IRS challenging deductions for ISO 9000 costs.

• Author: O'Connor, Lee

In a position paper that has been disseminated to examining agents, the IRS has instructed its agents to identify all costs--internal and external--attributable to ISO 9000 certification and to disallow them as current deductions. This approach can result in such things as the salaries of regular employees being treated as nondeductible capital expenditures.

However, the Service has made recent settlement offers permitting a current deduction for the employee training costs associated with ISO 9000. In most ISO 9000 certifications, training constitutes a significant portion of the total cost. Rev. Rul. 96-92, which states generally that most training costs are currently deductible, is the apparent source for the IRS's position. Additionally, the Service has seemed receptive to the argument that because ISO 9000 requires recertification after three years, other nontraining costs should be amortizable over the three-year period.

The IRS has held the upper hand in the deduction-versus-capitalization controversy since INDOPCO Inc., 112 Sup. Ct. 1039 (1992). In that case, the Supreme Court decided that a taxpayer could not deduct the costs it incurred to facilitate a friendly acquisition. The Court held that it was not necessary to find that expenditures...