14-Jun-2019 2:24pm
14-Jun-2019 11:30pm
15-Jun-2019 11:44am
16-Jun-2019 8:53am
SEC. 195. START-UP EXPENDITURES.
(a) ELECTION TO AMORTIZE.—Start-up expenditures may, at the
election of the taxpayer, be treated as deferred expenses. Such
deferred expenses shall be allowed as a deduction ratably over such
period of not less than 60 months as may be selected by the taxpayer
(beginning with the month in which the business begins).
(b) START-UP EXPENDITURES.—For purposes of this section, the
term 'start-up expenditure' means any amount—
(1) paid or incurred in connection with—
(A) investigating the creation or acquisition of an active
trade or business, or
(B) creating an active trade or business, and
(2) which, if paid or incurred in connection with the expansion
of an existing trade or business (in the same field as the trade or
business referred to in paragraph (1)), would be allowable as a
deduction for the taxable year in which paid or incurred.
(c) ELECTION.—
(1) TIME FOR MAKING ELECTION.—An election under subsection
(a) shall be made not later than the time prescribed by law for
filing the return for the taxable year in which the business
begins (including extensions thereof).
(2) SCOPE OF ELECTION.—The period selected under subsection
(a) shall be adhered to in computing taxable income for the
taxable year for which the election is made and all subsequent
taxable years.
(3) MANNER OF MAKING ELECTION.—An election under subsec-
tion (a) shall be made in such manner as the Secretary shall by
regulations prescribe.
(d) BUSINESS BEGINNING.—For purposes of this section, an
acquired trade or business shall be treated as beginning when the
taxpayer acquires it.
21-Jun-2019 6:16am
SEC. 195. START-UP EXPENDITURES.
[[(a) CAPITALIZATION OF EXPENDITURES.—Except as otherwise pro-
vided in this section, no deduction shall be allowed for start-up
expenditures.]]
(b) ELECTION TO AMORTIZE.—
(1) GENERAL.— Start-up expenditures may, at the election
of the taxpayer, be treated as deferred expenses. Such
[[prorated equally]]
deferred expenses shall be allowed as a deduction XXratablyXX over
such period of not less than 60 months as may be selected by the
taxpayer (beginning with the month in which the [[active trade
or ]]business begins).
[[(2) DISPOSITIONS BEFORE CLOSE OF AMORTIZATION PERIOD.—In
any case in which a trade or business is completely disposed of
by the taxpayer before the end of the period to which paragraph
(1) applies, any deferred expenses attributable to such trade or
business which were not allowed as a deduction by reason of
this section may be deducted to the extent allowable under
section 165.]]
(c) DEFINITIONS.—For purposes of this section—
(1) START-UP EXPENDITURES.—The term 'start-up expenditure'
means any amount—
(A) paid or incurred in connection with—
(i) investigating the creation or acquisition of an active
trade or business, or
(ii) creating an active trade or business, [[or
(iii) any activity engaged in for profit and for the
production of income before the day on which the
active trade or business begins, in anticipation of such
activity becoming an active trade or business,]] and
[[operation]]
(2) which, if paid or incurred in connection with the XXexpansionXX
of an existing [[active]] trade or business (in the same field as the trade or
business referred to in subparagraph (A)), would be allowable as a
deduction for the taxable year in which paid or incurred.
[[The term 'start-up expenditure' does not include any amount
with respect to which a deduction is allowable under section
163(a), 164, or 174.]]
(2) BEGINNING OF TRADE OR BUSINESS.—
[[(A) IN GENERAL.—Except as provided in subparagraph
(B), the determination of when an active trade or business
begins shall be made in accordance with such regulations as
the Secretary may prescribe.]]
(B) ACQUIRED TRADE OR BUSINESS.—An acquired [[active ]]
trade or business shall be treated as beginning when the
taxpayer acquires it.
(d) ELECTION.—
(1) TIME FOR MAKING ELECTION.—An election under subsection
(b) shall be made not later than the time prescribed by law for
filing the return for the taxable year in which the [[trade or ]]business
begins (including extensions thereof).
(2) SCOPE OF ELECTION.—The period selected under subsection
(b) shall be adhered to in computing taxable income for the
taxable year for which the election is made and all subsequent
taxable years.
XX(3) MANNER OF MAKING ELECTION.—An election under subsec-
tion (a) shall be made in such manner as the Secretary shall by
regulations prescribe.XX
22-Jun-2019 1:07pm
Respondent also argued that petitioners' 2009 rental expenses with respect to the Idaho property are startup expenditures under section 195 and must be capitalized. HN12 A startup expenditure is any amount paid or incurred in connection with investigating the creation or acquisition of an active trade or business; creating an active trade or business; or any activity engaged in for profit and for the production of income before the day on which the active trade or business begins, in anticipation of such activity's becoming an active trade or business, which, if paid or incurred in connection with the operation [**34] of an existing active trade or business, would be allowable for that taxable year. Sec. 195(c)(1).
[*35] HN13 Section 195 applies to both section 162 activities and section 212 activities. Toth v. Commissioner, 128 T.C. 1, 4 (2007); Hardy v. Commissioner, 93 T.C. 684, 692-693 (1989); see sec. 195(c). Rental activity must have commenced in order for related expenses to be considered ordinary and necessary. See Charlton v. Commissioner, 114 T.C. 333, 338 (2000); Woody v. Commissioner, T.C. Memo. 2009-93, 2009 WL 1230790, at *4, aff'd, 403 F. App'x 519 (D.C. Cir. 2010).
Even accepting respondent's premise that renting the Idaho property to vacationers was a new business distinct from their earlier 2009 rentals to the Bittons and Black Tip Supply, we have found that the Bittons and Black Tip Supply rented the Idaho property for a substantial part of 2009, and petitioners offered the property as a vacation rental in late 2009. We therefore conclude that petitioners' 2009 rental costs incurred were deductible rental expenses to the extent substantiated (and subject to the limits under section 469). See Charlton v. Commissioner, 114 T.C. at 338 (holding that the taxpayers' costs were startup expenditures because they did not at least offer the properties for rent).
22-Jun-2019 4:09pm
Chay wrote:Specifically, it is contended that the term "active trade or business" as used in section 195 applies equally to section 162 activities and section 212 activities.
A passive activity is any activity involving the conduct of a trade or business--or an income-producing activity--in which a taxpayer does not materially participate. Id. subsec. (c)(1), (6)
Chay wrote:To be subject to the "usual" PAL rules, an activity must involve the conduct of a trade or business (§469(c)(1)(A)). For these purposes, a "trade or business" includes any activity with respect to which expenses are allowable as a deduction under section 212, but only to the extent provided in regulations (§469(c)(6)). The regulations under section 469 provide that trade or business activities are defined in § 1.469-4(b)(1) (§§ 1.469-1T(e)(1) and -1(e)(2)), and when we look at the named section, we find that the definition applies to activities that:
- Involve the conduct of a trade or business (within the meaning of section 162);
- Are conducted in anticipation of the commencement of a trade or business; or
- Involve research or experimental expenditures that are deductible under section 174 (or would be deductible if the taxpayer adopted the method described in section 174(a)).
23-Jun-2019 8:51pm
23-Jun-2019 10:10pm
Jeff-Ohio wrote:Is it your position that Sec 195 doesn’t apply, at all, to Sec 212 activities (in terms of pre-activity commencement expenses)?
Or, is it your position that Sec 195 does apply to 212 activities in terms of capitalization (of pre-activity commencement expenses), but if the Sec 212 activity remains a Sec 212 activity, no amortization is allowed of those pre-activity commencement expenses?
Jeff-Ohio wrote:Toth wasn’t really about pre-activity commencement expenses. In Toth, we had an ongoing Sec 212 activity. The IRS said, “Wait a minute. Even though the taxpayer had an ongoing 212 activity, since the taxpayer anticipated that that activity would be a full-fledged operating business, all the ongoing expenses should be capitalized under Sec 195 based on (C)(1)(A)(iii).”
The judge didn’t buy this argument. The judge basically said that Sec 195 has no application to expenses incurred in an ongoing (i.e. up and running) activity, be it a Sec 212 activity or not. As the judge said:
This Court will not interpret section 195 to override the deductibility of ordinary and necessary expenses petitioner incurred in an ongoing section 212 activity any more than it would do so for an ongoing section 162 activity
But this is all about an “ongoing” Sec 212 activity. And it clearly resolves that issue, IMO.
Jeff-Ohio wrote:In my mind, the issue at play relates to pre-activity commencement expenses with respect to a Sec 212 activity. Old case law said that Sec 195 didn’t apply to such expenses, so people were just expensing them outright. New law says that Sec 195 does apply to those expenses, at least in terms of capitalization.
24-Jun-2019 8:30am
Where in the case law has anyone said that section 212 pre-activity commencement expenses are capitalized under section 195?
If an expense is truly incurred "in anticipation of" the activity becoming a trade or business, then that expense is for the purpose of creating that business.
24-Jun-2019 9:30am
Jeff-Ohio wrote:Sec 195 says what it says. It first defines start-up costs and then says those aren’t deductible. If they’re technically capitalized under some other provision, who cares?
Jeff-Ohio wrote:If an expense is truly incurred "in anticipation of" the activity becoming a trade or business, then that expense is for the purpose of creating that business.
You say this, despite what the judge said in Toth, and despite your own words in Post #3:
Once her section 212 activity has begun, the deduction of ordinary and necessary expenses paid or incurred in that activity is not precluded by section 195 regardless of whether that activity is subsequently transformed into a trade or business.
Jeff-Ohio wrote:The distinction between a Sec 212 activity that morphs into a Sec 162 activity, in that same “line of business,” is one of the slightest degree. You’re acting like a taxpayer has an ongoing Sec 212 activity…and then we have a distinct pause…and then we now start a Sec 162 activity. You’re focusing on the “pause.” The first issue you have is that you’re implying that during the pause, the Sec 212 activity ceases. Therefore, you would assert, cases like Toth do not apply because we don’t any ongoing activity being undertaken during the pause period. And after the pause we have a brand new business. Therefore, the transformative costs incurred during the pause relate to that new business and are subject to Sec 195. That might be fair enough if the prior Sec 212 activity and the current Sec 162 activity are completely different “lines of businesses.” I think we could all see how that logic might apply. But that is not the reality of things. The reality of things is just like we see in Rose: The Sec 212 activity and the Sec 162 activity involve the same line of business. In Rose, the judge said there was no pause. And if there is no pause, we jump directly from one to the other, making Section 195 inapplicable across the board.
25-Jun-2019 9:00am
All costs capitalized under section 195(a)
You've completely ignored the distinction I drew in my last post between an "ordinary and necessary" expense and an "expense truly incurred 'in anticipation of' the activity becoming a trade or business".
In hindsight, we might say that there was no ongoing activity at all, thus there was no "activity engaged in for profit and for the production of income", thus the concept of "transformative costs" isn't really on point.
and Congress was grappling with the contention that there really was an ongoing activity separate from the section 162 activity that hadn't started yet.
25-Jun-2019 1:45pm
Jeff-Ohio wrote:You said yourself that nothing gets capitalized under Sec 195 because it’s a deduction provision.
Jeff-Ohio wrote:But, if we play along, you’re incorrect from a technical standpoint: Sec 195(a) doesn’t say you capitalize the costs, it just says the costs are non-deductible.
Jeff-Ohio wrote:If you can maybe give us a firm example of a real life taxpayer, then maybe we can follow your thought process better. Right now, it seems like you’re creating distinctions that courts don’t find to be distinctions.
As far as I’m concerned, which comports with the professional literature on the matter, I’d say Sec 195 applies to a Sec 212 activity just as it applies to a Sec 162 activity. We now have parity and equal footing. End result is simple: Pre-commencement costs of the Sec 212 activity get captured by Sec 195. Coddington explained himself very well in the thread you linked in Post #1. We have the statute saying one thing, but we have to take it with a grain of salt, because of the “behind the scenes” stuff the statute doesn’t say.
25-Jun-2019 7:38pm
So unless you can back that up somehow, you should agree that the language of section 195(a) (which, by the way, is called "capitalization of expenditures") does provide for capitalization.
then we are forced to conclude that section 263(a) is also not a capitalization provision.
nowhere in case law has anyone said that section 212 pre-activity commencement expenses are capitalized under section 195.
You won't be able to slip those in to the section 195(b)(1) amortization provision unless you can first show that they are defined by section 195(c)(1)
The distinction I'm drawing is between these two types of expenses.
The third point hasn't been touched on, so if you have professional literature to cite in support of the position, then please link it by all means.
25-Jun-2019 9:39pm
Jeff-Ohio wrote:then we are forced to conclude that section 263(a) is also not a capitalization provision.
That’s correct. It’s the interplay between a Code Section that says it’s not deductible (like Sec 263), and another one that says it is (like Sec 168) , that makes tax basis Balance Sheet capitalization appropriate, like with a building. Of course, general accounting principles are operating behind the scenes. The Code doesn’t talk much about those, as I’ve mentioned before. Further, a taxpayer could just expense his Sec 195 costs to his P&L, as a non-deductible expense, if he felt like it.
Under your logic, we’d capitalize penalties and fines to the Balance Sheet, since that subsection says they’re not deductible, just like Sec 263 says a building isn’t deductible.
Jeff-Ohio wrote:nowhere in case law has anyone said that section 212 pre-activity commencement expenses are capitalized under section 195.
And nowhere in the case law does it say they aren’t.
Jeff-Ohio wrote:You won't be able to slip those in to the section 195(b)(1) amortization provision unless you can first show that they are defined by section 195(c)(1)
In the other thread, Coddington already explained such a reading of the statute is incorrect.
Coddington wrote:Is the "active trade or business" requirement in (b) different from the one in (c)(1)(A)(iii)? Saying "yes" will violate the equivalency standard and doesn't seem like it would get much traction in the Tax Court. Saying "no" violates basic norms of construction, but might work in a non-Tax Court setting.
What it really comes down to is that Congress, if they intended to address something beyond the facts of Hoopengarner, botched the statutory language. The Tax Court bailed them out by setting up section 195 with an esoteric meaning of "active trade or business".
Jeff-Ohio wrote:Unless you provide a concrete, real-life example (instead of just making references to other stuff), I’m not buying it.
Jeff-Ohio wrote:And certainly you know who James Hamill is.
26-Jun-2019 7:52am
Is there anything else I should know?
but I think this takes the cake. I will admit this is very interesting from a theoretical standpoint.
so I'm just going to pluck out one thing you said and replace a few words to prove that section 195 does have a capitalization effect
But not all of them.
So far I haven't seen anything beyond what I presented myself way back in post #1.
26-Jun-2019 9:34am
Jeff-Ohio wrote:he knows more tax law than anyone in the world, including a mastery of Subchapter K
“Your honor, I intended to engage in a Sec 212 activity involving the trading and holding of stocks and the collection of dividend income. I needed a few computers, a bunch of research materials, a telephone, some furniture and some office space. Before I bought 1 stock and moved everything into my new office space on July 1st, I paid the rent for June because I signed the lease on the June 1st effective date.”
You say no deduction for the June rent. I say it’s a start-up cost. All we need is some activity to begin.
the Senate Report treats a “net lease” as an active trade or business for purposes of Sec 195 (when we all know that it’s not a business under Sec 162 and hence, isn’t a business for QBI purposes). The word “passive” also shows up in the Senate Report.
Hoopengarner involved a guy that didn’t even have an ongoing Sec 212 activity. All Congress wanted to do was prevent the immediate expensing of his land rent payments. And they did so with a sloppily written statute, which you are hanging onto with your dear life.
And who’s to say that Hoopengarner’s building would have even been a Sec 162 activity anyway?
Why would people side with your argument, which is entirely unsupportable from a case law perspective?
we had an answer before you even posted your Post #1, an answer which you simply don’t like.
26-Jun-2019 11:24am
If there are no plans to turn the activity into a business, then the rent is not paid "in anticipation of such activity becoming an active trade or business"
The cost is better associated with the development of the income-producing activity itself. An activity is an intangible asset, and the Code sets forth a clear standard that unless such an asset has a determinable life or a specific provision applies to the contrary, there is no amortization allowed for the capitalized costs of the asset. That treatment is a better reflection of the matching principle than the completely arbitrary $5,000 + 180 month amortization parameters of section 195.
You say a deduction when the activity begins would better comport with the concepts of parity and equal footing, but these concepts are not universal. The pari materia standard announced by the Hardy court applies to deductions under sections 162 and 212, and not to those under any other section.
Also note that the report doesn't treat "a net lease" as "an active trade or business"; rather, it provides that treatment for "a business where property is regularly based on a net lease basis". If you try and use this to mean "active trade or business", you've got a circular definition because of the word "business".
But the reason is I don't see any support for it, so let's focus on that.
26-Jun-2019 2:53pm
Jeff-Ohio wrote:Why should we focus on the reason you don’t see any support for it? We should focus on how this would pan out if it went to court.
Sure it was, because investing in stocks is indeed an “active trade or business” as defined in the Senate Report from the DRA of 1984. That is the relevant guidance, not anything that came earlier.
Furthermore, the older Senate Report you reference can easily be understood to mean that Section 195 doesn’t apply to a Sec 212 activity. The result is that all expenses of a Sec 212 activity, no matter when incurred, are immediately and fully deductible. The “fix” for that “loophole” came in 1984.
It’s no surprise that the lives under Sec 197 and 195 are both 15-years. That’s the period over which Congress believes most intangibles should be recovered. The expense of creating an intangible that is deemed to last for such a period should be matched with the income generated over that period.
There was a disconnect between a Sec 162 activity and a Sec 212 activity. Expenses under the latter didn’t have to be capitalized because Sec 195 didn’t apply to Sec 212. The law was changed for that reason and that reason alone.
You’ve only got a circular definition under your interpretation.
If Congress botch the writing of the provision, so what. Everything that underpins the change points to one thing: The change was intended to throw Sec 212 activities under the veil of Sec 195. It really is that simple.
27-Jun-2019 9:03am
No, I didn't say "focus on the reason I don't see any support for it".
But the reason is I don't see any support for it, so let's focus on that.
See my post #5 for why the earlier guidance is more relevant
"it is clear from the legislative history that Congress then believed pre-opening expenses not to be currently deductible under either section 162 or section 212"
fe.But the concept of "life" here is inapplicable as a fundamental principle;
it's well settled that an activity itself does not have a determinable useful li
When Congress chooses to carve out exceptions like this, do taxpayers, the courts or the IRS have the right to broaden the scope of the exceptions by reason of corollary alone?
That minority view on the absence of pari materia was the disconnect that the law's amendments sought to correct.
Your argument is that net leases aren't businesses
My argument is that although a net lease by itself may not be a business, King v. Commissioner shows that one can be in a business centered around doing net leases, therefore "business" actually does mean "business" in the phrase "business where property is regularly based on a net lease basis".
We don't have a statement from either source clarifying in what way section 195 applies to section 212 activities