RJR Nabisco Inc. (Formerly R.J. Reynolds Industries, Inc.) and Consolidated Subsidiaries - Page 29

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          capitalized and are not currently deductible business expenses.3            
          Respondent also argues that the litigated expenses are neither              
          recurring, day-to-day expenditures nor are they deductible under            
          section 174.                                                                
               C.  Tax Rules Governing Advertising Expenditures                       
                    1.  Introduction                                                  
               Petitioner’s principal claim is that “graphic design and               
          advertising activities are indistinguishable in any way that                
          would justify their inconsistent tax treatment”.  Petitioner                
          supports its claim that graphic design and advertising are                  
          indistinguishable by analyzing and comparing the functions of               
          those activities.  Respondent attempts to counter petitioner’s              
          functional analysis with a functional analysis of his own,                  
          candidly conceding, however, that his disagreement with                     
          petitioner “is only a matter of degree”.4  Neither party argues             

          3    Respondent argues that the litigated expenses are allocable            
          to particular brands and, as so allocated, give rise to an                  
          economic benefit for the remaining life of that brand.                      
          Accordingly, respondent does not believe that the litigated                 
          expenses have a determinable useful life, and respondent would              
          allow no depreciation deduction for the litigated expenses.  We             
          need not address the question of a depreciation deduction because           
          petitioner stands on its claim that the litigated expenses are              
          deductible business expenses in 1982, and has not argued in the             
          alternative for capitalization and a depreciation deduction in              
          1982.                                                                       
          4    Indeed, the parties have stipulated similar, in part                   
          identical, functions for graphic design and advertising.  Compare           
          (1) “The graphic designs for a product serve to identify the                
                                                             (continued...)           





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