Illinois Tool Works, Inc. & Subsidiaries - Page 11

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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