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attorneyleasepartnership
attorneyleasepartnership

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Surloff v. Commissioner of Internal Revenue, 81 T.C. No. 17, 81 T.C. 210, Tax Ct. Rep. (CCH) 40,419

Facts

The petitioners were limited partners in eight partnerships formed in 1976 to lease and mine coal from properties in Kentucky and Tennessee. The partnerships, promoted by Finkel and his attorney Beck, incurred various expenses including advanced royalties, fees to the general partner, and attorney fees, but did not mine any coal during the relevant years. The partnerships claimed significant losses on their tax returns, which the IRS disallowed, leading to this dispute.

The petitioners were limited partners in eight partnerships formed in 1976 to lease and mine coal from properties in Kentucky and Tennessee. The partnerships, promoted by Finkel and his attorney Beck, incurred various expenses including advanced royalties, fees to the general partner, and attorney fees, but did not mine any coal during the relevant years.

Issue

Whether the limited partners are entitled to deduct their allocable shares of the losses incurred by the partnerships, including advanced royalties, fees to the general partner, and other expenses, given that no coal was mined.

Whether the limited partners are entitled to deduct their allocable shares of the losses incurred by the partnerships, including advanced royalties, fees to the general partner, and other expenses, given that no coal was mined.

Rule

The court applied the principle that expenses are only deductible if incurred in a trade or business with the primary objective of making a profit, as per section 162(a) and section 212(3) of the Internal Revenue Code.

The court applied the principle that expenses are only deductible if incurred in a trade or business with the primary objective of making a profit, as per section 162(a) and section 212(3) of the Internal Revenue Code.

Analysis

The court found that the partnerships were not engaged in a business with the primary objective of making a profit, as evidenced by the lack of coal mining activity and the structure of the partnerships which prioritized upfront payments to promoters over operational viability. Consequently, the advanced royalties and fees paid to the general partner were deemed non-deductible.

The court found that the partnerships were not engaged in a business with the primary objective of making a profit, as evidenced by the lack of coal mining activity and the structure of the partnerships which prioritized upfront payments to promoters over operational viability.

Conclusion

The court concluded that the partnerships were not entitled to deduct advanced royalties or fees paid to the general partner, but allowed deductions for accounting fees paid on behalf of the limited partners for tax return preparation.

The court concluded that the partnerships were not entitled to deduct advanced royalties or fees paid to the general partner, but allowed deductions for accounting fees paid on behalf of the limited partners for tax return preparation.

Who won?

The Commissioner of Internal Revenue prevailed in the case, as the court upheld the disallowance of most deductions claimed by the petitioners, finding that the partnerships did not operate with a profit motive.

The Commissioner of Internal Revenue prevailed in the case, as the court upheld the disallowance of most deductions claimed by the petitioners, finding that the partnerships did not operate with a profit motive.

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