Organizational Expenses [Internal Revenue] Law and Legal Definition
Pursuant to 26 CFR 1.709-2 (a) [Title 26 Internal Revenue; Chapter I Internal Revenue Service, Department of the Treasury; Subchapter A Income Tax; Part 1 Income Taxes; Normal Taxes and Surtaxes; Partners and Partnerships; Determination of Tax Liability] and Section 709(b)(2) of the Internal Revenue Code [26 USCS § 709(b)(2)] defines organizational expenses as “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) [26 USCS § 709(a)]) be amortized over such life.
An expenditure which fails to meet one or more of these three tests does not qualify as an organizational expense for purposes of section 709(b) [26 USCS § 709(b)] and this section. To satisfy the statutory requirement described in paragraph (a)(1) of this section, the expense must be incurred during the period beginning at a point which is a reasonable time before the partnership begins business and ending with the date prescribed by law for filing the partnership return (determined without regard to any extensions of time) for the taxable year the partnership begins business. In addition, the expenses must be for creation of the partnership and not for operation or starting operation of the partnership trade or business. To satisfy the statutory requirement described in paragraph (a)(3) of this section, the expense must be for an item of a nature normally expected to benefit the partnership throughout the entire life of the partnership. The following are examples of organizational expenses within the meaning of section 709 [26 USCS § 709] and this section: Legal fees for services incident to the organization of the partnership, such as negotiation and preparation of a partnership agreement; accounting fees for services incident to the organization of the partnership; and filing fees. The following are examples of expenses that are not organizational expenses within the meaning of section 709 [26 USCS § 709] and this section (regardless of how the partnership characterizes them): Expenses connected with acquiring assets for the partnership or transferring assets to the partnership; expenses connected with the admission or removal of partners other than at the time the partnership is first organized; expenses connected with a contract relating to the operation of the partnership trade or business (even where the contract is between the partnership and one of its members); and syndication expenses.
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