NOTE: Where it is feasible, a syllabus (headnote) will be released, as is
being done in connection with this case, at the time the opinion is issued.
The syllabus constitutes no part of the opinion of the Court but has been
prepared by the Reporter of Decisions for the convenience of the reader.
See United States v. Detroit Lumber Co., 200 U. S. 321, 337.

SUPREME COURT OF THE UNITED STATES

                 Syllabus

INDOPCO, INC. v. COMMISSIONER OF INTERNAL
REVENUE
certiorari to the united states court of appeals for
the third circuit
No. 90-1278.   Argued November 12, 1991-Decided February 26, 1992

On its 1978 federal income tax return, petitioner corporation claimed
 a deduction for certain investment banking fees and expenses that it
 incurred during a friendly acquisition in which it was transformed
 from a publicly held, freestanding corporation into a wholly owned
 subsidiary.  After respondent Commissioner disallowed the claim,
 petitioner sought reconsideration in the Tax Court, adding to its
 claim deductions for legal fees and other acquisition-related expenses.
 The Tax Court ruled that because long-term benefits accrued to
 petitioner from the acquisition, the expenditures were capital in
 nature and not deductible under 162(a) of the Internal Revenue
 Code as ``ordinary and necessary'' business expenses.  The Court of
 Appeals affirmed, rejecting petitioner's argument that, because the
 expenses did not ``create or enhance . . . a separate and distinct
 additional asset,'' see Commissioner v. Lincoln Savings & Loan Assn.,
 403 U.S. 345, 354, they could not be capitalized under 263 of the
 Code.
Held:Petitioner's expenses do not qualify for deduction under 162(a).
 Deductions are exceptions to the norm of capitalization and are
 allowed only if there is clear provision for them in the Code and the
 taxpayer has met the burden of showing a right to the deduction.
 Commissioner v. Lincoln Savings & Loan Assn., supra, holds simply
 that the creation of a separate and distinct asset may be a sufficient
 condition for classification as a capital expenditure, not that it is a
 prerequisite to such classification.  Nor does Lincoln Savings prohibit
 reliance on future benefit as means of distinguishing an ordinary
 business expense from a capital expenditure.  Although the presence
 of an incidental future benefit may not warrant capitalization, a
 taxpayer's realization of benefits beyond the year in which the
 expenditure is incurred is important in determining whether the
 appropriate tax treatment is immediate deduction or capitalization.
 The record in the instant case amply supports the lower courts'
 findings that the transaction produced significant benefits to petition-
 er extending beyond the tax year in question.  Pp.4-12.
918 F.2d 426, affirmed.

 Blackmun, J., delivered the opinion for a unanimous Court.
-------------------------------

 NOTICE: This opinion is subject to formal revision before publication in the
 preliminary print of the United States Reports.  Readers are requested to
 notify the Reporter of Decisions, Supreme Court of the United States, Wash-
 ington, D.C. 20543, of any typographical or other formal errors, in order that
 corrections may be made before the preliminary print goes to press.

SUPREME COURT OF THE UNITED STATES
--------
No. 90-1278
--------
INDOPCO, INC., PETITIONER v. COMMISSIONER OF
INTERNAL REVENUE
on writ of certiorari to the united states court of
appeals for the third circuit
[February 26, 1992]

  Justice Blackmun delivered the opinion of the Court.
  In this case we must decide whether certain professional
expenses incurred by a target corporation in the course of
a friendly takeover are deductible by that corporation as
``ordinary and necessary'' business expenses under 162(a)
of the federal Internal Revenue Code.
                      I
  Most of the relevant facts are stipulated.  See App. 12,
149.  Petitioner INDOPCO, Inc., formerly named National
Starch and Chemical Corporation and hereinafter referred
to as National Starch, is a Delaware corporation that
manufactures and sells adhesives, starches, and specialty
chemical products.  In October 1977, representatives of
Unilever United States, Inc., also a Delaware corporation
(Unilever), expressed interest in acquiring National
Starch, which was one of its suppliers, through a friendly
transaction.  National Starch at the time had outstanding
over 6,563,000 common shares held by approximately 3700
shareholders.  The stock was listed on the New York Stock
Exchange.  Frank and Anna Greenwall were the
corporation's largest shareholders and owned approximately
14.5% of the common.  The Greenwalls, getting along in
years and concerned about their estate plans, indicated that
they would transfer their shares to Unilever only if a
transaction tax-free for them could be arranged.
  Lawyers representing both sides devised a ``reverse
subsidiary cash merger'' that they felt would satisfy the
Greenwalls' concerns.  Two new entities would be creat-
ed-National Starch and Chemical Holding Corp. (Holding),
a subsidiary of Unilever, and NSC Merger, Inc., a subsid-
iary of Holding that would have only a transitory existence.
In an exchange specifically designed to be tax-free under
351 of the Internal Revenue Code, 26 U.S.C. 351,
Holding would exchange one share of its nonvoting pre-
ferred stock for each share of National Starch common that
it received from National Starch shareholders.  Any
National Starch common that was not so exchanged would
be converted into cash in a merger of NSC Merger, Inc.,
into National Starch.
  In November 1977, National Starch's directors were
formally advised of Unilever's interest and the proposed
transaction.  At that time, Debevoise, Plimpton, Lyons &
Gates, National Starch's counsel, told the directors that
under Delaware law they had a fiduciary duty to ensure
that the proposed transaction would be fair to the share-
holders.  National Starch thereupon engaged the invest-
ment banking firm of Morgan Stanley & Co., Inc., to
evaluate its shares, to render a fairness opinion, and
generally to assist in the event of the emergence of a hostile
tender offer.
  Although Unilever originally had suggested a price
between $65 and $70 per share, negotiations resulted in a
final offer of $73.50 per share, a figure Morgan Stanley
found to be fair.  Following approval by National Starch's
board and the issuance of a favorable private ruling from
the Internal Revenue Service that the transaction would be
tax-free under 351 for those National Starch shareholders
who exchanged their stock for Holding preferred, the
transaction was consummated in August 1978.
  Morgan Stanley charged National Starch a fee of
$2,200,000,  along with $7,586 for out-of-pocket expenses
and $18,000 for legal fees.  The Debevoise firm charged
National Starch $490,000, along with $15,069 for out-of-
pocket expenses.  National Starch also incurred expenses
aggregating $150,962 for miscellaneous items-such as
accounting, printing, proxy solicitation, and Securities and
Exchange Commission fees-in connection with the transac-
tion.  No issue is raised as to the propriety or reasonable-
ness of these charges.
  On its federal income tax return for its short taxable year
ended August 15, 1978, National Starch claimed a deduc-
tion for the $2,225,586 paid to Morgan Stanley, but did not
deduct the $505,069 paid to Debevoise or the other expens-
es.  Upon audit, the Commissioner of Internal Revenue
disallowed the claimed deduction and issued a notice of
deficiency.  Petitioner sought redetermination in the United
States Tax Court, asserting, however, not only the right to
deduct the investment banking fees and expenses but, as
well, the legal and miscellaneous expenses incurred.
  The Tax Court, in an unreviewed decision, ruled that the
expenditures were capital in nature and therefore not
deductible under 162(a) in the 1978 return as ``ordinary
and necessary expenses.''  National Starch and Chemical
Corp. v. Commissioner, 93 T.C. 67 (1989).  The court based
its holding primarily on the long-term benefits that accrued
to National Starch from the Unilever acquisition.  Id., at 75.
The United States Court of Appeals for the Third Circuit
affirmed, upholding the Tax Court's findings that ``both
Unilever's enormous resources and the possibility of
synergy arising from the transaction served the long-term
betterment of National Starch.''  National Starch and
Chemical Corp. v. Commissioner, 918 F. 2d 426, 432-433
(1990).  In so doing, the Court of Appeals rejected National
Starch's contention that, because the disputed expenses did
not ``create or enhance . . . a separate and distinct addition-
al asset,'' see Commissioner v. Lincoln Savings & Loan
Assn., 403 U.S. 345, 354 (1971), they could not be capital-
ized and therefore were deductible under 162(a).  918 F.
2d, at 428-431.  We granted certiorari to resolve a per-
ceived conflict on the issue among the Courts of Appeals.
___ U.S. ___ (1991).
                     II
  Section 162(a) of the Internal Revenue Code allows the
deduction of ``all the ordinary and necessary expenses paid
or incurred during the taxable year in carrying on any trade
or business.''  26 U.S.C. 162(a).  In contrast, 263 of the
Code allows no deduction for a capital expenditure-an
``amount paid out for new buildings or for permanent
improvements or betterments made to increase the value of
any property or estate.''  26 U.S.C. 263(a)(1).  The primary
effect of characterizing a payment as either a business
expense or a capital expenditure concerns the timing of the
taxpayer's cost recovery: While 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.
See 26 U.S.C. 167(a) and 336(a); Treas. Reg. 1.167(a),
26 CFR 1.167(a) (1991).  Through provisions such as
these, the Code endeavors to match expenses with the
revenues of the taxable period to which they are properly
attributable, thereby resulting in a more accurate calcula-
tion of net income for tax purposes.  See, e.g., Commissioner
v. Idaho Power Co., 418 U.S. 1, 16 (1974); Ellis Banking
Corp. v. Commissioner, 688 F. 2d 1376, 1379 (CA11 1982),
cert. denied, 463 U.S. 1207 (1983).
  In exploring the relationship between deductions and
capital expenditures, this Court has noted the ``familiar
rule'' that ``an income tax deduction is a matter of legisla-
tive grace and that the burden of clearly showing the right
to the claimed deduction is on the taxpayer.''  Interstate
Transit Lines v. Commissioner, 319 U.S. 590, 593 (1943);
Deputy v. Du Pont, 308 U.S. 488, 493 (1940); New Colonial
Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).  The notion
that deductions are exceptions to the norm of capitalization
finds support in various aspects of the Code.  Deductions
are specifically enumerated and thus are subject to disal-
lowance in favor of capitalization.  See 161 and 261.
Nondeductible capital expenditures, by contrast, are not
exhaustively enumerated in the Code; rather than providing
a ``complete list of nondeductible expenditures,'' Lincoln
Savings, 403 U.S., at 358, 263 serves as a general means
of distinguishing capital expenditures from current expens-
es.  See Commissioner v. Idaho Power Co., 418 U.S., at 16.
For these reasons, deductions are strictly construed and
allowed only ``as there is a clear provision therefor.''  New
Colonial Ice Co. v. Helvering, 292 U.S., at 440; Deputy v. Du
Pont, 308 U.S., at 493.
  The Court also has examined the interrelationship
between the Code's business expense and capital expendi-
ture provisions.  In so doing, it has had occasion to parse
162(a) and explore certain of its requirements.  For
example, in Lincoln Savings, we determined that, to qualify
for deduction under 162(a), ``an item must (1) be `paid or
incurred during the taxable year,' (2) be for `carrying on any
trade or business,' (3) be an `expense,' (4) be a `necessary'
expense, and (5) be an `ordinary' expense.''  403 U.S., at
352.  See also Commissioner v. Tellier, 383 U.S. 687, 689
(1966) (the term ``necessary'' imposes ``only the minimal
requirement that the expense be `appropriate and helpful'
for `the development of the [taxpayer's] business,''' quoting
Welch v. Helvering, 290 U.S. 111, 113 (1933)); Deputy v. Du
Pont, 308 U.S. 488, 495 (1940) (to qualify as ``ordinary,'' the
expense must relate to a transaction ``of common or fre-
quent occurrence in the type of business involved'').  The
Court has recognized, however, that the ``decisive distinc-
tions'' between current expenses and capital expenditures
``are those of degree and not of kind,'' Welch v. Helvering,
290 U.S., at 114, and that because each case ``turns on its
special facts,'' Deputy v. Du Pont, 308 U.S., at 496, the cases
sometimes appear difficult to harmonize.  See Welch v.
Helvering, 290 U.S., at 116.
  National Starch contends that the decision in Lincoln
Savings changed these familiar backdrops and announced
an exclusive test for identifying capital expenditures, a test
in which ``creation or enhancement of an asset'' is a prereq-
uisite to capitalization, and deductibility under 162(a) is
the rule rather than the exception.  Brief for Petitioner 16.
We do not agree, for we conclude that National Starch has
overread Lincoln Savings.
  In Lincoln Savings, we were asked to decide whether
certain premiums, required by federal statute to be paid by
a savings and loan association to the Federal Savings and
Loan Insurance Corporation (FSLIC), were ordinary and
necessary expenses under 162(a), as Lincoln Savings
argued and the Court of Appeals had held, or capital
expenditures under 263, as the Commissioner contended.
We found that the ``additional'' premiums, the purpose of
which was to provide FSLIC with a secondary reserve fund
in which each insured institution retained a pro rata
interest recoverable in certain situations, ``serv[e] to create
or enhance for Lincoln what is essentially a separate and
distinct additional asset.''  403 U.S., at 354.  ``[A]s an
inevitable consequence,'' we concluded, ``the payment is
capital in nature and not an expense, let alone an ordinary
expense, deductible under 162(a).''  Ibid.
  Lincoln Savings stands for the simple proposition that a
taxpayer's expenditure that ``serves to create or enhance . . .
a separate and distinct'' asset should be capitalized under
263.  It by no means follows, however, that only expendi-
tures that create or enhance separate and distinct assets
are to be capitalized under 263.  We had no occasion in
Lincoln Savings to consider the tax treatment of expendi-
tures that, unlike the additional premiums at issue there,
did not create or enhance a specific asset, and thus the case
cannot be read to preclude capitalization in other circum-
stances.  In short, Lincoln Savings holds that the creation
of a separate and distinct asset well may be a sufficient but
not a necessary condition to classification as a capital
expenditure. See General Bancshares Corp. v. Commission-
er, 326 F. 2d 712, 716 (CA8) (although expenditures may
not ``resul[t] in the acquisition or increase of a corporate
asset, . . . these expenditures are not, because of that fact,
deductible as ordinary and necessary business expenses''),
cert. denied, 379 U.S. 832 (1964).
  Nor does our statement in Lincoln Savings, 405 U.S., at
354, that ``the presence of an ensuing benefit that may have
some future aspect is not controlling'' prohibit reliance on
future benefit as a means of distinguishing an ordinary
business expense from a capital expenditure.  Although
the mere presence of an incidental future benefit-``some
future aspect''-may not warrant capitalization, a taxpay-
er's realization of benefits beyond the year in which the
expenditure is incurred is undeniably important in deter-
mining whether the appropriate tax treatment is immediate
deduction or capitalization.  See United States v. Miip-
pi Chemical Corp., 405 U.S. 298, 310 (1972) (expense that
``is of value in more than one taxable year'' is a nondeduct-
ible capital expenditure); Central Texas Savings & Loan
Assn. v. United States, 731 F. 2d 1181, 1183 (CA5 1984)
(``While the period of the benefits may not be controlling in
all cases, it nonetheless remains a prominent, if not
predominant, characteristic of a capital item.'').  Indeed, the
text of the Code's capitalization provision, 263(a)(1), which
refers to ``permanent improvements or betterments,'' itself
envisions an inquiry into the duration and extent of the
benefits realized by the taxpayer.
                     III
  In applying the foregoing principles to the specific
expenditures at issue in this case, we conclude that Nation-
al Starch has not demonstrated that the investment
banking, legal, and other costs it incurred in connection
with Unilever's acquisition of its shares are deductible as
ordinary and necessary business expenses under 162(a).
  Although petitioner attempts to dismiss the benefits that
accrued to National Starch from the Unilever acquisition as
"entirely speculative" or "merely incidental," Brief for
Petitioner 39-40, the Tax Court's and the Court of Appeals'
findings that the transaction produced significant benefits
to National Starch that extended beyond the tax year in
question are amply supported by the record.  For example,
in commenting on the merger with Unilever, National
Starch's 1978 ``Progress Report'' observed that the company
would ``benefit greatly from the availability of Unilever's
enormous resources, especially in the area of basic technolo-
gy.''  App. 43.  See also id., at 46 (Unilever ``provides new
opportunities and resources'').  Morgan Stanley's report to
the National Starch board concerning the fairness to
shareholders of a possible business combination with
Unilever noted that National Starch management ``feels
that some synergy may exist with the Unilever organization
given a) the nature of the Unilever chemical, paper, plastics
and packaging operations . . . and b) the strong consumer
products orientation of Unilever United States, Inc.''  Id., at
77-78.
  In addition to these anticipated resource-related benefits,
National Starch obtained benefits through its transforma-
tion from a publicly held, freestanding corporation into a
wholly owned subsidiary of Unilever.  The Court of Appeals
noted that National Starch management viewed the
transaction as ``swapping approximately 3500 shareholders
for one.''  918 F. 2d, at 427; see also App. 223.  Following
Unilever's acquisition of National Starch's outstanding
shares, National Starch was no longer subject to what even
it terms the ``substantial'' shareholder-relations expenses a
publicly traded corporation incurs, including reporting and
disclosure obligations, proxy battles, and derivative suits.
Brief for Petitioner 24.  The acquisition also allowed
National Starch, in the interests of administrative conve-
nience and simplicity, to eliminate previously authorized
but unissued shares of preferred and to reduce the total
number of authorized shares of common from 8,000,000 to
1,000.  See 93 T.C., at 74.
  Courts long have recognized that expenses such as these,
```incurred for the purpose of changing the corporate
structure for the benefit of future operations are not
ordinary and necessary business expenses.'''  General
Bancshares Corp. v. Commissioner, 326 F. 2d, at 715
(quoting Farmers Union Corp. v. Commissioner, 300 F. 2d
197, 200 (CA9), cert. denied, 371 U.S. 861 (1962)).  See also
B. Bittker & J. Eustice, Federal Income Taxation of
Corporations and Shareholders, pp. 5-33 to 5-36 (5th ed.
1987) (describing ``well-established rule'' that expenses
incurred in reorganizing or restructuring corporate entity
are not deductible under 162(a)).  Deductions for profes-
sional expenses thus have been disallowed in a wide variety
of cases concerning changes in corporate structure.
Although support for these decisions can be found in the
specific terms of 162(a), which require that deductible
expenses be ``ordinary and necessary'' and incurred ``in
carrying on any trade or business,'' courts more frequently
have characterized an expenditure as capital in nature
because ``the purpose for which the expenditure is made has
to do with the corporation's operations and betterment,
sometimes with a continuing capital asset, for the duration
of its existence or for the indefinite future or for a time
somewhat longer than the current taxable year.''  General
Bancshares Corp. v. Commissioner, 326 F. 2d, at 715.  See
also Mills Estate, Inc. v. Commissioner, 206 F. 2d 244, 246
(CA2 1953).  The rationale behind these decisions applies
equally to the  professional charges at issue in this case.
                     IV
  The expenses that National Starch incurred in Unilever's
friendly takeover do not qualify for deduction as ``ordinary
and necessary'' business expenses under 162(a).  The fact
that the expenditures do not create or enhance a separate
and distinct additional asset is not controlling; the acquisi-
tion-related expenses bear the indicia of capital expendi-
tures and are to be treated as such.
  The judgment of the Court of Appeals is affirmed.
                            It is so ordered.
-------------------------------
