Robinson Knife Mfg. Co. v. Comm'r, 600 F.3d 121 (2d Cir. 2010) held that, where 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.
The taxpayer designed, manufactured, and marketed kitchen tools, using trademarks and paying the trademark owners royalties. On appeal, the court held it was error to require the taxpayer to capitalize his royalty costs. Although marketing, selling, advertising, and distribution costs were deductible under 26 C.F.R. § 1.263A-1(e)(3)(iii)(A), not all royalty payments were such costs. Assuming royalty payments were not described in § 1.263A-1(e)(3)(ii)(U), they were still indirect costs, which had to be capitalized if they were properly allocable to the property produced.
See taxpayer counsel's input posted on this site:
Immediate Deductions Allowable for Sales-Based Royalties