Time: 10 min.
What are “syndication costs” and how are they treated for tax purposes?
Syndication costs are costs incurred in bringing an investment partnership to
market. These costs include brokerage commissions and fees; registration fees;
legal and accounting fees for developing the offering document; and printing and
distribution costs for the prospectus, placement memoranda, and related
Under § 709, syndication costs cannot be deducted and no amortization is
permitted. Upon termination of the partnership, the partners’ basis will
theoretically still include those costs, so the partner might have a lower gain or a
greater loss at that time. (See Chapter 11 for treatment of liquidating distributions
and limitations on when a loss can be recognized.)
SCPE.HRMY.15.LO: 10-04 - LO: 10-04
United States - BUSPORG: Analytic
United States - AK - AICPA: FN-Reporting
Time: 5 min.
Harry and Sally are considering forming a partnership. Both taxpayers use the calendar year
and are cash basis taxpayers. The partnership will not be a tax shelter. The partners are uncertain
as to whether the partnership should use the cash or accrual method of accounting. Also, the idea
of a tax deferral in the first year of operations has led them to consider using a June 30 fiscal
year-end for the partnership.
As their tax adviser, identify the issues that must be considered in selecting an accounting method
and tax year for the partnership.
Because neither partner is a Subchapter C corporation and the partnership is not a
tax shelter, the partnership may select any accounting method: cash, accrual, or a
hybrid of the two methods.
If the partnership uses the accrual method of accounting in determining its income,
the partners will be taxed on partnership revenues from all “closed” transactions.
In this regard, it does not matter whether cash has been received by the partnership
and whether or not the partners use the accrual method on their individual tax
returns. Thus, if the partnership adopts the accrual method for tax purposes, the
partners may be faced with reporting and paying taxes on partnership income long
before cash is available for distribution.
However, under accrual accounting,
expenses incurred but not paid may serve to mitigate or eliminate this possibility.
Regarding the July 1 to June 30 fiscal year, the desired tax deferral has little
chance of success. Under §
706(b), the partnership must use the calendar year
unless Harry and Sally can convince the
IRS that a business purposes exists for a
tax year other than the calendar year. Nothing in the fact pattern indicates a valid