Final Rules Issued on Bona Fide Indebtedness and Terminating Partnership’s Startup Expenses

On Tuesday, the IRS issued T.D. 9682, which finalized proposed regulations relating to basis of indebtedness of S corporations to their shareholders that provide that S corporation shareholders increase their basis of indebtedness of the S corporation to the shareholder only if the indebtedness is bona fide, which is determined under general Federal tax principles and depends upon all of the facts and circumstances.

The final regulations were adopted without substantive change, other than changes to the effective/applicability date and minor clarifying revisions. Originally, the regulations were to apply to loan transactions entered into on or after the final regulations were published in the Federal Register. But in response to comments that the rules should apply retroactively, the IRS decided to permit taxpayers to apply the new rules to indebtedness in any transaction that occurred in a year for which the statute of limitation on the assessment of tax has not expired as of July 23, 2014. (For earlier coverage of the proposed regulations, see “Proposed Regs. on Basis for S Corporation Shareholders From Bona Fide Indebtedness.”)

The IRS also finalized proposed regulations on the deductibility of startup expenditures and organizational expenses for partnerships following a termination of a partnership under Sec. 708(b)(1)(B), (a technical termination) (T.D. 9681). 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 regulations provide that after a technical termination, the new partnership must continue to amortize the startup and organizational expenditures over the remaining portion of the amortization period adopted by the terminating partnership.

The only change from the proposed regulations was a change in language that the IRS says is not intended to be a substantive change. In Regs. Sec. 1.708-1(b)(6)(i), “using the same amortization period adopted by the terminating partnership” has been changed to “over the remaining portion of the amortization period adopted by the terminating partnership” to clarify that the amortization period does not restart.

The final regulations apply to technical terminations of partnerships that occur on or after Dec. 9, 2013.