IRS disallows write-off of startup and organizational costs in a technical termination.

• Author: Almeras, Jon

On Dec. 6, the IRS released Prop. Regs. Sec. 1.195-2 and proposed amendments to Regs. Secs. 1.708-1 and 1.709-1 (REG-126285-12). These proposals require new partnerships formed from Sec. 708(b)(1)(B) technical terminations to step into the shoes of the terminated partnership and continue to amortize Sec. 195 startup expenditures and Sec. 709 organization fees using the same amortization period the terminated partnership used. When the proposed regulations and amendments are finalized, they will be applied to technical terminations occurring after Dec. 8, 2013.

Sec. 195 and Sec. 709 Expenditures

Sec. 195, a general provision that applies to all trades and businesses, denies a deduction for startup expenditures unless the taxpayer elects otherwise. An electing taxpayer may immediately deduct up to $5,000 of qualifying startup expenditures once the taxpayer begins its active trade or business. This amount is reduced dollar for dollar by the amount of startup expenditures exceeding 550,000 (Sec. 195(b)(1)(A)(ii)). The residual amount is deducted ratably over 180 months beginning with the month the active trade or business begins (Sec. 195(b)(1)(B)). Sec. 709, which is analogous to the election under Sec. 248 for corporate entities to deduct organizational expenditures, generally applies the same rules found in Sec. 195 to organization fees partnerships incurred.

An election to deduct Sec. 195 or Sec. 709 costs is irrevocable and applies to all startup or organizational costs incurred in connection with the trade, business, or partnership. An election under Sec. 195 or Sec. 709 is deemed to be made when the tax return is filed (Regs. Secs. 1.195-1 (b) and 1.709-l(b)(2)). However, a taxpayer may choose to forgo either deemed election by affirmatively electing to capitalize its startup or organizational expenditures on its timely filed tax return, including extensions.

Sec. 708(b)(1)(B} Technical Terminations

A partnership can terminate in two ways:

1. A true liquidation where no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners.

2. When there is a cumulative sale or exchange of 50% of more of the total capital and profits interests of the partnership within a consecutive 12-month period (Sec. 708(b)). This is often referred to as a "technical termination."

   When a partnership technically terminates, the regulations deem the following rooccur(Regs. Sec. 1.708-1 (b)(4)):

1. The...