Retention of the "separate and distinct asset" test in the final intangible asset regs.

• Author: Gordon, Frederick

The Supreme Court's decision in INDOPCO, Inc. 503 US 79 (1992)--denying deductions for banking and legal fees incurred to Facilitate a friendly takeover offer--gave rise to concerns that the IRS would seek to curtail current deductibility of other types of business expenses that could be viewed as creating more than an incidental future benefit. In INDOPCO, the Court stated that business expenses with benefits extending beyond the current year might have to be capitalized, even if the expenditure does not create a separate and distinct asset. Many practitioners read the Court's holding as establishing a new "future benefit" standard.

While Treasury's published position was that INDOPCO did not change the fundamental principles for determining whether a particular expenditure may be deducted or has to be capitalized, many types of business expenditures became subject to greater IlLS scrutiny on the basis of the future benefit standard articulated in the INDOPCO decision. This, in turn, created great uncertainly as to sell-created intangibles and regular and recurring business expenditures. Although various IlLS rulings issued subsequent to INDOPCO sought to clarify that decision's scope, the IRS recognized, with the publication of Notice 96-7 (inviting the public to suggest standards for broader guidance on capitalization issues), that its piecenieal approach to issuing specific guidance was unlikely to reduce the controversy.

New Guidance

Late last year, the Service issued final regulations (TD 9107, 12/31/03), addressing capitalization of costs to acquire or create an intangible asset. By expressly defining the categories and types of costs subject to capitalization, these regulations are a significant step toward minimizing protracted disagreements between the IRS and taxpayers as to the parameters of INDOPCO's amorphous "future benefit" standard.

While reserving the right to identify--in future published guidance--amounts "paid to create or enhance a future benefit" that must be capitalized, the final regulations do not retain an open-ended future benefit standard. Rather, they are intended to strike an appropriate balance between the Code's capitalization provisions and taxpayers' ability to comply, and the IRS's abilivy to administer the law. At the same time, they reflect a conscious IRS decision to minimize resource allocation in this area in favor of other current priorities (e.g., tax shelter compliance).

Definition

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