8) In public remarks, senior IRS and Treasury officials downplayed this perception, suggesting the increase in capitalization issues was due in part to the changing nature of the American economy and the emergence of an increasing array of intangibles that had never before been scrutinized under section 263.
Whether in response to the emergence of a new generation of intangibles that did not fit neatly within the decades old template of capitalization principles, its string of losses before appellate courts permitting deductions for an array of costs, (10) or the continuing perception of revenue agents gone wild, the National Office and Treasury committed to issue regulations fundamentally changing the capitalization landscape.
The final regulations require capitalization of (i) an amount paid to acquire any intangible; (ii) an amount paid to create certain but not all intangibles; (iii) an amount paid to create or enhance a "separate and distinct intangible asset"; and (iv) an amount paid to create or enhance a "future benefit," but only under certain circumstances.
12) This is unfortunate, because a single, unified definition of "asset" for all purposes of the capitalization rules--including the repair regulations as well as the uniform capitalization rules (13)--would further the goal of simplification.
as an intangible for which capitalization is required under this section.
While National Starch serves as clear and compelling authority for the capitalization of certain expenses incurred incident to a friendly takeover, the deductibility of a target's takeover-defense expenses remains an unsettled issue.
In addressing the issue of capitalization, the IRS held that the expenditures were not capital in nature for the following reasons:
The IRS gave only cursory attention to the capitalization issue; instead, the requirements under section 162(a) became the focus of the IRS's analysis.
Since the costs are incurred incident to the change in ownership and not with respect to the board of directors' fiduciary responsibilities or the target's current business operations, capitalization is justified.