SECTION 5. ALTERNATIVE

METHODS OF ACCOUNTING

.01 The capitalization method. (1) Description of method. The treatment of the costs of developing new package designs or modifying existing designs in accordance with the capitalization method constitutes a permissible method of accounting. Under the capitalization method, the taxpayer must capitalize the costs of developing (or modifying) any package design if the asset created by those costs has no ascertainable useful life or an ascertainable useful life that extends substantially beyond the end of the tax year in which the costs are incurred. If the asset created by the costs has an ascertainable useful life, the taxpayer may amortize the costs ratably over the useful life, beginning with the month the package design (or modification to the design) is placed in service. If the asset created by the costs has no ascertainable useful life, the taxpayer may deduct the costs only upon the disposition or abandonment of the package design (or modification to the design). See Rev. Rul. 89-23.

(2) Computation of basis. The basis of each package design (or modification to the design) subject to capitalization is determined by applying the provisions of § 263 and the regulations thereunder to costs incurred prior to January 1, 1987, and § 263A and the regulations thereunder to costs incurred after December 31, 1986 (regardless of the tax year the design (or modification to the design) is placed in service). The costs required to be capi

talized are described in section 2 of this revenue procedure.

.02 The design-by-design capitalization and 60-month amortization method.

(1) Description of method. The treatment of the costs of developing new package designs or modifying existing designs in accordance with the designby-design capitalization and 60-month amortization method constitutes a permissible method of accounting. Under the design-by-design capitalization and 60-month amortization method, the taxpayer must capitalize the costs of developing (or modifying) any package design if the asset created by those costs has no ascertainable useful life or an ascertainable useful life that extends substantially beyond the end of the tax year in which the costs are incurred. The taxpayer must amortize the basis of any package design (or modification to the design) subject to capitalization over a period of 60 months. Thus, in computing taxable income, the basis of each package design (or modification to the design) subject to capitalization is allowed as a deduction ratably over a 60-month period, beginning with the month the design (or modification to the design) is treated as placed in service. See section 5.02(3) of this revenue procedure. If the package design (or modification to the design) is disposed of or abandoned within the 60month period, the taxpayer is permitted to deduct the unamortized portion of the basis of the design (or modification to the design) in the tax year of disposition or abandonment.

(2) Computation of basis. Under the design-by-design capitalization and 60month amortization method, the basis of each package design (or modification of the design) subject to capitalization must be determined by applying the provisions of § 263 and the regulations thereunder to costs incurred prior to January 1, 1987, and § 263A and the regulations thereunder to costs incurred after December 31, 1986 (regardless of the tax year the design (or modification to the design) is placed in service). The costs required to be capitalized are described in section 2 of this revenue procedure.

(3) Half-year convention. Under the design-by-design capitalization and 60month amortization method, the amortization allowance for each package design

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to designs) which had an ascertainable useful life on the date the designs (or modifications to the designs) were placed in service. The § 481(a) adjustment is the difference at the beginning of the tax year of change between the basis of all such package designs (or modifications to designs) determined under the taxpayer’s present method of accounting and the basis redetermined under the capitalization method.

(2) Change to the design-by-design capitalization and 60-month amortiza- tion method. If the taxpayer is changing its method of accounting for package design costs to the design-by-design capitalization and 60-month amortization method, the § 481(a) adjustment is equal to the total amounts deducted or amortized in tax years prior to the year of change with respect to all package designs (or modifications to designs) subject to capitalization and not abandoned as of the first day of the tax year of change, less the amounts that would have been amortized during the tax years prior to the year of change with respect to such designs (or modifications to designs) had the design-by-design capitalization and 60-month amortization method been used.

(3) Change to the pool-of-cost capital- ization and 48-month amortization method. If the taxpayer is changing its method of accounting for package design costs to the pool-of-cost capitalization and 48-month amortization method, the § 481(a) adjustment is equal to the total amounts deducted or amortized in tax years prior to the year of change with respect to all package design costs treated as incurred during the tax years prior to the year of change, less the amounts that would have been amortized during the tax years prior to the year of change with respect to such costs had the pool-of-cost capitalization and 48-month amortization method been used.