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The Lemelson lawsuit, like the contingent liability in
David R. Webb Co. v. Commissioner, supra, was a contingent
liability that petitioner was aware of prior to the acquisition
of assets and liabilities from DeVilbiss and that petitioner
expressly assumed in the purchase agreement. Additionally, the
status of the Lemelson lawsuit was considered in determining the
final purchase price, and petitioner created a reserve for the
liability arising from the patent infringement claim.
Following David R. Webb Co., we conclude that petitioner’s
payment of the court judgment, which was an obligation of
DeVilbiss and acquired by petitioner, whether or not such
obligation was fixed, contingent, or even known at the time such
property was acquired, was not an ordinary and necessary business
expense. Such payment is a capital expenditure that becomes part
of the cost basis of the acquired property regardless of what
would have been the tax character of the payment to the prior
owner. See David R. Webb Co. v. Commissioner, 77 T.C. at 1137-
1138; see also Meredith Corp. & Subs. v. Commissioner, 102 T.C.
406, 454-455 (1994) (holding that the time at which a contingent
liability that is assumed in an asset acquisition is to be
capitalized occurs when the expense is incurred).
We have considered all of the remaining arguments that have
been made by the parties for a result contrary to that expressed
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