RJR Nabisco Inc. (Formerly R.J. Reynolds Industries, Inc.) and Consolidated Subsidiaries - Page 27

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                                       OPINION                                        
          I.  Graphic Design Issue                                                    
               A.  Issue                                                              
               We must determine whether the litigated expenses are                   
          currently deductible business expenses.  Respondent determined              
          that they are capital expenditures and, therefore, not currently            
          deductible.  The litigated expenses include expenditures relating           
          to the graphic design of cigarette packaging materials (cartons,            
          soft-packs, and crush-proof boxes) and cigarette papers, tips,              
          and other components of the cigarette product, as well as a                 
          relatively small amount of expenditures relating to package                 
          design (the physical construction of the package itself).                   
               B.  Arguments of the Parties                                           
               Petitioner starts with the premise that expenditures for               
          ordinary business advertising (to sell a product or service or              
          for institutional or “goodwill” advertising that keeps the                  
          taxpayer’s name before the public) are deductible under section             
          162(a) and argues that the litigated expenses give rise to a                
          benefit that is indistinguishable from the benefit derived from             
          ordinary business advertising.  Consequently, petitioner argues,            
          the litigated expenses are also deductible under section 162(a).            
          Petitioner also argues that, like expenditures for ordinary                 
          business advertising, the litigated expenses represent a                    






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Last modified: May 25, 2011