SECTION 2. DEFINITIONS

For purposes of this revenue procedure, the terms “package design” and “package design cost” have the meanings provided in Rev. Rul. 89–23, 1989–1 C.B. 85. If the taxpayer develops the package design, the term includes the cost of materials,

1997–33 I.R.B. 11 August 18, 1997

January 1, 1987 under § 263 because those costs create intangible assets having useful lives that extend substantially beyond the end of the tax year in which the costs are incurred. See Rev. Rul. 89-23.

.03 Section 263A, enacted by the Tax Reform Act of 1986, provides, in part, for the capitalization of certain direct and indirect costs with respect to real or tangible personal property produced by the taxpayer. All costs that are incurred with respect to real or tangible personal property that the taxpayer produces are to be capitalized with respect to the property. The term “produce” includes construct, build, install, manufacture, develop, improve, create, raise, or grow. For purposes of §263A, “tangible personal property” includes a film, sound recording, video tape, book, or similar property embodying words, ideas, concepts, images, or sounds ( see 2 H.R. Conf. Rep. No. 841, 99th Cong., 2d Sess. II–308 (1986), 1986–3 (Vol. 4) C.B. 308) without regard to whether the property is treated as tangible or intangible under other provisions of the Code. See § 1.263A-2(a)(2)(ii). Section 263A and the regulations thereunder require that costs incurred after December 31, 1986 in connection with the development and design of product packages must be capitalized. See Rev. Rul. 89–23.

.04 As stated in Rev. Rul. 89–23, package designs generally do not have an ascertainable useful life, and thus no depreciation or amortization is allowed under § 167 and the regulations thereunder. See § 1.167(a)–3. Only when such a package design is abandoned may the capitalized costs be deducted. See § 165 and §1.165–2(a).

.05 Thus, taxpayers are generally required under the Code and regulations to use the capitalization method of accounting for package design costs described in section 5.01 of this revenue procedure. However, to minimize disputes regarding the accounting for package design costs, the Internal Revenue Service, as a matter of administrative convenience, will allow a taxpayer that complies with the requirements of this revenue procedure to choose one of two alternative methods of accounting for package design costs:

(1) the capitalization and 60-month amortization method described in section 5.02 of this revenue procedure, deter

mined on a design-by-design basis for all package designs or;

(2) the capitalization and 48-month amortization method described in section 5.03 of this revenue procedure, determined on a pool-of-cost basis for all package design costs.