SERVICE ISSUES PROCEDURE TO ELECT SIXTY-MONTH USEFUL LIFE FOR PACKAGE DESIGN COSTS.

Rev. Proc. 89-17

SECTION 1. PURPOSE

This revenue procedure allows taxpayers that incur package design costs (as defined in section 2 of this revenue procedure) to deem the useful lives of certain package designs to be 60 months.

SECTION 2. DEFINITIONS

For purposes of this revenue procedure, the term "package design" means an asset that is created by a specific graphic arrangement or design of shapes, colors, words, pictures, lettering, and so forth on a given product package, or the design of a container with respect to its shape or function.

The term "package design cost", as used in this revenue procedure, means the cost of package designs. If the taxpayer develops the package design, the term includes the cost of materials, labor, and overhead associated with the design. If an independent contractor performs the work, the term includes all billings related to the development of the particular package design. Whether a package design is created in-house or is created by an independent contractor, the term includes all design exploration and study, refinement of the basic design selected, testing, and preparation of the final master comprehensive design. If the taxpayer purchases the package design, the term includes the purchase price. (See also section 1.263A-1T(a)(5)(ii) of the regulations that treats a taxpayer purchasing a package design as also producing such design to the extent the taxpayer incurs costs with respect to the design). The term, however, does not include costs associated with coupon inserts, refund offers, and other promotion-related changes, nor does it include costs that are unrelated to the package design itself, such as a change to the list of ingredients. Moreover, the term does not include costs that would have qualified as "trademark or trade name expenditures" under section 177 of the Internal Revenue Code of 1954 (the 1954 Code).

SEC. 3. BACKGROUND

01 Because intangible assets created by package design costs generally have useful lives greater than one year, those costs generally must be capitalized, either under section 263A of the Code (for purchase cost and production costs incurred after December 31, 1986) for section 263 (for purchase costs and production costs incurred prior to January 1, 1987). See Rev. Rul. 89-23, page 4, this Bulletin. Rev. Rul. 89-23 also notes that, in general, the cost of package designs may not be amortized because their useful lives cannot be ascertained.

02 To minimize disputes regarding the useful lives of individual package designs, the Service, as a matter of administrative convenience, will allow taxpayers to elect to deem the useful lives of certain package designs to be 60 months.

SEC. 4. SCOPE

This revenue procedure applies only to package designs (as defined in section 2 of this revenue procedure) place in service in a tax year for which the taxpayer files its federal income tax return properly using a capitalization method of accounting with respect to its package design costs (as defined in section 2 of this revenue procedure). See Rev. Proc. 89-16, page 18, this Bulletin, which automatically grants the Commissioner's consent to certain taxpayers that are required to change to a capitalization method of accounting with respect to their package design costs, both with respect to package design costs incurred prior to January 1, 1987 (change in method of accounting made pursuant to section 263 of the Code) and package design costs incurred after December 31, 1986 (change made pursuant to section 263A). See also Notice 88-78, 1988-28 I.R.B. 24 which provides guidance and procedural information to taxpayers that fail to change their method of accounting in order to conform to the uniform capitalization rules in accordance with the effective date provisions of section 263A.

SEC. 5. APPLICATION

01 As a condition to a taxpayer electing pursuant to this revenue procedure to deem the useful lives of certain of its package designs to be 60 months, the tax payer first must change its method of accounting for package design costs to a capitalization method (to the extent it is not already on a capitalization method.) The required change in method of accounting is both with respect to package design costs incurred prior to Januaray 1, 1987, and package design costs incurred after December 31, 1986. See Rev. Proc. 89-16.

02 If an election has been made under this revenue procedure, with respect to a package design, the useful life of that package design is deemed to be 60 months. Thus, in computing taxable income, the cost of the package design would be allowed as a deduction ratably over a 60-month period, beginning with the month the design is placed in service. If the package design is disposed of or abandoned within the 60-month period, the taxpayer would be permitted to deduct the unamortized portion of the cost of the design in the taxable year of disposition or abandonment.

03. With respect to one or more package designs described in section 4 that are placed in service in a tax year, a taxpayer makes an election under this revenue procedure as follows:

(1) The taxpayer must attach a statement to its timely filed (determined with regard to extensions) federal income tax return for the year in which the package designs are placed in service.

(2) The statement must indicate that, for specified package designs, the taxpayer is electing the 60-month deemed useful life provided in Rev. Proc. 89-17.

(3) The statement must provide a description of the particular package design(s) with respect to which the election is made, the date on which each was placed in service, and the cost basis of each.

04 If no election is timely made for a package design, that package design remains subject to the federal income tax treatment described in Rev. Rul. 89-23.

SEC. 6. EFFECTIVE DATE

This revenue procedure is effective for package designs placed in service in tax years ending on or after March 6, 1989, the date of publication.

DRAFTING INFORMATION

The principal author of this revenue procedure is Robert Testoff of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure contact Mr. Testoff on (202) 566-4196 (not a toll-free call).