Opinion ID: 357
Heading Depth: 3
Heading Rank: 1

Heading: Marketing, Selling, Advertising, and Distribution Costs

Text: According to Robinson, its royalty payments are marketing, selling, advertising, [or] distribution costs. Although Robinson is correct that marketing, selling, advertising, and distribution costs are deductible, 26 C.F.R. § 1.263A-1(e)(3)(iii)(A), we are not persuaded by Robinson's two arguments that all trademark royalty payments are such costs. First, Robinson emphasizes that its object in licensing the trademarks is to entice customers to buy products that are otherwise identical to Robinson's competitors' products. But Robinson's argument proves too much. All trademarks may serve that purpose. And the regulations specifically list fees incurred in securing the contractual right to use a trademark, id. § 1.263A-1(e)(3)(ii)(U) (emphasis added), as an example[ ] of indirect costs that must be capitalized to the extent they are properly allocable to property produced or property acquired for resale, id. § 1.263A-1(e)(3)(ii). If we were to accept Robinson's view, we would effectively read the word trademark out of the relevant regulation. Second, Robinson argues that Rev. Rul. 2000-4, 2000-1 C.B. 331, compels the conclusion that trademark royalties are marketing, selling, advertising, and distribution costs. This Court has not decided on the proper level of deference owed to revenue rulings after United States v. Mead Corp., 533 U.S. 218, 121 S.Ct. 2164, 150 L.Ed.2d 292 (2001). See Reimels v. Comm'r, 436 F.3d 344, 347 n. 2 (2d Cir. 2006). We need not do so here, for the ruling does not help Robinson no matter how much deference we accord to it. In the revenue ruling, a taxpayer was permitted to deduct the costs of obtaining ISO 9000 certification, which differentiated it from non-certified competitors and allowed it to do businesses with customers who required certification. The IRS determined that ISO 9000 certification, like advertising or training expenses, does not result in future benefits that are more than incidental. Rev. Rul. 2000-4, 2000-1 C.B. at 331. But, in contrast to trademarks, there is nothing in the 26 C.F.R. § 1.263A-1(e)(3)(ii) list that suggests that fees for certifications such as ISO 9000 must ever be capitalized. Since trademarks instead are on the capitalization list, the revenue ruling is wholly distinguishable. Moreover, Robinson's argument is at odds with the intent of both § 263A and the regulations. If all trademark royalties were marketing, selling, advertising, [or] distribution costs, then they would be deductible regardless of the terms of the contracts under which they were paid. As a result, a lump-sum minimum royalty payment ( i.e., a royalty payment of a specified amount which does not vary regardless of the number of trademarked items manufactured or sold) would be immediately deductible. So would a manufacturing-based royalty paid whenever the manufacturer produced an inventory item bearing the licensed trademark-and this would be so even if the trademarked items were not sold until a later taxable year. But the point of § 263A and its regulations is precisely to make sure that trademark royalties are not deducted during a taxable year which precedes the year in which the corresponding trademarked items are sold. To hold otherwise would be to allow costs that are in reality costs of producing, acquiring, or carrying property to be deducted currently, rather than capitalized into the basis of the property and recovered when the property is sold or as it is used by the taxpayer. This [would] produce[ ] a mismatching of expenses and the related income and an unwarranted deferral of taxes. S.Rep. No. 99-313, at 140; accord T.D. 8482, 1993-2 C.B. at 78. For these reasons, we reject the contention that all trademark royalties are immediately deductible.