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Tuesday, March 23, 2010


On January 21, 2009, we discussed how a manufacturer of kitchen items was required by the Tax Court to capitalize royalties paid to put Pyrex and Oneida trademarks on their kitchen tools. The Tax Court found that the trademarks were part of the production process, and thus could not be immediately expensed.

The Second Circuit Court of Appeals has now reversed the Tax Court, and allowed the taxpayer to immediately deduct the royalty payments. The Court held that the royalty payments were not “properly allocable to the property produced” so as to require capitalization under the Code Section 263A uniform capitalization rules.

The Court focused on the royalty payments being calculated on items SOLD and not PRODUCED, and thus were more in the character of expenses for marketing instead of production. Presumably, if the royalty payments were instead based on units produced, capitalization would have been required.

Robinson Knife Manufacturing Co., Inc., 105 AFTR 2d ¶2010-634 (CA-2 3/19/2010) 

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