[Code of Federal Regulations]
[Title 26, Volume 8]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.709-2]

[Page 498-499]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
Determination of Tax Liability--Table of Contents
 
Sec. 1.709-2  Definitions.

    (a) Organizational expenses. Section 709(b)(2) of the Internal 
Revenue Code 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)) 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) 
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 
and

[[Page 499]]

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 
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.
    (b) Syndication expenses. Syndication expenses are expenses 
connected with the issuing and marketing of interests in the 
partnership. Examples of syndication expenses are brokerage fees; 
registration fees; legal fees of the underwriter or placement agent and 
the issuer (the general partner or the partnership) for securities 
advice and for advice pertaining to the adequacy of tax disclosures in 
the prospectus or placement memorandum for securities law purposes; 
accounting fees for preparation of representations to be included in the 
offering materials; and printing costs of the prospectus, placement 
memorandum, and other selling and promotional material. These expenses 
are not subject to the election under section 709(b) and must be 
capitalized.
    (c) Beginning business. The determination of the date a partnership 
begins business for purposes of section 709 presents a question of fact 
that must be determined in each case in light of all the circumstances 
of the particular case. Ordinarily, a partnership begins business when 
it starts the business operations for which it was organized. The mere 
signing of a partnership agreement is not alone sufficient to show the 
beginning of business.

If the activities of the partnership have advanced to the extent 
necessary to establish the nature of its business operations, it will be 
deemed to have begun business. Accordingly, the acquisition of operating 
assets which are necessary to the type of business contemplated may 
constitute beginning business for these purposes. The term operating 
assets, as used herein, means assets that are in a state of readiness to 
be placed in service within a reasonable period following their 
acquisition.

[T.D. 7891, 48 FR 20049, May 4, 1983]

               Contributions, Distributions, and Transfers

                     contributions to a partnership