Rev. Rul. 88-4

1988-1 C.B. 264, 1988-3 I.R.B. 8.

                       Internal Revenue Service (I.R.S.)

                                 Revenue Ruling

           PARTNERSHIPS; TREATMENT OF THE FEE PAID FOR A TAX OPINION

                          Published: January 19, 1988

Section 709. - Treatment of Organization and Syndication Fees, 26 CFR 1.709-2: Definitions.

(Also Sections 162, 212; 1.162-1, 1.212-1.)

  Partnerships; treatment of the fee paid for a tax opinion. The fee paid by a syndicated limited partnership for the tax opinion used in the partnership's prospectus is a syndication expense chargeable by the partnership to a capital account and can not be amortized.

ISSUE

  Is the fee paid by a syndicated limited partnership for the tax opinion used in the partnership's prospectus a syndication expense under section 709 of the Internal Revenue Code?

FACTS

  LP is a publicly syndicated limited partnership. LP engaged the services of A, a tax attorney, to prepare the tax opinion used in connection with the preparation of the tax section of the prospectus that was used to sell interests in LP. The fee paid to A covered the expense of researching, analyzing, developing, and drafting the opinion.

LAW AND ANALYSIS

  Section 162(a) of the Code provides that there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.

  Section 212(3) of the Code provides that, in the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in connection with the determination, collection, or refund of any tax.

  Section 709(a) of the Code provides that, except as provided in section 709(b), no deduction shall be allowed under chapter I of subtitle A of the Code to a partnership or to any partner for any amounts paid or incurred to organize a partnership or to promote the sale of (or to sell) an interest in such partnership.

  Section 709(b) of the Code provides that amounts paid or incurred to organize a partnership may be allowed as a deduction ratably over a period of not less than 60 months beginning with the month in which the partnership begins business.

  Section 1.709-2(a) of the Income Tax Regulations provides that organization expenses are expenses which: (1) are incident to the creation of the partnership, (2) are chargeable to capital account and (3) are of a character which, if expended incident to the creation of a partnership having an ascertainable life, would (but for section 709(a) of the Code) be amortized over such life.

  Section 1.1709-2(b) of the regulations provides that syndication expenses are expenses connected with the issuing and marketing of interests in the partnership. Included in the category of syndication expenses are (1) legal fees for securities advice and for advice pertaining to the adequacy of tax disclosures in the prospectus or placement memorandum for securities law purposes and (2) accounting fees for the preparation of representations to be included in the offering materials. Syndication expenses are not subject to the election under section 709(b) of the Code and must be capitalized.

  For most syndicated partnerships, federal or state securities rules require that the prospectus or private placement memorandum contain a tax opinion or tax section setting forth the tax consequences to the investors. Moreover, the presence of a tax opinion in an offering of partnership interests is viewed as an important promotional feature which is useful in marketing the interests to investors.

  In this case, the expenses of preparing the tax opinion (including the expense of legal research and analysis performed with respect to the opinion, as well as the expense of developing and drafting the opinion) was incurred to comply with securities laws and to promote the marketing of partnership interests. Thus, the expense of preparing the tax opinion is a syndication expense under section 709 of the Code. See Surloff v. Commissioner, 81 T.C. 210, 245 (1983).

  Section 709 of the Code specifically prohibits deductions under chapter 1 for any expense of organizing or syndicating a partnership. Therefore, if an expense falls within the scope of section 709, no deduction is allowable unless the expense is an organization expense that can be amortized as provided in section 709(b). Since the expense of the tax opinion is the type of expense described in section 709, it may not be deducted under section 162(a) or section 212(3). In addition, since the expense of the tax opinion is a syndication expense rather than an organization expense, it may not be amortized under section 709(b). See Rev. Rul. 85-32, 1985-1 C.B. 186, which holds that syndication fees may not be amortized; See also section 1.709-2(b) of the regulations.

HOLDING

  The fee paid by a syndicated limited partnership for the tax opinion used in connection with the preparation of the partnership prospectus is a syndication expense that may not be amortized under section 709(b) of the Code or deducted under section 162(a) or section 212(3). The fee must be capitalized by the partnership.

DRAFTING INFORMATION

  The principal author of this revenue ruling is Claire Toth of the Interpretative Division. For further information regarding this revenue ruling contact Ms. Toth on (202) 566-3354 (not a toll-free call).