Textbooks and visual aids; devel­opment and publication costs . Costs incurred by an accrual basis taxpayer in writing, editing, design and art work directly attributable to the development of textbooks and visual aids are capital expendi­tures under section 263 of the Code that are depreciable under section 167(a). Costs incurred in the printing and publishing of such material should be inventoried with aliquot apportionment to the books and visual aids on hand at the end of the taxable year. Expenditures for manuscripts or visual aids that are abandoned may be deductible as losses under section 165. Fur­ther, the Service will not follow the decision in Stern holding that a tax­payer, in the business of writing books, may deduct traveling ex­penses incurred while researching, writing, and arranging material for a book.

Rev. Rul. 73-395

Advice has been requested concern­ing the proper Federal income tax treatment of expenditures incurred for the writing and editing of text­books and the design and art work of visual teaching aids that occurred prior to publication of the textbook and the visual aid. Advice has also been requested as to the tax treatment of expenditures incurred in the actual printing and publishing of a textbook and visual aid.


The taxpayer is in the business of creating, publishing, and distributing textbooks and visual teaching aids. In this connection, it is involved in the process of writing, editing, designing, and in the preparation of the art work necessary in the development of textbooks and in the development of new and improved product models of teaching aids. Copyrights are obtained on the captions and the text material of the visual aids and on the textbooks after all of the writing, editing, design and art work is completed. The ex­penditures are specifically identifiable and allocated to each project. The ap­proximate life of a textbook or visual aid is substantially less than the legal life of a copyright. In a few instances, projects that are started must be aban­doned prior to the receipt of a copy­right.

The taxpayer, using the accrual method of accounting, asks whether it may deduct, in the year incurred, all of its expenditures relative to the writ­ing, editing, design and art work for textbooks and/or visual teaching port­folios, even though a substantial num­ber of such books and visual aids printed may be on hand at the end of the year, on the assumption that they are research and experimental expenditures pursuant to section 174 of the Internal Revenue Code of 1954. The, costs of actual printing and binding have been included in an inventory account in accordance with section 471.

Section 174(a)(1) of the Code permits, under certain circumstances, a deduction for research and experi­mental expenditures which would otherwise be chargeable to capital account.

Section 1.174-2(a)(1) of the In­come Tax Regulations defines re­search and experimental expenditures as expenditures incurred in connection with a taxpayer’s trade or business which represent research and develop­ment costs in the experimental or laboratory sense. Specifically excluded are expenditures for research in con­nection with literary, historical, or similar projects.

Section 1.263(a)-2(b) of the regu­lations, in substance, provides that amounts expended for securing a copyright and plates which remain the property of the person making the payments are to be capitalized.

Section 167 of the Code sets forth the general rule that there shall be allowed as a depreciation deduction a reasonable allowance for the exhaus­tion, wear and tear, and obsolescence of property used in the trade or busi­ness, or of property held for the pro­duction of income.

Section 1.167(a)-1(a) of the regu­lations in defining what constitutes a reasonable allowance for depreciation states that the amounts of deprecia­tion set aside, plus the salvage value, will at the end of the estimated use­ful life of the depreciable property equal the cost or other basis of the property.

Section 1.167(a)-1(b) of the regu­lations provides, in part, that the esti­mated useful life of an asset is the period of time it can reasonably be expected to be used in the taxpayer’s trade or business. It further provides that the estimated remaining useful life may be subject to redetermination and modification in accordance with circumstances known to exist at the end of the taxable year.

Section 1.471-1 of the regulations provides that in order to reflect tax­able income correctly, inventories at the beginning and end of each tax­able year are necessary in every case in which production, purchase, or sale of merchandise is an income-produc­ing factor.

Section 165(a) of the Code pro­vides that there shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.

Expenditures that are directly at­tributable to producing and copyright­ing a manuscript of a literary compo­sition by a taxpayer result in the creation of an asset having a useful life that extends substantially beyond the close of the taxable year and are thus capital in nature and not deduct­ible for Federal income tax purposes. Section 1.461-1(a)(2) of the regula­tions. Also see Rev. Rul. 68-194, 1968-1 C.B. 87. Moreover, a copy­right is an asset and costs directly at­tributable thereto are capital in nature within the meaning of section 263 of the Code.

Accordingly, in the instant case it is held that the costs incurred in the writing, editing, design and art work directly attributable to the develop­ment of the textbooks and visual aids do not constitute research and experi­mental expenditures under section 174 of the Code. Also such costs are not inventoriable within the meaning of section 471 as they represent expendi­tures that must be capitalized pursu­ant to section 263 of the Code and the regulations thereunder and that are depreciable under section 167(a). Although the legal life of a copyright is 28 years, exclusive of any exten­sions, the actual useful life of the copyright for depreciation purposes may be less when it is so demon­strated.

Expenditures incurred for manu­scripts or visual aids that are aban­doned prior to the receipt of a copy­right are deductible in accordance with section 165 of the Code. The ad­justed basis of a copyright on a text­book or visual aid may be deductible under section 165 provided the tax­payer can establish the fact of aban­donment of the copyright. See section 1.165-2(c) of the regulations. Ex­penditures incurred in the actual printing and publishing of the text­books and visual aids should be inven­toried within the meaning of section 471 with an aliquot part of such costs being apportioned to the books and visual aids still on hand at the end of the taxable year.

The Service will not follow the de­cision of the United States District Court, Central District, California in the case of Stern v. United States , 1971-1 U.S.T.C. 86,419 holding that a taxpayer, in the business of writing books, could deduct traveling expenses incurred while researching, writing, and arranging material for a book. No appeal was recommended in that case for the reason that an erroneous stipulation was made to the effect that “if the taxpayer was determined to be in the business of being a writer, the traveling expenses in question were ordinary and necessary.”

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