Amortizing and deducting partnership organization costs.

• Author: Ellentuck, Albert B.

Facts: Bert and Ernie formed Burntside Golf Club, a calendar-year partnership, to purchase and operate a golf course. Burntside's golf course opened under the new ownership on Feb. 1,2003. In addition to other expenses incurred before the business began, Burntside paid $2,500 to attorneys to draft its partnership agreement, $500 to accountants to organize its books and $3,000 in wages to prepare and maintain the golf course before opening. Issue: Can Bert and Ernie deduct the expenses incurred in organizing their partnership?

Analysis

Generally under Sec. 709(a), partners cannot deduct partnership organization expenses; such costs must be capitalized. However, Sec. 709(b) permits partnerships to elect to amortize organization costs over not less than 60 months, beginning with the month in which the partnership commences business. Organization costs eligible for amortization are expenses:

1. Incident to partnership creation.

2. Chargeable to a capital account.

3. Of a character that, if the partnership had an ascertainable life, would be amortized over that life. The item must be expected to benefit the partnership throughout its entire life.

   An expense must be incurred during a period that starts a reasonable time before the partnership began business and ends on the due date (without extensions) for the return for the partnership year in which the partnership began business. Eligible expenses include filing fees, legal fees to negotiate and draft a partnership agreement, and accounting fees to organize the partnership. Expenses of acquiring assets, business start-up costs and syndication expenses are ineligible.

   The amortization period begins in the month business commences. Regs. Sec. 1.709-1(b)(1) bars a cash-basis partnership from amortizing an expense until paid. Any amortization expense for periods before the year in which the organization costs are paid is deductible in the year of payment.

   If the partnership is liquidated before the amortization period ends, the unamortized portion of the organization costs generally could be deducted under Sec. 165 as a business loss in the liquidation year. If the amortization election is not made, however, these expenses could not be deducted as a business loss. According to Rev. Rul. 87-111, these amounts, having been capitalized and included in the partners' tax basis, will provide a tax benefit only by creating or increasing a capital loss, or reducing a capital gain recognized on the liquidation...