I:15-63 Tax Strategy ProblemYour client, Home Products Universal (HPU), distributes home improvement products to independent retailers throughout the country. Its management wants to explore the possibilityof opening its own home improvement centers. Accordingly, it commissions a consultingfirm to conduct a feasibility study, which ultimately persuades HPU to expand into retail sales. The consulting firm bills HPU $150,000, which HPU deducts on its current year tax return. The IRS disputes the deduction, contending that, because the cost relates to entering a new business, it should be capitalized. HPU’s management, on the other hand, firmly believes that, because the cost relates to expanding HPU’s existing business, it should be deducted. In contemplating legal action against the IRS, HPU’s management considers the state of judicial precedent: The federal court for HPU’s district has ruled that the cost of expanding from distribution into retail sales should be capitalized. The appellate court for HPU’s circuit has stated in
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United States district court, Tax Court, HPU, United States Court of Federal Claims