Rev. Rul. 96-62: a lump of coal or a nicely wrapped present?

• Author: McCormally, Timothy J.

Two days before Christmas, the Internal Revenue Service issued a ruling on the treatment of training expenses. Rev. Rul. 96-62 holds that the Supreme Court's 1992 decision in INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992), "does not affect the treatment of training costs as business expenses, which [remain] generally deductible under [section] 162." The ruling prompted a letter of commendation from Tax Executives Institute, which said that Rev. Rul. 96-62 "promises to bring much needed certainty to this area."

Other commentators, however, were far less sanguine. Most notably, the Wall Street Journal published an article about the ruling on January 14 headlined "Tax Rule May Crimp Firms' Expansion." The article apocalyptically warned that Rev. Rul. 96-62 "could have a chilling effect on U.S. companies' expansion plans [by making] training costs harder to deduct." The Journal article quoted one corporate executive as saying the ruling is "devastating" and may "put the brakes on our efforts to expand." It then elaborated that "tax experts" believe "the auto industry could have trouble trying to deduct the cost of training workers who design and build new vehicle models."

Who is correct? Is Rev. Rul. 96-62 a lump of coal the IRS placed in taxpayers' stockings on December 23rd or is it a nicely wrapped present? In my view, the IRS was playing more Santa than Scrooge in issuing the ruling, and a pessimistic view of the IRS's training ruling is unwarranted. And since I am the only person quoted in the Journal story as being pleased with the ruling, I want to explain why.

Satisfying a Compelling Need

for Guidance

The Journal article notwithstanding, the issuance of Rev. Rul. 96-62 is a good thing. First, it provides guidance on a subject where guidance was needed, and second, the guidance that it provides is generally pro-taxpayer.

Taxpayers have been seeking guidance from the IRS about the continued deductibility of training and other expenses in the aftermath of INDOPCO, almost from the time the Supreme Court handed down its decision. Rev. Rul. 96-62 is responsive to those requests. Stated differently, almost any guidance is better than no guidance. Given the broad language of the Supreme Court's decision in INDOPCO (that "capitalization is the norm"), TEI and others have long contended that the National Office needed to rein in aggressive agents. Otherwise, they would strain to capitalize all sorts of expenses that historically have been currently deducted. One of the reasons that TEI filed an amicus brief in INDOPCO back in 1991 was to express concern over the possible breadth of the Third Circuit's decision in the case: "If the Third Circuit's definition of a capital expenditure as any...