Robin, Inc., acquired the assets of Sparrow, Inc. In addition, Robin assumed certain liabilities of Sparrow. robin agreed that it would be legally responsible for any judgement in a patent infringement claim being litigated against Sparrow. Experts opinions indicated that the likelihood that a contingent liability would result was remote.
After a trial, a jury concluded that patent infringement had occurred and awarded a judgement of $5 million. Robin, Inc., paid the $5 million and deducted it as an ordinary and necessary business expense. Upon audit, the IRS reclassified the $5 million payment and treated it as a capital expenditure under Statute 263.
Evaluate the positions taken by Robin and by the IRS.