FROM THE OFFICE OF PUBLIC AFFAIRS

Today the Treasury Department and the Internal Revenue Service sent an advance notice of proposed rulemaking (ANPRM) regarding capitalization to the Federal Register for publication. The ANPRM describes rules and standards the Treasury Department and the IRS expect to propose in 2002 to provide a framework for addressing capitalization issues with respect to expenditures incurred in acquiring, creating, or enhancing intangible assets.

"Currently, the IRS spends a substantial and disproportionate amount of its examination resources resolving capitalization issues. Recently, much of the uncertainty and controversy in the capitalization area has related to expenditures that create or enhance intangible assets. We believe the rules and principles described in this advance notice with respect to intangible assets are a first step to providing clear and administrable rules that will significantly reduce uncertainty and controversy in this area thereby freeing up both IRS and taxpayer resources," said Mark Weinberger, Treasury Assistant Secretary (Tax Policy). "We also hope to issue additional guidance addressing other areas of capitalization, such as costs to repair or improve tangible assets."

The ANPRM indicates that forthcoming proposed regulations will describe the specific categories of expenditures incurred in acquiring, creating, or enhancing intangible assets or benefits that taxpayers are required to capitalize. In addition, the forthcoming proposed regulations will recognize that many expenditures that create or enhance intangible assets or benefits do not create the type of future benefits for which capitalization under section 263(a) is appropriate, particularly when the administrative and record keeping costs associated with capitalization are weighed against the potential distortion of income.

In addition, the ANPRM indicates that forthcoming proposed regulations are expected to provide safe harbors and simplifying assumptions to reduce the administrative and compliance costs associated with section 263(a). Specifically, the forthcoming proposed regulations are expected to include a "one-year rule," under which costs relating to intangible assets with relatively short useful lives will not be capitalized, and "de minimis rules," under which certain types of costs less than a specified dollar amount will not be capitalized.

The ANPRM also indicates that the Treasury Department and the IRS are considering whether additional administrative relief should be provided. Finally, the ANPRM invites comments from the public regarding these standards.

The text of the ANPRM