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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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