Comments on proper treatment of package design costs, June 20, 1989.

• Position: Tax Executives Institute letter to James D. Bridgeman

Comments on Proper Treatment of Package Design Costs

June 20, 1989

On behalf of the Tax Executives Institute, I want to thank you for meeting with us on June 12 to discuss the recent ruling and procedures in respect of package design costs.

Although the Institute continues to question the propriety of Rev. Rul. 89-23 and whether it should be given any retroactive effect, we are pleased that the IRS is moving toward providing transitional relief in respect of the implementation of the package design ruling and revenue procedures. In this letter, we summarize our understanding of the changes now under consideration in the National Office and comment on some implementation issues that we believe could benefit from further consideration.

Proposed General Rule

Perhaps the most profound implementation issue posed by the IRS's package design ruling and revenue procedures is the so-called 1913 issue - the requirement of Rev. Proc. 89-16 that taxpayers reconstruct package design costs incurred potentially as far back as 1913. Based on our discussion, consideration is being given to providing that taxpayers who make a section 481 adjustment under Rev. Proc. 89-16 need go back only a limited number of years (say, to the later of 1984 or the taxpayer's earliest open year) and undertake to capture package design data.

TEI is heartened by indications that the IRS will soon take amelioratory action in respect of the implementation of Rev. Rul. 89-23. Limiting the section 481 "look-back" to five (or fewer years(*)) would not only be symmetrical with the capitalization period allowed by Rev. Proc. 89-17 (in respect of post-March 6, 1989, package design costs), but would also give recognition to the tremendous administrative burdens otherwise posed by Rev. Proc. 89-16. We also believe it would be consistent with general principles underlying section 7805(b) of the Code. Those principles could be further vindicated, however, if taxpayers were permitted to amortize the amount required to be capitalized in each of the years during the applicable section 481 spread period.

"Mass Asset" Election

TEI is especially pleased with IRS's efforts to perfect a "mass asset" alternative to the capitalization and amortization rules set forth in Rev. Proc. 89-17. Under such an elective procedure, taxpayers would "pool" all the costs incurred in respect of package designs and amortize those costs over a specified time period, without regard to whether any of the designs had a...