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would have been a deductible expense if it had been paid by
DeVilbiss, the acquired corporation, retains its deductible
character when petitioner, the acquiring corporation, becomes the
party in interest and (2) as a result of petitioner’s efforts in
defending the Lemelson lawsuit, the final judgment amount that
petitioner paid was an ordinary and necessary business expense
that was directly connected to the business operations. In
support of these alternative arguments, petitioner relies on
Nahey v. Commissioner, 196 F.3d 866 (7th Cir. 1999), affg. 111
T.C. 256 (1998).
Respondent maintains that the assets that petitioner
received in exchange for the sales price, which included the
assumed liabilities, produced a substantial benefit to petitioner
in future years as the assets were used in petitioner’s business.
Respondent maintains that the Lemelson lawsuit was a contingent
liability of DeVilbiss that was assumed, in full, by petitioner
as consideration for the acquired assets of DeVilbiss.
Therefore, respondent contends, regardless of whether the final
amount of the liability was unexpected or remote at the time of
acquisition, the total sum of the payment for the assumed
contingent liability must be added to the cost basis of the
property that was acquired in the asset acquisition. Respondent
relies on the Court of Appeals for the Ninth Circuit’s decision
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Last modified: May 25, 2011