New Capitalization Rules: Their Sweeping Effect on Financial Institutions

Posted: 3 Aug 2004

See all articles by Ronald Blasi

Ronald Blasi

Georgia State University College of Law

Debra Lee

Deloitte & Touche, LLP


Final regulations issued under IRC Section 263(a) prescribe a sweeping set of new rules that will affect the tax treatment of a variety of amounts paid by taxpayers to acquire or to create intangibles, including amounts paid to facilitate such transactions. While these rules provide some clarity with respect to the types of costs to be capitalized and contain useful simplifying conventions, they also may result in increased capitalization for some taxpayers and will require accounting method changes for most taxpayers. Among the taxpayers most affected by the new regulations will be financial institutions. Nearly all of the assets on a financial institution's balance sheet constitute intangibles that are the focus of these regulations. In these regulations, the IRS and Treasury Department have refrained from requiring capitalization, generally, of amounts paid to create a "substantial future benefit." Thus, this test for capitalization articulated by the Supreme Court in INDOPCO has been substantially attenuated in the regulations. In fact, the IRS and the Treasury Department acknowledged in the preamble to the proposed version of the regulations that the substantial future benefits test has spawned considerable litigation, and that the more administrable test is the "separate and distinct asset" test adopted by the Court many years earlier in Lincoln Savings & Loan Association. The latter test has been proven not to yield the same level of controversy as the significant future benefit standard. Nevertheless, the regulations provide that the Treasury may issue notices identifying specific intangibles the associated costs of which must be capitalized under the "substantial future benefit" test. If such guidance is published, however, it will apply only on a prospective basis. This article provides a detailed analysis of the regulations and of their impact on financial institutions.

Suggested Citation

Blasi, Ronald and Lee, Debra, New Capitalization Rules: Their Sweeping Effect on Financial Institutions. Journal of Taxation and Regulation of Financial Institutions, Vol. 17, No. 5, May-June 2004, Available at SSRN:

Ronald Blasi (Contact Author)

Georgia State University College of Law ( email )

P.O. Box 4037
Atlanta, GA 30302-4037
United States

Debra Lee

Deloitte & Touche, LLP ( email )

Atlanta, GA 30303
United States

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