Category: Partnerships & LLCs; Deductions & Credits
Subject: Partnership Expenses
Title: Expenses Incurred by General Partner
IRC Sections: 162, 212
Filename: 1368.html
Date Produced: 06/92

Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com

Taxpayer (TP) is the general partner of a partnership engaged in the business of operating a mobile home park. TP is required by the partnership agreement to manage the park. TP alleges that a 2% share of partnership profits are paid as a result of his management duties although the partnership agreement is silent on the issue. The additional 2% is not segregated from TP's share of partnership profit or loss. No part of partnership income is treated as income from self employment. At this point, it is unclear what the partnership agreement provides regarding any expenses incurred by TP in managing partnership assets.

TP is under examination by the IRS. The agent has disallowed a portion of the expenses incurred by the TP related to performance of management duties claiming that such portion is a capital contribution.

TP's position is the fees are ordinary and necessary business expenses incurred in the trade or business of managing the partnership's property.

Discussion

It seems that there are potentially two issues in play.

1. Are the expenses incurred properly the expenses of the partnership or the TP?

2. Do TP's management activities rise to the level of a trade or business. If so, the expenses should be deductible under IRC Sec. 162. If not, the expenses would be handled under IRC Sec. 212 and subject to the 2% floor as we discussed.

Both of these issues are factual in nature. The language of the partnership agreement should be dispositive of the first issue. If the expenses are properly TP's under the partnership agreement, then 100% of such expenses are deductible either under IRC Secs. 162 or 212. I have identified a number of cases which may prove helpful in this area. As we discussed, we will hold off on pulling these cases until further notice.

As you know, neither the law nor the regulations define the phrase trade or business. I was unable to locate a case on point regarding the issue of whether a partner's activities in managing partnership property are per se considered a trade or business. If you need to press this issue, further research will be required to establish under general case law and these specific facts that the TP's activities rise to the level of a trade or business.