Partnership structural changes: deductibility of expenses.

• Author: Mack, Lynda R.

Partnerships may be divided, combined, or otherwise restructured in order to meet a taxpayer's goal of asset protection, succession planning, or wealth preservation. To complete the restructuring, the taxpayer will usually incur significant legal and accounting fees. These expenses likely comprise a combination of capital and deductible expenses, depending on the particular circumstances surrounding the restructuring.

Regs. Sec. 1.263(a)-5(a) requires a partnership to capitalize expenses paid to facilitate its restructuring, recapitalization, or reorganization. Sec. 709 carves out an exception to this rule and allows the partnership to deduct certain expenses incurred in the organization and creation of a new partnership. Consequently, it becomes important to determine whether the restructuring transactions create a new partnership or simply continue the original partnership. This item examines several partnership restructuring transactions and discusses the circumstances in which a restructuring expense can be deducted and amortized under Sec. 709 or must be capitalized under Regs. Sec. 1.263(a)-5(a).

Regs. Sec. 1.2631a1-5 Capitalization Requirement

In relevant part, Regs. Sec. 1.263(a)-5(a) requires the taxpayer to capitalize expenses incurred to facilitate (1) a restructuring, recapitalization, or reorganization of a business entity's capital structure; (2) a Sec. 721 transfer; and (3) a formation or organization of a disregarded entity. The regulations explain that an amount is paid to facilitate one of the above transactions if, based on the facts and circumstances, it is "paid in the process of investigating or otherwise pursuing the transaction" (Regs. Sec. 1.263(a)-5(b)). The fact that an amount would (or would not) have been paid but for the transaction is relevant but does not determine the issue of whether an amount facilitates a transaction (Regs. Sec. 1.263(a)-5(b)). Regs. Sec. 1.263(a)-5(d) contains an exception for de minimis costs and states that amounts paid in the process of investigating or pursuing one of the above transactions will be treated as an amount that does not facilitate a capital transaction if, in the aggregate, the amounts do not exceed $5,000. Nevertheless, the taxpayer may still elect to capitalize de minimis costs under Regs. Sec. 1.263(a)-5(d)(4). Notwithstanding Regs. Sec. 1.263(a)-5(a), a partnership may still deduct certain expenses paid to facilitate its structural change if the deduction is...