Prop. Regs. may resolve many, but not all, INDOPCO issues.

• Author: Packard, Pamela

The IRS recently published proposed regulations (REG-125638-01) on the deduction and capitalization of expenditures. The regulations' stated purpose, as set forth in the preamble, is to provide certainty and promote consistent interpretation of Sec. 263(a) by taxpayers and IRS field personnel:

If an expenditure is not described in one of the categories in the proposed regulations or in subsequent future guidance, taxpayers and IRS field personnel need not determine whether that expenditure produces a significant future benefit. Upon finalization of the proposed regulations, the IRS expects to identify and withdraw existing capitalization guidance that is susceptible to application inconsistent with these regulations. (Emphasis added.) The proposed regulations have the greatest effect on the INDOPCO, Inc., 503 US 79 (1992), "significant future benefit" test. According to the preamble, that test does not provide the "certainty and clarity" needed for taxpayers to comply with the law or for the Service to administer it.

INDOPCO questioned whether internal expenditures (e.g., salary and overhead) in mergers, acquisitions and similar transactions provided a significant future benefit. The IRS wants to take the guesswork out of such questions and eliminate INDOPCO's retroactive effect. It intends to provide a list of intangible assets, on which a taxpayer may rely without having to speculate (at the risk of an audit adjustment and possible penalties) whether to capitalize an expenditure.

TAM 200244019

Obviously, many taxpayers will welcome this enormous change. However, new uncertainties are bound to arise for costs other than acquisition expenses.

One such intangible came up in Technical Advice Memorandum (TAM) 200244019, in which a taxpayer acquired an undivided share of local television broadcast rights associated with a sports franchise. Under Sec. 197(e)(6), "any item acquired in connection with" a sports franchise is not a Sec. 197 intangible and, thus, not eligible for amortization under that provision. In the TAM, the taxpayer did not acquire the team itself and argued that Sec. 197(e)(6) did not exclude the rights. The Service disagreed.

After failing under Sec. 197, the taxpayer had to establish a value for the rights and determine their useful life for Sec. 167 depreciation purposes. However, in relying on a line of cases culminating in McCarthy, 807 F2d 1306 (6th Cir. 1986), the Service determined that the intangible asset was not any...