Proposed regulations under Section 263A concerning distribution and handling costs.

• Author: Weiland, Ralph J.

On January 13, 1994, Tax Executives Institute submitted the following comments to the Internal Revenue Service concerning the treatment of certain distribution and handling costs for purposes of the uniform capitalization rules under section 263A of the Internal Revenue Code. The comments, which took the form of a letter from TEI President Ralph Weiland to Commissioner Margaret Richardson, were prepared under the aegis of the Institute's Federal Tax Committee, whose chair is Michael A. DeLuca of Household International, Inc. Rick Eckert of General Motors Corporation also contributed materially to the preparation of the comments.

On behalf of Tax Executives Institute, the following comments are submitted on the proposed regulations under section 263A of the Internal Revenue Code relating to the treatment of distribution and handling costs. The proposed regulations (IA-64-91) were published in the Federal Register on August 9, 1993 (58 Fed. Reg. 42263), and in the Internal Revenue Bulletin (1993-28 I.R.B. 54) on September 7, 1993. A public hearing was held on November 30, 1993. We believe that, consistent with legislative history of section 263A, the cost of filling orders and other related distribution activities--so-called "pick, pack, and ship" activities-- should not be allocated between inventory and cost of goods sold. Rather, they should be deducted when incurred.

Background

Tax Executives Institute is the principal association of corporate tax executives in North America. Our approximately 4,700 members represent 2,400 of the leading corporations in the United States and Canada. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works--one that is administrable and with which taxpayers can comply.

We believe that the diversity and professional training of our members enable us to bring an important, balanced, and practical perspective to the issues raised by the proposed regulations under section 263A, relating to the uniform capitalization of "handling" costs and a bright-line test providing an exception for deduction of "distribution" costs generally.

Overview

On March 30, and August 7, 1987, temporary regulations under section 263A were issued to provide guidance on the uniform capitalization (hereinafter UNICAP) rules enacted in the Tax Reform Act of 1986. The 1987 temporary regulations generally distinguish between "handling" and "distribution" costs, requiring capitalization of the former and permitting current deductions for the latter.(1) Thus, the distribution cost exception under the temporary UNICAP rules permits all costs incurred in delivering goods from storage to a customer to be deducted. The temporary...