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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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