[section] 1.263(a)-4 essentially follows three steps: (a) what intangibles fall within its scope; (b) what activities with respect to those intangibles require capitalization; and (c) what costs relating to those activities must be capitalized.
The final regulations require capitalization of (i) an amount paid to acquire any intangible; (ii) an amount paid to create certain but not all intangibles; (iii) an amount paid to create or enhance a "separate and distinct intangible asset"; and (iv) an amount paid to create or enhance a "future benefit," but only under certain circumstances.
(12) This is unfortunate, because a single, unified definition of "asset" for all purposes of the capitalization rules--including the repair regulations as well as the uniform capitalization rules (13)--would further the goal of simplification.
as an intangible for which capitalization is required under this section." The practical effect of this provision is to retain the Supreme Court's "significant future benefit" standard, but to place control of that standard squarely within the purview of the senior leadership of the IRS and Treasury.
Again, rather than invite ambiguity or permit creative interpretations, the government chose to eliminate the concept altogether and to replace it with specific situations requiring capitalization. The regulations' heavy reliance on lists, specific categories, and detailed examples suggests that rather than invite another round of controversy on the proper interpretation to be given to a new set of general principles, the government chose to simply tell agents and taxpayers the specific costs that are to be capitalized.
While National Starch serves as clear and compelling authority for the capitalization of certain expenses incurred incident to a friendly takeover, the deductibility of a target's takeover-defense expenses remains an unsettled issue.
In addressing the issue of capitalization, the IRS held that the expenditures were not capital in nature for the following reasons:
The IRS gave only cursory attention to the capitalization issue; instead, the requirements under section 162(a) became the focus of the IRS's analysis.
Since the costs are incurred incident to the change in ownership and not with respect to the board of directors' fiduciary responsibilities or the target's current business operations, capitalization is justified.