feree has a carry-over basis) of the entire sports franchise. In the case of the sale or exchange of individual player contracts recapture will continue to be determined on a contract-by-contract basis. Under these special rules, to the extent of any gain attributable to player contracts, the amount recaptured as ordinary income will be the greater of (1) the sum of the depreciation taken plus any deductions taken for losses (i.e., abandonment losses) with respect to those player contracts which are initially acquired as a part of the original acquisition of the franchise or (2) the amount of depreciation taken with respect to those player contracts which are owned by the seller at the time of the sale of the sports franchise. To the extent that depreciation taken on player contracts which were acquired as part of the original acquisition of the franchise has previously been recaptured, the amount so recaptured will reduce the aggregate amount of depreciation and losses attributable to player contracts initially acquired for purposes of determining the recapture amount under (1) above. The amount determined under (2) above with respect to player contracts held at the time the franchise is sold will be equal to the aggregate depreciation allowed or allowable for all such contracts. Thus, the amount subject to recapture will be determined for player contracts on a consolidated basis and may exceed the sum of the amounts which would otherwise be subject to recapture if determined on a contract-by-contract basis, e.g., the aggregate gain is equal to or greater than the aggregate depreciation deductions, but the gain attributable to one or more of the contracts is less than the applicable depreciation. Effective dates. The provision relating to the allocation of basis to player contracts applies to sales or exchanges of franchises after December 31, 1975, in taxable years ending after that date. The provision relating to the recapture of depreciation applies to transfers of player contracts in connection with any sale or exchange of a franchise after December 31, 1975. Revenue effect It is estimated that the provision relating to allocation of basis to player contracts will result in a revenue gain of $1 million for fiscal year 1977, and $8 million for fiscal year 1981. In addition, it is estimated that the provision relating to depreciation recapture will result in a revenue gain of $7 million for fiscal year 1977 and 1981. 8. Partnership Provisions a. Partnership Additional First-Year Depreciation (sec. 213(a) of the Act and sec. 179(d) of the Code) Prior law An owner of tangible personal property is eligible to elect, for the first year the property is depreciated, a deduction for additional firstyear depreciation of 20 percent of the cost of the property (sec. 179). The cost of the property on which this "bonus" depreciation is calculated is not to exceed $10,000 ($20,000 for an individual who files a joint return). The maximum bonus depreciation deduction is thus limited to $2,000 ($4,000 for an individual filing a joint return). Bonus depreciation is available only for property that has a useful life of six years or more. Where the owner is a partnership, the election for bonus depreciation is made by partnership. However, under prior law, the dollar limitation described above was applied to the individual partners rather than to the partnership entity. For example, each one of 40 individual investors who contributed $5,000 to an equipment leasing limited partnership, which purchased a $1 million executive aircraft, would have been entitled to $4,000 of bonus depreciation if he filed a joint return. In this case, additional first-year depreciation would have provided total deductions to the partners of up to $160,000. A corporation, however, under present law, is allowed to deduct only $2,000 of additional first-year depreciation. Thus, in the case of the purchase of an aircraft, as described above, a corporation would be limited to $2,000 of additional first-year depreciation, whereas the partnership, under prior law, could have passed through to the partners total first-year additional depreciation of up to $160,000. Reasons for change Allowing each individual partner in a partnership to have the full $2,000 first-year depreciation deduction (or $4,000, in the case of a married partner filing a joint return) inflates the amount of "bonus depreciation" which should be allowable in the year the property is placed in service. The provision for bonus depreciation (sec. 179) was enacted to provide a special incentive for small businesses to make investments in depreciable property. The limitations on the dollar amount of property with respect to which a taxpayer can take additional first-year depreciation were intended to insure that this provision allow only a very limited dollar benefit to any enterprise, regardless of size. The dollar limitation was thus intended to insure that the allowance for additional first-year depreciation would be of significance primarily for small businesses. In practice, however, the lack of a dollar limitation on the amount of depreciable basis with respect to which a partnership could calculate the bonus depreciation-even though there is a dollar limitation which applies to each partner-had enabled partnerships with many partners, especially tax-shelter partnerships, to pass through amounts of bonus depreciation very substantially in excess of what was intended to be allowed. Explanation of provision The Act provides that, with respect to a partnership, the dollar limitation is first applied at the partnership level. Thus, the cost of the property on which additional first-year depreciation is calculated for the partnership as a whole is not to exceed $10,000. However, this provision does not affect the dollar limitation which is applicable to the individual partners. Thus, for example, if a single individual is a member of a partnership and also owns a sole proprietorship, the total amount of the cost basis of property on which he can calculate additional first-year depreciation is $10,000. Effective date This provision is effective for partnership taxable years beginning after December 31, 1975. Revenue effect It is estimated that this provision and the three following partnership provisions will result in an increase in budget receipts of $12 million in fiscal year 1977 and $10 million annually thereafter. b. Partnership Syndication and Organization Fees (sec. 213(b) of the Act and secs. 707(c) and 709 of the Code) Prior law Prior law (sec. 707 (c)) provided for the deduction by a partnership of so-called "guaranteed payments" made to a partner for services or for the use of capital to the extent the payments were determined without regard to the income of a partnership, "but only for the purposes of section 61 (a) (relating to gross income) and section 162 (a) (relating to trade or business expenses)." However, present law (sec. 263) generally provides that no current deduction shall be allowed for capital expenditures. Nonetheless, it has been contended that these payments under section 707 (c) were automatically deductible by the partnership without regard to the "ordinary and necessary" requirements of section 162 (a) or section 263. Thus, until recently, it has been the common practice for limited partnerships to deduct the payments made to the general partner for the services he rendered in connection with the syndication and organization of the limited partnership. However, in recently issued Rev. Rul. 75-214 (1975-1 C.B. 185), the Internal Revenue Service ruled that payments made by a partnership to a general partner to reimburse him for costs of organizing the partnership and for selling the limited partnership interests were not automatically deductible by virtue of section 707 (c), but rather were capital expenditures under section 263. The ruling stated that: "For purposes of either section 707 (a) or section 707 (c) of the Code, payments to partners for services on behalf of the partnership may be deducted by the partnership only if such payments would otherwise be deductible (under section 162) if they had been made to persons who are not members of the partnership." Similarly, the Tax Court, in Jackson E. Cagle, Jr., 63 T.C. 86 (1974) aff'd, 539 F. 2d 409 (5th Cir. 1976), disallowed deductions for partners' shares of payments made by a partnership to another partner for services rendered in conducting a feasibility study of a proposed officeshowroom facility, obtaining financing, and developing a building for the partnership. In this decision, the Tax Court expressly rejected the contention that Congress, in enacting section 707 (c), had intended to make guaranteed payments to partners automatically deductible to the partnership without regard to sections 162(a) and 263. Reasons for change The correct interpretation of section 707(c) is the interpretation given that subsection by the Internal Revenue Service and the Tax Court, as discussed above. However, despite this court decision and Revenue Ruling, prior law was not entirely clear that, to be deductible, guaranteed payments must meet the same tests under section 162(a) as if the payments had been made to a person who is not a member of the partnership. A contrary conclusion would allow partnerships to treat capital expenditures as current deductions, while a corporation incurring these expenditures would not be entitled to similar treatment. While section 263 requires these expenditures of a corporation to be capitalized, section 248 allows the corporation to elect to amortize the organizational expenditures (as opposed to syndication-type expenditures) over a period of not less than 60 months. Under the regulations, the costs incurred by a corporation in marketing and issuing its stock are capital expenditures under section 263, but are not subject to the 60-month amortization provisions of section 248. (Regs. § 1.248-1(b) (3) (i)1 Explanation of provisions The Act adds a new provision (sec. 709) which provides that, subject to the special amortization provision described below, no deduction shall be allowed to a partnership or to any partner for any amounts paid or incurred to organize a partnership or to promote the sale (or to sell) an interest in the partnership. The Act also amends section 707 (c) to make it clear that, in determining whether a guaranteed payment is deductible by the partnership, it must meet the same tests under section 162 (a), as if the payment had been made to a person who is not a member of the partnership, and the normal rules of section 263 (relating to capital expenditures) must be taken into account.2 The Act provides that a partnership may elect to deduct ratably, over a period of not less than 60 months, amounts paid or incurred in organizing the partnership.3 The organizational expenses subject to the 60-month amortization provision are defined as those expenditures which are incident to the creation of the partnership, chargeable to the capital account, and of a character which, if expended in connection with the creation of a partnership having an ascertainable life, would be amortized over that period of time. The capitalized syndication fees, i.e., the expenditures connected with the issuing and marketing of interests in the partnership, such as commissions, professional fees, and printing costs, are not to be subject to the special 60-month amortization provision. Effective date The provisions relating to guaranteed payments and the capitalization of partnership syndication and organization fees apply to taxable years beginning after December 31, 1975. The provision pertaining to the amortization of organization fees applies to amounts paid or in 1 For cases supporting this position, see Davis v. Commissioner, 151 F. 2d 441 (8th Cir. 1945), cert. den., 327 U.S. 783; United Carbon Company, 32 B.T.A. 1000 (1935). 2 The Act is not intended to adversely affect the deductibility to the partnership of a payment described in section 736 (a) (2) to a retiring partner or to a deceased partner's successor in interest. 3 If the partnership were liquidated before the end of the 60-month period, the remaining organizational expenses would be deductible to the extent provided under the provision relating to losses (sec. 165). curred in partnership taxable years beginning after December 31, 1976. Revenue effect The revenue impact of these provisions is included in the estimate under a above. c. Retroactive Allocations of Partnership Income or Loss (sec. 213(c) of the bill and secs. 704(a) and 706(c) of the Code) Prior law Investments in tax shelter limited partnerships have commonly been made toward the end of the taxable year. It has also been common for the limited partnership to have been formed earlier in the year on a skeletal basis with one general partner and a so-called "dummy" limited partner. In many cases, the limited partnerships incurs substantial deductible expenses prior to the year-end entry of the limited partner-investors. In these cases, a full share of the partnership losses for the entire year had usually been allocated to those limited partners joining at the close of the year. These are referred to as "retroactive allocations." For example, in the case of a limited partnership owning an apartment house which had been under construction for a substantial part of the year, where construction interest and certain deductible taxes had been paid during that time, such deductions might have been retroactively allocated to investors entering the partnership on, say, December 28th of that year. Prior law was not clear whether retroactive allocations were permissible under the Code. Essentially, there are four partnership Code provisions which had a direct or indirect bearing on this issue-sections 704 (a), 761 (c), 704 (b) (2) and 706 (c) (2) (B). Section 704 (a) of prior law provided, in effect, that except as otherwise provided in section 704, the partnership agreement would govern the manner of allocation of "income, gain, loss, deduction, or credit." With respect to a particular taxable year, section 761 (c) of present law treats a partnership agreement as consisting of any amendment made up to and including the time for which the partnership's tax return must be filed for such year. It was argued that sections 704 (a) and 761 (c), particularly when read together, allowed retroactive allocations. On the other hand, it was argued that sections 704 (b) (2) and/or 706(c) (2) (B) of prior law, discussed below, prohibited some or all retroactive allocations. Section 704 (b) (2) prohibited the allocation of items of income, deduction, loss or credit (such as capital gains and depreciation) where the principal purpose of the allocation was the avoidance or evasion of tax. This provision, it was argued, prohibited any retroactive allocation having tax avoidance as its principal purpose. The counter-argument to this claim was that section 704(b)(2) was inapplicable to retroactive allocations of taxable income and loss, since, by its own terms, Two primary cases dealing with the issue of retroactive allocations are Smith v. Commissioner, 331 F. 2d 298 (7th Cir. 1964), and Rodman v. Commissioner, F. 2d - (2d Cir. 1976) [CCH U.S. Tax Cases. I No. 9710], reversing and remanding 32 T.C.M. 1307 (1973). |