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Robinson Knife Manufacturing Co. v. Commissioner of Internal Revenue

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Argued: December 16, 2009

Before: CALABRESI, CABRANES, and PARKER, Circuit Judges.

Petitioner-Appellant Robinson Knife Manufacturing Company (“Robinson”) sells kitchen tools labeled with trademarks licensed from third parties to whom Robinson pays royalties. In Robinson’s income tax returns for its taxable years ending March 1, 2003, and February 28, 2004, Robinson deducted these royalty payments as ordinary and necessary business expenses under 26 U.S.C. § 162. The Commissioner disagreed and issued a notice of deficiency stating that, under 26 U.S.C. § 263A, the royalties are required to be capitalized and made part of Robinson’s inventory costs. The Tax Court, T.C. Memo 2009-9, 2009 Tax Ct. Memo LEXIS 10, upheld the Commissioner. Robinson appeals. We hold that where, as here, a producer’s royalty payments (1) are calculated as a percentage of sales revenue from inventory and (2) are incurred only upon the sale of that inventory, they are immediately deductible as a matter of law because they are not “properly allocable to property produced” within the meaning of 26 C.F.R. § 1.263A-1(e). We therefore REVERSE the decision below.

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