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No capitalization required – in this case


The IRS has concluded that amounts that a manufacturer paid to retailers to offset the cost of constructing display areas for the manufacturer’s products did not have to be capitalized.

Under the facts presented in Chief Counsel Advice (CCA) 201405014, the manufacturer enters into an agreement to pay the retailers to maintain retail space that conforms to the manufacturer’s design requirements. The agreement provides that the retailers must repay the manufacturer if, within 15 years, the retailer no longer conforms to the requirements of the display area, no longer sells and maintains a full line of the manufacturer’s products or no longer provides servicing. The agreement does not obligate the retailers to purchase any specific quantity of products.

The CCA concluded that the manufacturer did not have to capitalize its payments to the retailer because the manufacturer did not own the retail space and the payments did not create or enhance a separate and distinct intangible asset.

The retailers were required to sell and maintain a full line of products and to provide servicing on site. However, the retailers were not required to purchase any specific amount of products during the term of the agreement, and the price of the product was not fixed. The manufacturer did not have the right to provide any specific quantity of products to the retailers.

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