Proposed Rules Would Require Terminating Partnerships to Amortize Startup Expenditures

On Friday, the IRS issued proposed regulations aimed at preventing partnerships from using technical terminations to accelerate their deductions of startup and organizational expenses (REG-126285-12). When finalized, the regulations will apply to technical terminations of partnerships that occur on or after Dec. 9, 2013.

Under Sec. 708(b)(1), a partnership terminates if (1) no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership, or (2) within a 12-month period there is a sale or exchange of 50% or more of the total interest in partnership capital and profits. The second form of termination is often called a technical termination.

Under Sec. 195(b)(1)(B), startup expenditures that are not fully deductible under Sec. 195(b)(1)(A) must be amortized over a 180-month period (15 years). Sec. 195(b)(2) allows taxpayers that completely dispose of a business before the end of the 15-year period to deduct the remaining expenses to the extent allowed under Sec. 165 as a loss. A similar rule applies under Sec. 709(b)(2) to the organizational expenditures of partnerships.

In response to reports that some taxpayers have taken the position that a technical termination of a partnership permitted an accelerated deduction of unamortized amounts of startup and organizational expenditures, the IRS has issued the new proposed regulations to disallow these accelerated deductions upon a partnership’s technical termination. This rule would bring the treatment of startup and organizational expenditures in line with the treatment of amortization of intangibles under Sec. 197, which may not be accelerated upon a technical termination under Regs. Sec. 1.197-2(g)(2).