Efficiency versus Validity: The Dilemma of the INDOPCO Regulations

Abstract:     
The article examines the potential invalidity of the INDOPCO regulations, which were finalized by Treasury in 2004 to provide bright lines as to the proper tax treatment of costs associated with intangibles. They were promulgated to reduce tax controversies, which had abounded due to the broad underlying statutory language, and the imprecise standards developed in case law.

Although Treasury's intent was laudable, the regulations are likely invalid in several aspects because they conflict with prior judicial interpretations of the statute. This conclusion seems likely despite the Supreme Court's 2005 decision in National Cable & Telecommunications Association v. Brand X Internet Services (indicating administrative agencies could sometimes overturn prior judicial statutory interpretations).

Certain provisions of the INDOPCO regulations are likely invalid, but detrimental primarily to taxpayers that are particularly ill-suited to wage a costly and time-consuming legal battle to challenge them. An invalid administrative action that is likely to remain unchallenged has troubling policy implications generally. However, this appears to be an emerging trend by Treasury to overturn adverse court decisions by administrative decree.

Number of Pages in PDF File: 122

Keywords: administrative law, federal income tax, capitalization, deductibility, IRC section 263, IRC section 162, IRC section 7805, intangibles, Treasury, IRS, Supreme Court, Clarence Thomas, INDOPCO, Skidmore v. Swift & Company, Chevron U.S.A. v. Natural Resources Defense Council, National Cable & Telecom

working papers series