Tax practitioners are cheering the IRS plans to simplify the tax rules that apply to intangibles. In an advance notice of proposed rulemaking (REG-125638-01) released on January 17, 2002, the IRS announced its intent to propose new rules that would provide descriptions of the specific types of expenditures that must be capitalized, along with broad-based rules for exceptions.
The tentative list of expenditures that must be capitalized include those incurred in acquiring, creating or enhancing the following types of intangible assets or benefits:
- Prepayments for services, such as insurance.
- Amounts paid to an organization to obtain a membership or privilege from that organization, such as a stock trading privilege or admission to practice medicine at a hospital.
- Amounts paid to obtain certain rights from a government agency, such as for a license to serve alcoholic beverages.
- Amounts paid to obtain or modify contract rights, such as payments for leases, covenants not to compete, or supplier contracts.
- Amounts paid to terminate certain contracts, such as an exclusive right to conduct business in a defined geographic area.
The exceptions will apply to expenditures below a certain dollar amount and those related to intangible assets or benefits of relatively short duration (less than one year).
Tax practitioners and clients alike welcome the IRS’s rulemaking proposal in hopes it will start to clear up the long-standing and growing confusion over the 1992 INDOPCO court case. The Supreme Court set precedent in the INDOPCO case by ruling that expenditures must be capitalized if they create or enhance separate and distinct assets or produce certain other future benefits of a significant nature. Ken Kies, co-managing partner of the PricewaterhouseCoopers Washington National Tax Practice, says, “INDOPCO has to be among the top five items on every corporation’s nightmare list.”