Rev. Rul. 85-32

1985-1 C.B. 186, 1985-12 I.R.B. 6.

PARTNERSHIPS; TREATMENT OF SYNDICATION COSTS

Published: March 25, 1985

Section 709.-Treatment of Organization and Syndication Fees, 26 CFR 1.709-1: Treatment of organization and syndication costs.

  Partnerships; treatment of syndication costs. Syndication costs incurred in connection with the sale of limited partnership interests are chargeable by the partnership to a capital account and can not be amortized.

ISSUE

  May a partnership amortize syndication costs incurred in connection with the

sale of limited partnership interests?

FACTS

  Promoter P formed limited partnership LP to purchase and manage hotels. As part of a public offering of limited partnership interests in LP, P arranged for the printing of a prospectus at a cost of 300x dollars.

LAW AND ANALYSIS

  Section 709(a) of the Code provides that, except as provided in section 709(b), amounts paid to organize a partnership or to promote the sale of partnership interests are not deductible under Chapter 1 of the Code (Normal Taxes and Surtaxes). Section 709(b)(1) permits a partnership to elect to amortize organizational expenses over a period of not less than 60 months.

  Section 709(b)(2) defines organizational expenses as expenditures which are incident to the creation of the partnership, are chargeable to capital account, and are of a character which, if expended incident to the creation of a partnership having an ascertainable life, would be amortized over such life.

  Section 1.709-2(a) of the Income Tax Regulations also discusses the definition of organizational expenses and specifically states that syndication expenses are not organizational expenses within the meaning of section 709.

  Section 1.709-2(b) of the regulations defines syndication expenses as expenses connected with the issuing and marketing of interests in the partnership. Examples of syndication expenses are brokerage fees; registration fees; legal fees of the underwriter and the issuer for securities advice pertaining to the adequacy of tax disclosures in the prospectus or placement memorandum for securities law purposes; accounting fees for preparation of representations to be included in the offering materials; and printing costs of the prospectus, placement memorandum, and other selling and promotional material. These expenses are not subject to the election under section 709(b) and must be capitalized.

  Section 1.709-1(b)(2) of the regulations provides that if there is a winding up and complete liquidation of the partnership prior to the end of the amortization period, the unamortized amount of organizational expenses with respect to which an election has been made under section 709(b) is deductible as a partnership loss to the extent provided under section 165 of the Code in the partnership's final taxable year. However, no deduction is permitted at the partnership or partner level with respect to the partnership's capitalized organization expenses (for which an election under the section 709(b) has been made) and capitalized syndication expenses.

  The 300x dollar cost of printing LP's prospectus is an amount paid to promote the sale of partnership interests, and section 709 of the Code prohibits any deduction for the amount. Section 1.709-2(b) of the regulations further provides that the cost of printing the prospectus is a syndication expense that is not eligible for amortization under section 709(b). As section 709 denies any deduction for organization and syndication fees unless allowed under section 709(b), the provisions of section 709 of the Code and the regulations thereunder supersede any other section contained in Chapter 1 of the Code with respect to the deductibility of the cost of printing LP's prospectus.

HOLDING

  A partnership may not amortize syndication costs incurred in connection with the sale of limited partnership interests. The syndication costs are expenses chargeable by the partnership to capital account.

Rev. Rul. 85-32, 1985-1 C.B. 186, 1985-12 I.R.B. 6.