INDOPCO DECISION DOESN'T AFFECT DEDUCTIBILITY OF ADVERTISING COSTS.

Rev. Rul. 92-80

ISSUE

Does the Supreme Court's decision in Indopco, Inc. v. Commissioner, ___ U.S. ___, 112 S. Ct. 1039 (1992), affect the treatment of advertising costs as business expenses which are generally deductible under section 162 of the Internal Revenue Code?

LAW AND ANALYSIS

Section 162(a) of the Code allows a deduction for a11 the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.

Section 1.162-1(a) of the Income Tax Regulations expressly provides that "advertising and other selling expenses" are among the items included in deductible business expenses under section 162 of the Code.

Section 1.162-20(a)(2) of the regulations provides, in part, that expenditures for institutional or goodwill advertising which keeps the taxpayer's name before the public are generally deductible as ordinary and necessary business expenses provided the expenditures are related to the patronage the taxpayer might reasonably expect in the future.

Section 263(a) of the Code provides that no deduction is allowed for any amount paid out for permanent improvements or betterments made to increase the value of any property.

In Indopco Inc. v. Commissioner, ___ U.S. ___, 112 S. Ct. 1039 (1992), the Supreme Court concluded that certain legal and professional fees incurred by a target corporation to facilitate a friendly acquisition were capital expenditures. The Court stated that the acquisition costs created significant long-term benefits for the taxpayer. In reaching this decision, the Court specifically rejected the argument that its decision in Commissioner v. Lincoln Savings & Loan Association, 403 U.S. 345 (1971), should be read as holding "that ONLY expenditures that create or enhance separate and distinct assets are to be capitalized under section 263." Indopco at 1044. (Emphasis in original.)

The Indopco decision does not affect the treatment of advertising costs under section 162(a) of the Code. These costs are generally deductible under that section even though advertising may have some future effect on business activities, as in the case of institutional or goodwill advertising. See section 1.162-1(a) and section 1.162-20(a)(2) of the regulations. Only in the unusual circumstance where advertising is directed towards obtaining future benefits significantly beyond those traditionally associated with ordinary product advertising or with institutional or goodwill advertising, must the costs of that advertising be capitalized. See, e.g., Cleveland Electric Illuminating Co. v. United States, 7 Cl. Ct. 220 (1975) (capitalization of advertising costs incurred to allay public opposition to the granting of a license to construct a nuclear power plant).

HOLDING

The Indopco decision does not affect the treatment of advertising costs as business expenses which are generally deductible under section 162 of the Code.

DRAFTING INFORMATION

The principal author of this revenue ruling is Debra L. Carlisle of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Ms. Carlisle on (202) 622-4950 (not a toll-free call).