Deductibility of just-in-time manufacturing costs.

On September 21, 1995, Tax Executiues Institute sent the following comments to IRS Commissioner Margaret M. Richardson and Chief Counsel Stuart L. Brown, expressing the Institute's concern about a recent technical advice memorandum relating to the adoption of just-in-time manufacturing techniques. Copies of the Institute's comments, which took the form of a letter from President Jack R. Skinner, were also submitted to the Treasury Department. TEIS submission was prepared under the aegis of its Federal Tax Committee whose chair is Bruce H. Barnett of Cargill, Inc. Contributing substantially to the development of TEIS letter was the Vice President of TEIS Region VI and vice chair of the Federal Tax Committee, Roger D. Wheeler of General Motors, Incorporated.

As President of Tax Executives, Institute's I am writing to express the Institute's concern about a recent technical advice memorandum, relating to the adoption of just-in-time manufacturing techniques.(1) TEI believes that the ruling's conclusions are questionable and arise from either a misapprehension of the facts attendant to the adoption of just-in-time manufacturing or a distention of applicable legal principles. As a result, we encourage the Internal Revenue Service to reconsider the ruling, especially in light of its likely deleterious effect on continuing efforts by U.S. manufacturers to enhance their global competitiveness through higher levels of productivity. Should the ruling's result be confirmed, at a minimum additional guidance should be promulgated to permit taxpayers to distinguish normal, recurring re-engineering and training costs from the costs that the IRS views as capital.

Discussion

1. The Ruling's Analysis and Conclusions Are Unsound. Proper matching of income and expense has been the root cause of much contention between taxpayers and the Internal Revenue Service since the inception of the income tax. A recurring source of that friction is the requirement that proper distinctions be drawn between capital expenditures and deductible ordinary and necessary business expenses. Moreover, the INDOPCO decision(2)--with its expansive language applied to a narrowly circumscribed set of facts -- has seemingly engendered a new wave of controversy about capitalization issues. Relying in part on INDOPCO as support for capitalization of heretofore routinely deducted costs, the "just-in-time manufacturing" technical advice memorandum has expanded that controversy into yet another area.

   The ruling addresses four types of expenses associated with the...