Court of Appeals Rules the Master Manuscripts are Tangible Property
In Random House, Inc. v. Department of Treasury, Michigan Court of Appeals, No. 307035, November 27, 2012, a taxpayer was allowed to claim the capital acquisition deduction (CAD) under the Michigan single business tax (SBT) for amounts spent purchasing original or "master manuscripts" from authors. The taxpayer was a publisher and sold books in interstate commerce.
The taxpayer argued that the costs were of the same type that were capitalized and depreciated for federal income tax purposes as required by the IRS; in essence, the taxpayer claimed that it was buying physical manuscripts. The Department of Treasury argued that the taxpayer purchased the rights to publish books, which was an intangible asset.
Under the SBT law, the tax base was adjusted by deducting the cost paid or accrued in a tax year of tangible assets of a type that were eligible for depreciation for federal income tax purposes. Under federal guidelines, to determine if a taxpayer producing intellectual or creative property is producing tangible personal property or intangible property, the term "tangible personal property" includes books. Furthermore, according to the IRS, the costs of producing such property, including prepublication expenditures incurred by publishers, are required to be capitalized.
Under a previous federal income tax audit, the IRS required the taxpayer to capitalize the amounts spent purchasing the manuscripts. The department argued that the manuscripts were not subject to wear and tear or decay. The court noted that this argument was without merit because the "useful life" was a period over which the asset may reasonably be expected to be useful to the taxpayer in trade or business or in the production of income. Accordingly, the taxpayer was entitled to the CAD under the SBT for manuscript purchases.