Robust Company, Inc., acquired all the assets of Depleted Company,Inc. In addition, Robust assumed certain liabilities of Depleted. Robust agreed that it would be legally responsible for any judgment in a patent infringement claim being litigated against Depleted Company. Experts' opinions indicated that the likelihood that a significant change and liability would result was remote (less than 10%). After a trial, the jury concluded that an illegal patent infringement had occurred, and it awarded the judgment of $5 million. Robust paid $5 million and deducted it as an ordinary and necessary business expense. Upon audit, the IRS classified the $5 million payment and treated it as a capital expenditure under IRC section 263.

For discussion: How would you evaluate the positions taken by Robust Company, Inc., and by the IRS?

Support your positions by using the tax code, regulations, IRS rulings, and/or case law. Try to find a new approach not used by your colleagues.