Question

About two decades ago, RJR Nabisco incurred $2 million dollars in cost for package design – the physical construction of the package and graphic design. Nabisco wanted to deduct the entire $2 million in the year it was spent; the Internal Revenue Service (IRS) insisted that the $2 million be treated as a capital expenditure and depreciate over time. Eventually, the tax court sided with Nabisco.

a. Explain clearly why Nabisco would prefer to have the $2 million treated as a current expense rather than a capital expenditure?

b. Do you agree with the ruling of the tax court? Briefly explain your answer.

Answer 1

Answer :-

a. Explain clearly why Nabisco would prefer to have the $2 million treated as a current expense rather than a capital expenditure?

On the off chance that the $20 million is exhausted , the firm gets a conclusion of $20 million in the present year. on the off chance that the $20 million is devaluation , the derivations are spread after some time ( in a way that relies upon the points of interest of the deterioration plan ). The present estimation of things to come stream of seasonings is under $20 million .

b. Do you agree with the ruling of the tax court? Briefly explain your answer.

Since the bundle configuration will yield benefits that reach out over some undefined time frame , it would appear to be sensible to see it as a capital use . Provided that this is true, devaluation is proper, and the IRS was correct .