Believe it or not, there is a tax issue there.
Let’s set it up by discussing Hisham Ashkouri (HA).
HA was an architect. He was bidding on projects in Washington state and
Utah. He was also bidding on projects in Libya and in the Republic of
Tartarstan, which is in Russia.
Those last two are certainly off the beaten path.
Using different companies, he submitted development bid proposals. I am
not sure what was in these bid proposals, but over three years (2009 – 2011),
he deducted over $500 grand in bid expenses.
Sounds expensive.
The IRS audited the three years.
And disallowed the bid expenses.
That doesn’t sound right, thought I.
HA argued that he had deducted marketing and promotion expenses.
Then HA went foot-in-mouth:
“If any of those projects had resulted in ‘a real estate transaction …, I would be having 20 percent ownership.’”
Let’s introduce Code Section 263A. That bad boy generally deals with
the acquisition of property, and its intention is to make you capitalize
everything under the sun when you acquire – including constructing or
developing – property. “Capitalize” is accounting-speak for depreciating
something rather than deducting it immediately.
If you depreciate over one year, then I suppose the net effect is
approximately the same. If you have to depreciate over 39 years, well, it is
going to hurt.
HA fired off first and strong:
The deductions …"could not be capitalized as they were used for marketing and promotion with no real estate transaction." Although petitioners fail to cite any authority in support of that claim, they are correct that section 263A does not require the capitalization of "marketing, selling, advertising, and distribution costs."
The Court however nailed the issue:
Mr. Ashkouri's testimony regarding the projects he pursued was not particularly detailed, but we take him as having acknowledged that, had he been awarded any of the projects, he would have acquired an ownership interest in the property being developed. He did not identify any project for which he claimed deductions in which he would not have received an ownership interest had he been awarded the contract.”
Every project would have resulted in the acquisition of an ownership
interest. This is not marketing or promotion in a conventional sense. HA’s
possible ownership interest at the end lands these transactions within the
Section 263A dragnet.
So what? He did not win any of these bids, and he would get to deduct
the bid costs when the contract was awarded to someone else. Granted, the
deduction might be held-up a year or two – until the bid was awarded – but HA
would eventually get his deduction.
Here comes the Scooby Doo mystery portion of the case:
But petitioners have not established when (if ever) the development contracts Mr. Ashkouri sought were awarded to others, when Mr. Ashkouri received written notice that no contract would be awarded, or when he abandoned his bid or proposal for each project.”
Seriously? He could not show that the bid
went to someone else or was withdrawn entirely? I am not getting this at all.
The Tax Court then backed-up and ran over the
body a second time – apparently to make sure that it had stopped breathing:
Even if we were to accept that the expenses in issue were not subject to deferral under section 1.263A-1(e)(3)(ii)(T), Income Tax Regs., we would still conclude that respondent properly disallowed the deductions for architectural or contract services claimed on the Schedules C for Mr. Ashkouri's proprietorship because petitioners did not adequately substantiate the expenses underlying the claimed deductions. In general, section 162(a) allows a deduction for "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business". When called upon by the Commissioner, however, a taxpayer must substantiate his expenses.”
Bam! Even if HA provided evidence about the bid outcomes, the Court was
still going to say “No.”
Back to my real estate guy.
What was the tax issue back when?
His transaction involved real estate development. There is no question that he would have had an ownership interest if the project went through; in fact, he would be the only owner.
Let’s say he incurred significant expenses – legal, engineering and the
like – while battling the county.
Would have had to capitalize those expenses rather than deduct them
right away?
