Question & Answer: Determine the deductibility under Section 162 and 195 of expenses incurred in the following situations……

Determine the deductibility under Section 162 and 195 of expenses incurred in the following situations.

(a) Tycoon, a doctor, unexpectedly inherited a sizable amount of money from an eccentric millionaire. Tycoon decided to invest a part of her fortune in the development of industrial properties and she incurred expenses in making a preliminary investigation.

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(b) The facts are the same as in (a), above, except that Tycoon, rather than having been a doctor, who was a successful developer of residential and shopping center properties.

(c) The facts are the same as in (b), above, except that Tycoon, desiring to diversify her investments, incurs expenses in investing the possibility of purchasing a professional sports team.

(d) The facts are the same as in (c), above, and Tycoon purchases a sports team. However, after two years Tycoon’s fortunes turn sour and she sells the team at a loss. What happens to the deferred investigation expenses?

Expert Answer

 

Solution:-

(a):-  

No deduction under§195(a); Amortizable under§195(c)(1)(A)(i) as investigation costs if she goes into the business (amortizable over 60 months under§195(b)(1))

  1. Morton Frank says no deduction under§162 b/c the expense was not incurred in carrying on an existing trade or business.

i.In the business = deduction

ii.Not in the business & GO in it = capitalize & amortize

iii.Not in the business & DON’T GO in it = no benefi

2. If she buys the business she could take a§162 deduction.

3. NOTE: IRS often finds separation of trades or businesses: if it’s a little diff, IRS says it’s a diff trade or business than you’re already in.

4. HYPO: Mfr/Wholesaler decides to sell in its new retail shop. IRS said it’s a new trade or business! §195 applies.

(b):-

If this is considered an existing business then it is deductible under§162 through§195(c)(1)(B) – look at residential v. industrial; If this is considered start-up expenses for a new business then§195(b)(1) would apply if she actually started the business (60 month amortization).

  1. Issue: was Tycoon already in the business (i.e.: “carrying on”)? Maybe.

i.If so, then it would fall under§162–it had to be ordinary and nec expense.

ii.If not, then§195 would apply.

(c):-

This is not an expansion of an existing trade or business, therefore no deductionunder§162; If she goes into the business then§195 will apply (60 months amortization).

  • Buying a sports team would not be expanding one’s industrial development business/trade, so this would fall under§195.

(d):-

Assuming it is a 195 to begin with, 24 months into period, still has 13 years worth of amortization to go.  If you totally cease business before amortization has run, then you can claim loss (and by loss it is remainder of amortization) for current year

§195(b)(2) says any leftover deductions will be used up through§165.Limited as an individual under§165(c)(1).

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