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With regard to the deduction for the amortization expense,
C&L noted that, for the deduction to be taken, the transferee of
a franchise must also be conducting a trade or business. It
explained that the trade or business requirement allows
deductions for expenses incurred only when business operations
commence and activities for which the trade or business was
formed are performed. C&L stated that there was an issue as to
whether or not a trade or business existed with respect to MCI
and GCI/SDCI because the actual operations of the castles would
not commence for at least a year.
C&L addressed a resolution for both issues and stated:
However, if we assume that both MC [MCI] and GC
[GCI/SDCI] can be operated as divisions of MDT instead
of separate subsidiaries, an argument can be made for
amortizing the franchise rights before the commencement
of operations at MC and GC. It can be argued that MDT
acquired the additional franchise rights in order to
expand into other territories and as such the
amortization of the additional franchise rights are
"ordinary and necessary" expansion costs incurred by an
ongoing business enterprise in "carrying on a trade or
business."
C&L concluded that “there appears to be relatively strong support
for deducting pre-operating expenses at MC [MCI] and GC [GCI] and
amortizing the franchise rights for the Glendale and Meadowlands
sites as long as both castles are operated as divisions of MDT,
not as separate subsidiaries.” C&L recommended a number of
actions, which included:
Operate the two additional castles as divisions of MDT
and delay equity contributions to MC [MCI] and GC [GCI]
until after the operation commences at each location.
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