Capitalization rules top TEI's spring agenda: IRS funding, role of Taxpayer Advocate, debt collection, and options withholding also prompt responses.

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An advance notice of proposed rulemaking on the treatment of expenditures in acquiring, creating, or enhancing intangible rights was the subject of comments submitted on April 24 by Tax Executives Institute to the U.S. Treasury Department and Internal Revenue Service. Issued in January, Announcement 2002-9 sets forth rules the government is likely to propose this year to provide a framework for expensing or capitalizing these expenditures.

In its comments, TEI commended the Treasury and IRS for seeking public comments on the issues. "The consultative process will enable the government to issue rules that will reduce compliance and administration costs and minimize uncertainty and controversy for the benefit of both taxpayers and the government," TEI President Bob Ashby wrote. "Indeed, to minimize resources devoted to unproductive controversies, we recommend that the final rules not only be effective immediately, but also that guidance be issued stating that the government will not challenge a taxpayer's treatment of expenditures in prior years to the extent such treatment is consistent with the new rules."

The advance notice generally describes categories of expenditures for which capitalization will be required. The government stated it anticipates "that other expenditures to acquire, create, or enhance intangible assets or benefits generally will not be subject to capitalization under section 263(a)." In its comments, the Institute urged the adoption of a formal rule of "general deductibility." The organization explained that, during the past 10 years, a number of revenue rulings have been issued that were intended to quell controversies by according taxpayers deductions for specific expenditures. "Regrettably, revenue agents have narrowly construed the rulings by characterizing many routine expenditures as `rare and unusual' and thus outside the scope of the ruling's general rule of deductibility." An explicit statement that expenditures--other than those identified--are deductible is needed, TEI stated.

In addition, the Institute supported the adoption of a 12-month rule. "Where the future benefit or life of an asset is 12 months or less," TEI said, "it is unlikely that taxable income will be materially distorted by permitting a current deduction." For purposes of applying the rule, the organization recommended that the expected economic life of an intangible asset be the basis for measuring the period of the benefits. In respect of...