SECTION 2. MODIFICATIONS

.01 Section 1 of Rev. Proc. 97–35 is modified by deleting section 1.02.

.02 Section 2 of Rev. Proc. 97–35 is modified by adding the word “design” after the word “package” in the next to last sentence.

.03 Section 3.03 of Rev. Proc. 97–35 is modified by changing the regulation cite, deleting the last sentence and a cite, and adding a new last sentence and a cite to read as follows:

See former § 1.263A–1T(a)(5)(iii) of the temporary regulations. Section 263A and the temporary regulations thereunder required that costs incurred after December 31, 1986, in

taxable years beginning before January 1, 1994, must be capitalized to the extent that they were attributable to the development and design of product packages. See Rev. Rul. 89–23. .04 Sections 3.04 and 3.05 of Rev. Proc. 97–35 are renumbered as sections 3.07 and 3.08, respectively, and new sections 3.04, 3.05, and 3.06 are added to read as follows:

.04 Section 1.263A–2(a)(2)(ii) of the final regulations, which, in the case of property that is not inventory, applies to costs incurred in taxable years beginning after December 31, 1993, modified the definition of tangible personal property to exclude from “other similar property” any intellectual or creative property that is embodied in a tangible medium that is mass distributed merely incident to the distribution of a principal product or good of the creator. Thus, package design costs incurred in taxable years beginning after December 31, 1993, are not treated as costs of tangible personal property under § 263A.

.05 Accordingly, taxpayers are required to: (1) capitalize under § 263 package design costs incurred prior to January 1, 1987, or in taxable years beginning after December 31, 1993; and (2) capitalize under § 263A package design costs incurred after December 31, 1986, in taxable years beginning before January 1, 1994. .06 Section 197(a), which is generally applicable to property acquired after August 10, 1993, provides that a taxpayer is entitled to an amortization deduction with respect to any “amortizable § 197 intangible” (as defined in § 197(c)), which may include the costs of certain package designs. Section 197(b) provides that, other than the amortization provided in § 197(a), no other depreciation or amortization is allowable for an amortizable § 197 intangible.

.05 Section 3.05 of Rev. Proc. 97–35 (new section 3.08) is modified by inserting in the first sentence after “Thus,” the following: “except for the costs of a package design that is an amortizable § 197 intangible,”.

.06 Section 4 of Rev. Proc. 97–35 is modified to read as follows:

.01 Applicability. Except as provided in section 4.02 of this revenue pro

June 29, 1998 36 1998–26 I.R.B.

modified. Rev. Proc. 90–63, 1990–2 C.B. 664, is modified, and as modified, is superseded. However, see the transition rules in section 13.02 of Rev. Proc. 97–37.