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Capitalization has always been viewed as one of those areas where the self-interest of financial accounting would generally be offset by the self-interest of tax accounting. For accounting purposes, it would generally be desirable to capitalize expenditures in order to postpone the expense and improve current earnings. For tax purposes, it would generally be desirable to expense currently in order to lower current taxes.
An Internal Revenue Service agent could use the difference in treatment for tax and book purposes as an audit road map. In the age of re-engineering and consolidations, however, it has become popular for the new management team to try to structure a large hit to expenses in the current year, blaming that on the foibles of the past. Any improvement thereafter would be due, of course, to the genius of current management.
It is therefore in the area of reorganization, re-engineering and acquisition costs that we have seen a growing conflict between the taxpayer and the IRS, as the taxpayer seeks a quick write-off for both accounting and tax purposes. The case of Indopco Inc. vs. Commissioner (92-1 USTC 50, 113, 503, US 79 (1992)), in which the Supreme Court held that legal and other professional fees incurred in connection with a friendly acquisition of the taxpayer conferred significant long-term benefits and therefore must be capitalized rather than expensed, typifies this fact pattern. In the same vein is TAM 9544001 (July 21,1995), requiring the capitalization of the cost of implementing a just-intime manufacturing program. The search for a long-term benefit is always more speculative in the intangibles area. The IRS issued Notice 96-7 soliciting comments to help formulate future IRS guidance on capitalization issues, and that possible guidance remains on the IRS business plan for 1998. There have, however, been some recent developments worthy of note on the accounting side that might have useful implications for tax...