[15474]
December 19, 2002
TO: TAX COMMITTEE No. 41-02
RE: IRS ISSUES PROPOSED REGULATIONS REGARDING CAPITALIZATION OF
INTANGIBLE ASSETS
The Internal Revenue Service (the “Service”) has issued proposed regulations1 regarding
the deductibility or capitalization of amounts paid to acquire, create, or enhance intangible
assets. The proposed regulations generally follow the approach outlined in the Advance Notice
of Proposed Rulemaking (the “Advance Notice”) issued by the Service earlier this year2 that
described (1) specific categories of expenditures incurred in acquiring, creating or enhancing
intangible assets or benefits that taxpayers are required to capitalize and (2) certain types of
transaction costs otherwise capitalizable that nevertheless would be deductible.
The proposed regulations confirm that certain enumerated internal transaction costs
including “compensation [including bonuses and commissions] paid to employees, overhead,
and de minimis costs” are not required to be capitalized, as they are not treated as amounts that
facilitate a transaction. Thus, as urged by the Institute, a fund sponsor’s internal costs of
creating new funds are deductible.3 The proposed regulations, however, do not adopt the
Institute’s suggestion that independent contractors who function as employees be treated as
employees, where the independent contractors facilitate a transaction otherwise subject to
capitalization.4
As requested by the Institute, the preamble to the proposed regulations also confirms
the continuing vitality of Revenue Ruling 94-705 -- which concludes that open-end investment
companies may deduct stock issuance costs (other than those related to the initial stock
offering).
1 The proposed regulations are available at http://www.treas.gov/press/releases/reports/cap.pdf and are attached
to the electronic version of this memorandum.
2 See, Institute Memorandum to Tax Members No. 5-02, dated January 25, 2002.
3 See, Institute Memorandum to Tax Members No. 15-02, dated March 25, 2002.
4 The proposed regulations specify that only compensation paid to employees as defined in Code section 3401(c)
satisfies the “simplifying convention” adopted with respect to internal costs.
5 1994-2 C.B. 17.
2
ACTION REQUESTED
Comments on the proposed regulations are due by March 19, 2003. Please contact the
undersigned (202/326-5821 or cbarre@ici.org) by February 19 with any comments that you
would like the Institute to submit on the proposed regulations.
Catherine Barré
Assistant Counsel
Attachment (in .pdf format)