## Facts

- Bennett Paper Corporation and subsidiaries filed a consolidated federal income tax return for 1974.
- A subsidiary, Commodores International Yacht Club, Inc. (CIYC), was formed in 1974 to establish and operate a marina and yacht club.
- During 1974, CIYC incurred expenses for organizational and preparatory activities and collected refundable application fees from prospective members.
- By the end of 1974, CIYC had not acquired a marina, opened a yacht club, obtained members, or begun operations; it purchased a marina and opened in 1975.
- The consolidated return deducted $45,370 of CIYC expenses as ordinary and necessary business expenses under I.R.C. § 162(a).
- The Commissioner disallowed the CIYC deduction as nondeductible pre-opening costs and required capitalization of those expenses, including $12,500 of parent administrative expenses allocated to CIYC.
- Bennett also accrued and deducted $181,650.01 for a 1974 profit-sharing plan contribution payable in 1975; the plan provided forfeiture (reversion to Bennett) if an employee was not employed when payment was made.
- The Commissioner disallowed $129,475.51 of the profit-sharing deduction as not fixed at year-end under accrual principles, determining a 1974 deficiency.

## Issues

1. Whether CIYC’s 1974 expenditures were incurred “in carrying on a trade or business” and thus deductible under I.R.C. § 162(a), or were pre-opening expenditures required to be capitalized.
2. Whether an accrual-method taxpayer may deduct the full amount of an accrued profit-sharing contribution for 1974 when employee rights to amounts are subject to forfeiture if employment does not continue until payment in 1975.

## Decision

- The Tax Court sustained the Commissioner’s deficiency determination on both issues.
- CIYC was not carrying on a trade or business in 1974; its 1974 costs (including the allocated administrative expenses) were pre-opening expenditures that had to be capitalized, not currently deducted under § 162(a).
- Bennett’s profit-sharing plan deduction for 1974 was limited to the portion representing a fixed, noncontingent liability as of year-end; the disallowed portion was contingent due to forfeiture conditions.
- The Eighth Circuit affirmed the Tax Court’s judgment in full.

## Legal Principles

- I.R.C. § 162(a) permits deductions only for ordinary and necessary expenses incurred “in carrying on” an existing trade or business; preparatory costs incurred before operations begin are not currently deductible.
- Start-up or pre-opening expenditures associated with organizing, establishing, or readying a business for operations must be capitalized rather than deducted as current business expenses.
- On a consolidated return, deductibility depends on whether the particular entity incurring or being allocated the expense is carrying on an active trade or business during the tax year.
- Under the accrual method, a liability is deductible only when all events have occurred to fix the fact of liability and the amount is reasonably determinable; liabilities subject to substantial contingencies (including employee forfeiture provisions) are not fixed.

## Conclusion

The courts held that a newly formed subsidiary’s 1974 marina-and-yacht-club expenditures were nondeductible pre-opening costs because the subsidiary had not begun operations, and they limited the parent’s accrued profit-sharing deduction to the portion of the contribution liability that was fixed and noncontingent at the close of the tax year.


Bennett Paper Corp. v. Comm’r, 78 T.C. 458 (1982), aff’d, 699 F.2d 450 (8th Cir. 1983)