Medieval Attractions N.V - Page 115

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               ISSUE                                                                  
               Can MDT currently deduct the pre-operating expenditures                
               incurred for the Glendale and Meadowlands castles and                  
               amortize under IRC Section 1253(d)(2) the franchise                    
               rights it acquired from Manver, N.V. (MNV) before the                  
               operation at each castle commences?                                    
               C&L's letter recited several facts, including:  MDT entered            
          into a contract with Manver to amortize franchise rights for MDT,           
          GCI/SDCI, and MCI; GCI/SDCI and MCI were both incorporated in               
          December 1987 to operate castles; GCI/SDCI and MCI were both                
          currently negotiating leases for land to build castles; MCI had             
          already incurred $200,000 in startup expenses, which were paid              
          with advances from MDT and contributions of capital from 13                 
          minority shareholders; it was expected that both sites would                
          incur substantial additional preoperating expenses; and MDT was             
          planning to contribute its capital share (87 percent of                     
          $1.5 million) to MCI in the near future.                                    
               The letter continued with an assessment of various Internal            
          Revenue Code sections and case law.  It pointed out that costs              
          incurred before the actual commencement of a trade or business              
          (i.e., startup costs) are "clearly not deductible since such                
          expenses are not incurred in 'carrying on a trade or business'              
          under IRC section 162."  However, it noted that expansion costs             
          incurred by an ongoing business enterprise are incurred in                  
          "carrying on a trade or business" under section 162 and will                
          therefore be currently deductible as long as they are not capital           
          expenditures.                                                               




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