Internal Revenue Bulletin (2004) stipulates guidance for capitalization of expenditures. There are a number of intangibles listed therein expenditures incurred for acquisition of which are required to be capitalized if they are held to be for more than 12 months period. Para 4 of section1.263 (a)-4 and 1.263(a)-5 are added in the bulletin to read as follows.
(a) Overview. This section provides rules for applying section 263(a) to amounts paid to acquire or create intangibles. Except to the extent provided in paragraph (d)(8) of this section, the rules provided by this section do not apply to amounts paid to acquire or create tangible assets. Paragraph (b) of this section provides a general principle of capitalization. Paragraphs (c) and (d) of this section identify intangibles for which capitalization is specifically required under the general principle. Paragraph (e) of this section provides rules for determining the extent to which taxpayers must capitalize transaction costs. Paragraph (f) of this section provides a 12-month rule intended to simplify the application of the general principle to certain payments that create benefits of a brief duration. Additional rules and examples relating to these provisions are provided in paragraphs (g) through (n) of this section. The applicability date of the rules in this section is prov ided in paragraph (o) of this section. Paragraph (p) of this section provides rules applicable to changes in methods of accounting made to comply with this section.
Terming a credit card agreement as a finacial interest as iten no 2 (i) ( c ) (2) at page 26, the bulletin states that aqusition expendtures for credit card should be capitalised.
Analyzing the code 195, it has been found that it applies to capitalization of business start-up expeditures which can be deducted from the income over a certain period depending upon the election of the tax payer. Credit card acquisitions expenses do not come under the defintion of start-up expenditures as per section 195.( IRC ) Please refer to the Appendix A for defiintions.
In addition to the above clearly defined calrifications, in FSA 200136010, the conlusion arrived at by the Service was that a bank must capitalize the expenditure involved in acquisition of credit card receivables. It includes also credit card accounts from other institutions. In this connection the bank had in its return "deducted the cost of acquiring and securitizing the credit card receivables" ( David J 2002), which the tax officer disallowed. On appeal by the bank against the deductions, it was pointed out that in the case of INDOCO Inc, 503 US 79 (1992), the IRS had already decided that credit card receivables were assets capable of giving future benefits along with interst.and that IRS further decided that it could not be amortized also under sec 195 which only provided for investigative expenses for starting a buisness and not for purchasing a partcular capital asset in reply to the contention of the bank that the expnses were of investigatory in nature and could therfore be deducted.
Under the circumstances, it is