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Regs.
Certain “indirect costs” must also be capitalized to the
extent they are properly allocable to property produced.
“Indirect costs” are defined as all costs allocable to property
produced or acquired for resale by the taxpayer other than direct
material costs and direct labor costs (in the case of property
produced). Sec. 1.263A-1(e)(3), Income Tax Regs. Indirect costs
are properly allocable to property produced when the costs
directly benefit or are incurred by reason of the performance of
production activities. Id. Royalty payments are specifically
identified as an indirect cost that must be capitalized. Section
1.263A-1(e)(3)(ii)(U), Income Tax Regs., states as follows:
Licensing and franchise costs. Licensing and franchise
costs include fees incurred in securing the contractual
right to use a trademark, corporate plan, manufacturing
procedure, special recipe, or other similar right
associated with property produced or property acquired
for resale. These costs include the otherwise
deductible portion (e.g., amortization) of the initial
fees incurred to obtain the license or franchise and
any minimum annual payments and royalties that are
incurred by a licensee or a franchisee.
Section 1.263A-1(e)(3)(ii), Income Tax Regs., provides a
nonexclusive list of examples of certain indirect costs that must
be capitalized.
Respondent contends that the royalty payments incurred by
petitioner are subject to the capitalization rules of section
263A, and further that the payments must be deducted over time
through petitioner’s cost of goods sold.
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Last modified: May 25, 2011