The IRS has released a Chief Counsel advice memorandum (CCA 202304009) concluding that a taxpayer’s intent determines the proper treatment for capitalization under Section 263(a) and recovery under Sections 167 or 197 for amounts paid or incurred to obtain Priority Review Vouchers (PRVs).
PRVs provide pharmaceutical companies an expedited New Drug Application (NDA) review from the FDA as an incentive to develop treatments for rare or neglected diseases. PRVs do not expire and are freely transferrable to both related and unrelated parties.
Treas. Reg. Sec. 1.263(a)-4 provides general rules for capitalizing amounts paid or incurred for the acquisition or creation of an intangible asset, including amounts that facilitate the acquisition or creation of an intangible asset. The IRS stated that the proper tax treatment for amounts paid to acquire a PRV hinges on the facts and circumstances surrounding the acquisition, and specifically the taxpayer’s intent for the PRV.
A taxpayer who acquires a PRV for the purpose of resale or investment must capitalize the acquisition costs under Treas. Reg. Sec. 1.263(a)-4(c)(1) as amounts paid to acquire an intangible. In this scenario, the IRS considered the PRV a separate and distinct intangible asset. On the other hand, the IRS said that a taxpayer that intends to utilize the PRV to expedite an NDA review is required to capitalize the acquisition costs under Treas. Reg. Sec. 1.263(a)-4(d)(5) as amounts paid to facilitate obtaining the NDA. The IRS reasoned that because the PRV is intended to be used to obtain an NDA, which is a franchise right granted by a government agency, the cost of the PRV is a transaction cost that facilitates obtaining that government right and must be capitalized to the NDA.
The IRS further indicated that costs to obtain PRVs are neither depreciable nor amortizable at the time the PRV is acquired. The IRS stated that the PRV by itself is not a Section 197 intangible because the acquisition of rights from a governmental unit are expressly excluded from amortization under Section 197 unless they were acquired as part of a purchase of a trade or business. Further, amounts paid or incurred to acquire PRVs are not depreciable under Section 167 because PRVs do not expire and therefore are assets with unlimited useful lives.
However, a PRV may be recovered later as a cost of facilitating the creation of a franchise right under Section 197 if the taxpayer uses the PRV to obtain an NDA, because franchise rights are deemed to be a trade or business and are an amortizable Section 197 asset. In that circumstance, the taxpayer may recover the costs to acquire the PRV as part of the NDA ratably over a 15-year period beginning on the first day of the month that the NDA is approved. For PRVs acquired for resale, the costs are recovered as basis upon the sale. Therefore, taxpayers that acquire PRVs should consider the intent for obtaining PRVs and document the facts surrounding the acquisition of PRVs because it will impact how to properly capitalize and recover the associated amounts.
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