Package design costs might be deductible.

• Author: O'Connor, Lee

Under the rationale of RJR Nabisco, TC Memo 1998-252, there may be a tax savings opportunity for clients and others who incur package design costs. In that case, the Service conceded that package design costs were advertising costs, and the Tax Court found those advertising costs deductible.

In Rev. Rul. 89-23, the IRS ruled that Sec. 263A required taxpayers to capitalize package design costs. In Rev. Proc. 90-63, the Service provided three methods of capitalization the IRS would accept, and the procedures under which taxpayers could change from their existing methods of accounting for package design costs to one of those three methods. The procedures for changing to an acceptable method were updated in Rev. Procs. 97-35 and 97-37.

When the Sec. 263A regulations were finalized, however, they did not require the capitalization of costs related to intellectual or creative property, embodied in a tangible medium that is mass distributed merely incident to the distribution of a principal product or good of the creator. This left a defect in Rev. Rul. 89-23. To remedy it, on June 29, 1998, the IRS issued Rev. Proc. 98-39, concluding that, as the final Sec. 263A regulations did not require the capitalization of package design costs, the Service would rely on Sec. 263(a) to do so.

On July 9, 1998, the Tax Court decided RJR...