Several years ago, RJR Nabisco incurred $ 2 million in costs for package design— the physical construction of a package and its graphic design. Nabisco wanted to deduct the entire $ 2 million in the year it was spent; the Internal Revenue Service insisted that the $ 2 million be treated like a capital expenditure and depreciated over time. Eventually, the tax court sided with Nabisco.
a. Explain carefully 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?