Abandoned Costs

• August 3, 2023
• Carey M. Heyman, CPA

“The best laid plans of mice and men often go awry.” – Robert Burns, “To A Mouse”

Tell me if you have heard this one before:

• The City Council rejects another round of architecture and engineering plans.
• You are having constant knock-down drag-out fights with NIMBYers.
• The partners changed their minds on a development proposal. They refuse to commit additional capital until significant changes are made.

So when plans change, what do you do with the expenses that you have incurred to date? To qualify as an abandoned cost, intent and action are important. In the case of Charles T. Parker, v. Commissioner (1 T.C. 709), the taxpayer performed due diligence on a potential investment in a mining operation. The taxpayer contributed cash and hired several temporary employees to rehabilitate the mining equipment and to operate the mine. The results of the temporary operation were unsatisfactory and the project was abandoned. The taxpayer never acquired an interest or made any other investment in the mining operation. The Tax Court held that the taxpayer sustained a deductible loss in the taxable year in which the project was abandoned because the activities in connection with the project were more than investigatory and the taxpayer had entered into the transaction with a profit-motive.

Other items to note:

• If a taxpayer is still investigating ways to use a potential asset or determine whether there is any value to the taxpayer at the time of the claimed abandonment, it may be difficult to demonstrate the intent to abandon.
• An abandonment loss is only allowable in the taxable year in which the project is abandoned.
• If a cost will be recouped through insurance, it should not also be claimed as an abandoned cost.
• And lastly, abandoned costs have been known to catch the eye of taxing authorities. While you can’t prevent a taxing authority from asking a question, you can reduce the time that a potential inquiry might take. An internal memo should be drafted that documents the timeline of the events and management’s decision-making process.

Source: Bloomberg Tax

Tags: Abandoned Costs, Losses, Real Estate, Federal and state taxation, including proposed regulations, Industry best practices, Industry trends/analysis, Year-end tax planning | Comments Off on Abandoned Costs