of

stock in Ash Grove.

      On January 18, 2002, Daniel Raider, a minority shareholder in Ash Grove, filed a

class action complaint in Delaware Chancery Court against Ash Grove and each member
                                           -2-
of its board of directors. Raider alleged that the reorganization constituted self-dealing

by the Sunderlands and that the special committee of the board was not meaningfully

independent of the family. He claimed that the transaction had unfairly diluted the

minority shareholders’ interests in Ash Grove. Among other remedies, Raider sought

rescission of the transaction, imposition of a constructive trust on all of the “profits and

benefits” the individual defendants had “wrongfully obtained,” and compensation from

the individual defendants to Raider and the class “for all losses they have sustained as a

result of the [t]ransaction.”

       In August 2005, the suit was settled without the admission of liability by any

defendant. As part of the settlement, Ash Grove paid $15 million into a trust for the

class. During the 2005 tax year, Ash Grove also paid $43,345 for legal fees incurred in

defense of its board members and related to the suit. Ash Grove had previously adopted

corporate bylaws that included indemnification rights for directors of the company. The

bylaws stated in relevant part that “the Corporation shall indemnify and advance

expenses to each person who is or was a director or officer of the Corporation . . . to the

full extent permitted by the laws of the State of Delaware.”

       Ash Grove, together with several subsidiary corporations (collectively, the

“Group” or “Plaintiffs”), filed a consolidated federal income tax return. The Group, in its

2005 tax return, deducted the settlement payment and the payment of $43,345 in legal

fees as ordinary and necessary business expenses. The IRS disallowed the deductions on

the ground that the payments should be considered capital expenditures. Ash Grove paid
                                             -3-
the deficiency determined by the IRS, and after the IRS denied the Group’s subsequent

claim, the Group filed suit in district court.1 The district court granted summary

judgment to the United States and denied as moot the government’s motion to exclude

expert testimony by William B. Chandler, III, the former Chancellor of the Delaware

Court of Chancery who had presided over the litigation between Raider and Ash Grove.

Plaintiffs filed a timely notice of appeal.

                                              II

       Plaintiffs contend that the district court erred by granting summary judgment for

the United States. “We review the district court’s summary judgment order de novo, and

apply the same legal standards as the district court.” Ribeau v. Katt, 681 F.3d 1190, 1194

(10th Cir. 2012) (quotation omitted). Summary judgment is appropriate “if the movant

shows that there is no genuine dispute as to any material fact and the movant is entitled to

judgment as a matter of law.” Fed. R. Civ. P. 56(a). “When applying this standard, we

view the evidence and draw reasonable inferences therefrom in the light most favorable

to the nonmoving party.” Ribeau, 681 F.3d at 1194.

       Taxpayers may deduct “all the ordinary and necessary expenses paid or incurred

during the taxable year in carrying on any trade or business.” I.R.C. § 162. However,


       1
        The complaint filed by the Group included another claim regarding a “Research
Credit Refund,” but Plaintiffs stated that if Ash Grove received the refund that the IRS
had determined should be allowed, it would not further contest the issue. It appears that
Ash Grove was issued the relevant refund in December 2011, and that claim is not before
us.

                                              -4-
“[w]hile business expenses are currently deductible, a capital expenditure usually is

amortized and depreciated over the life of the relevant asset, or, where no specific asset

or useful life can be ascertained, is deducted upon dissolution of the enterprise.”

INDOPCO, Inc. v. C.I.R., 503 U.S. 79, 83-84 (1992); see I.R.C. § 263. “It has long been

recognized, as a general matter, that costs incurred in the acquisition or disposition of a

capital asset are to be treated as capital expenditures.” Woodward v. C.I.R., 397 U.S.

572, 575 (1970); see also INDOPCO, Inc., 503 U.S. at 89 (“[c]ourts long have recognized

that expenses . . . incurred for the purpose of changing the corporate structure for the

benefit of future operations are not ordinary and necessary business expenses” and

“[d]eductions for professional expenses thus have been disallowed in a wide variety of

cases concerning changes in corporate structure” (quotation omitted)). Moreover, “the

expenses of litigation that arise out of the acquisition of a capital asset are capital

expenses, quite apart from whether the taxpayer’s purpose in incurring them is the

defense or perfection of title to property.” United States v. Hilton Hotels Corp., 397 U.S.

580, 583 (1970). “The law could hardly be otherwise, for such ancillary expenses

incurred in acquiring or disposing of an asset are as much part of the cost of that asset as

is the price paid for it.” Woodward, 397 U.S. at 576.

       Whether litigation expenses “are properly characterized as ‘ordinary income’ or

‘capital income’ is governed by the ‘origin of the claim’ test.” Dye v. United States, 121

F.3d 1399, 1404 (10th Cir. 1997). “[T]he object of the ‘origin of the claim’ test is to find

the transaction or activity from which the taxable event proximately resulted, or the event
                                              -5-
that led to the tax dispute.” Id. (quotations and citation omitted).

       It is a “familiar rule that an income tax deduction is a matter of legislative grace

and . . . the burden of clearly showing the right to the claimed deduction is on the

taxpayer.” INDOPCO, Inc., 503 U.S. at 84 (quotations omitted). Courts have repeatedly

concluded that litigation costs arising out of corporate reorganizations are capital

expenditures. E.g., id. at 90; Hilton Hotels Corp., 397 U.S. at 583-84. Ash Grove

attempts to distinguish those cases by arguing that: (1) the Raider litigation did not

involve the purchase of a capital asset or setting the price of a capital asset and (2) “Ash

Grove was not the real party in interest in” Raider’s suit.

       Raider’s complaint, however, expressly concerned the terms of the reorganization,

particularly the purchase price for Vinton and the Lyman-Richey Corporation. The

complaint sought, among other remedies, rescission of the transaction. Thus, the legal

fees and settlement operated to defend and maintain the reorganization itself. The

Supreme Court has previously determined that a variation in state law that changed the

relationship between parties involved in a suit regarding capital expenses did not alter the

deductibility of expenditures. See Hilton Hotels Corp., 397 U.S. at 583-84. In Hilton

Hotels Corp., “[t]he chief distinction” was “that under New York law title to the

dissenters’ stock passed to [a company] as soon as they formally registered their dissent,

placing them in the relationship of creditors of the company for the fair value of the

stock, whereas under Iowa law passage of title was delayed until after the price was

settled in the appraisal proceeding.” Id. at 583 (footnote omitted). The present matter
                                             -6-
also involves “a distinction without a difference.” Id. at 584. As in Woodward, where

the plaintiffs were akin to “creditors of the company for the fair value of the stock,”

Hilton Hotels Corp., 397 U.S. at 583, the Raider complaint sought payment and

rescission to ensure that minority shareholders retained the fair value of their stock in the

reorganization. The fact that Delaware law allows a suit against the board of directors to

seek those remedies does not change the fact that the suit, and Ash Grove’s related

payments, “proximately resulted” from the transaction itself. Dye, 121 F.3d at 1404

(quotation omitted). We thus agree with the government and the district court that the

expenditures were capital expenses.2

       Ash Grove also contends that it was a named defendant in the Raider litigation

only “to invoke the Court of Chancery’s jurisdiction over Ash Grove for the purposes of

any rescission remedy that might be ordered by that court.” Plaintiffs state that Raider

did not assert a claim for which relief could have been granted by the Delaware courts—

and did not plead a cause of action—against Ash Grove, and thus the payments regarding

the litigation were purely pursuant to the indemnification requirements set out in Ash

       2
        Plaintiffs argue that a different conclusion is mandated by Larchfield Corp. v.
United States, 373 F.2d 159 (2d Cir. 1966), and other cases that were decided prior to the
Supreme Court’s articulation of the “origin of the claim” test in Woodward. In
Larchfield, the Second Circuit concluded that amounts paid for counsel for individual
defendants pursuant to an indemnification bylaw were deductible even though the same
payments would not have been deductible if incurred by the corporation itself. 373 F.3d
at 167. Larchfield, however, noted that “the expenses of a suit against directors” are not
“always deductible.” Id. at 166. We apply the “origin of the claim” test and not the
Larchfield test, and are convinced that the present matter is one of those instances in
which the expenses related to such a suit are not deductible.

                                             -7-
Grove’s bylaws. Although Ash Grove contends it “would have been dismissed upon

motion by the time of the settlement,” it was not dismissed in the period—more than two

years—between the complaint and the settlement. Plaintiffs assert that Chandler’s expert

report “implie[s]” that they would have been dismissed, but it does no such thing.

Rather, Chandler states that Ash Grove was an “indispensable party” to the litigation, that

its “rights would have been affected if the Court granted the Raider Plaintiffs certain

relief,” and that Ash Grove would have “no longer been indispens[a]ble to the action”

only “[i]f, hypothetically, the Raider Litigation had progressed to a point at which the

Court were able to determine that the remedy of rescission was not available to the

Raider Plaintiffs.” (Emphasis added.) Even were we to assume that the outcome of the

origin of the claim test would be different had Ash Grove not been a party to the case and

not had real motivations to seek a settlement for its own benefit, Plaintiffs have not

carried their burden in demonstrating their right to a deduction premised on such a factual

scenario. See INDOPCO, Inc., 503 U.S. at 84.

       Moreover, we are unconvinced that the extent of Ash Grove’s indispensability in

the Delaware litigation is relevant to our analysis. In Hilton Hotels Corp., the company

“obtained the services of lawyers, and other professional services, in connection with the

appraisal litigation.” 397 U.S. at 583 (emphasis added). Similarly, there can be no

dispute in the case at bar that the payments made by Ash Grove were, at a minimum, “in

connection with” Raider’s suit and the reorganization. We do not need to interpret state

law regarding proper joinder of parties to determine the nature of the connection between
                                             -8-
the payment settling the Raider litigation and the reorganization. Thus, we conclude that

the district court was correct in granting summary judgment to the government based on

its determination that the payment made by Ash Grove was a nondeductible capital

expense.

                                           III

      AFFIRMED.



                                         Entered for the Court



                                         Carlos F. Lucero
                                         Circuit Judge




                                           -9-
