Opinion ID: 357
Heading Depth: 3
Heading Rank: 2

Heading: Incurred in Securing the Contractual Right

Text: Robinson next argues that its royalty payments are deductible because they are not described in § 1.263A-1(e)(3)(ii)(U), that is, because they are not incurred in securing the contractual right to use a trademark, corporate plan, manufacturing procedure, special recipe, or other similar right associated with property produced. But Robinson's conclusion does not follow from its premise. Assuming arguendo that Robinson's royalty payments are not described in § 1.263A-1(e)(3)(ii)(U), that description does not include all costs, or even all trademark costs, that must be capitalized. The costs incurred by Robinson are still indirect costs, and they are, therefore, required to be capitalized to the extent they are properly allocable to property produced. As § 1.263A-1(e)(3)(i) explains, [i]ndirect costs are defined as all costs other than direct material costs and direct labor costs (in the case of property produced). (emphasis added). The royalties are costs. They are not direct costs. Hence, they are indirect costs, and such costs are not exempt from the capitalization requirement merely because they are absent from the list of examples of indirect costs that must be capitalized to the extent they are properly allocable to property produced found in § 1.263A-1(e)(3)(ii). Robinson's second argument, like its first, moreover, is too broad. According to Robinson, the above-cited language in § 1.263A-1(e)(3)(ii)(U) requires capitalization only of lump-sum minimum royalties. Assuming, contrary to what we have said above, that costs not described in subclause (U) are necessarily deductible, then any manufacturing-based royalty would be deductible. But it would be contrary to the purpose of § 263A to permit taxpayers to manufacture inventory and deduct royalties immediately, even if that inventory were not sold or otherwise disposed of until a later taxable year.