[Federal Register Volume 63, Number 8 (Tuesday, January 13, 1998)]
[Proposed Rules]
[Pages 1933-1935]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-598]


-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-209373-81]
RIN 1545-AT71


Election To Amortize Start-Up Expenditures

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

-----------------------------------------------------------------------

SUMMARY: This document contains proposed regulations concerning start-
up expenditures under section 195. The proposed regulations provide 
rules and procedures for electing to amortize start-up expenditures 
under section 195. The regulations affect all taxpayers wishing to 
amortize start-up expenditures under section 195. This document also 
provides notice of a public hearing on these proposed regulations.

DATES: Comments and outlines of topics to be discussed at the public 
hearing scheduled for June 2, 1998, at 10 a.m. must be received by 
April 13, 1998.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (PS-36-81), room 5228, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. In the alternative, submissions may be hand-delivered between 
the hours of 8:15 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-209373-81), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW., 
Washington, DC, or electronically, via the IRS Internet site at: http:/
/www.irs.ustreas.gov/prod/tax__regs/comments.html. The public hearing 
will be held in the NYU Classroom, Room 2615, Internal Revenue 
Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, David 
Selig, (202) 622-3040; concerning submissions and the hearing, LaNita 
VanDyke, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)).
    Comments on the collection of information should be sent to the 
Office of Management and Budget, Attn: Desk Officer for the Department 
of the Treasury, Office of Information and Regulatory Affairs, 
Washington, DC 20503, with copies to the Internal Revenue Service, 
Attn: IRS Reports Clearance Officer, T:FP, Washington, DC 20224. 
Comments on the collection of information should be received by March 
16, 1998. Comments are specifically requested concerning: Whether the 
proposed collection of information is necessary for the proper 
performance of the functions of the Internal Revenue Service, including 
whether the information will have practical utility; the accuracy of 
the estimated burden associated with the proposed collection of 
information (see below); how the quality, utility, and clarity of the 
information to be collected may be enhanced; how the burden of 
complying with the proposed collection of information may be minimized, 
including through the application of automated collection techniques or 
other forms of information technology; and estimates of capital or 
start-up costs of operation, maintenance, and purchase of services to 
provide information.
    The requirement for the collection of information in this notice of 
proposed rulemaking is in Sec. 1.195-1(c). This information is required 
by the IRS to establish that a taxpayer properly has made an election 
to amortize start-up expenditures under section 195. This information 
will be used to determine whether the amount amortized under section 
195 has been computed properly. The likely respondents are businesses 
and other for-profit organizations. Responses to this collection of 
information are required to make an election to amortize start-up 
expenditures under section 195.
    Estimated total annual reporting burden: 37,500 hours. The 
estimated annual burden per respondent varies from .10 hours to .50 
hour, depending on individual circumstances, with an estimated average 
of .25 hours.
    Estimated number of respondents: 150,000.
    Estimated annual frequency of responses: one-time election.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid OMB control number.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1) to provide regulations under section 195 of 
the Internal Revenue Code. Section 195 was added to the Internal 
Revenue Code of 1954 by section 102 of the Miscellaneous Revenue Act of 
1980, and amended by section 94 of the Tax Reform Act of 1984.
    Section 195 generally provides that no deduction is allowed for 
start-up expenditures unless the taxpayer elects to amortize the 
expenditures. If the taxpayer elects to amortize start-up expenditures 
under section 195(b)(1), the expenditures are amortizable over a period 
of not less than 60 months beginning with the month when the active 
trade or business begins. Under section 195(d), an election to amortize 
start-up expenditures must be made not later than the time prescribed 
by law for filing the return for the taxable year in which the active 
trade or business begins (including extensions thereof).

[[Page 1934]]

Announcement 81-43 (1981-1 I.R.B. 52) described the time and manner for 
making this election.
    An expense is a start-up expenditure if it satisfies two 
conditions. First, the expense must be paid or incurred in connection 
with any one of the following: (1) Creating an active trade or 
business, (2) investigating the creation or acquisition of an active 
trade or business, or (3) any activity entered into for profit and for 
the production of income before the day on which the active trade or 
business begins, in anticipation of the activity becoming an active 
trade or business (expenditures in this last category are start-up 
expenditures only if they are attributable to periods after June 30, 
1984).
    Second, the expenditure must be of the type that, if paid or 
incurred in connection with the operation of an existing active trade 
or business in the same field as that being entered into by the 
taxpayer, would be allowable as a deduction for the taxable year when 
paid or incurred.

Explanation of Provisions

    The proposed regulations provide that an election to amortize 
start-up expenditures is made by attaching a statement to the 
taxpayer's income tax return. The income tax return and statement must 
be filed not later than the date prescribed by law for filing the 
income tax return (including any extensions of time) for the taxable 
year when the active trade or business begins.
    The IRS is interested in ways to simplify the filing of elections. 
The proposed regulations are intended to simplify the filing of section 
195 elections in two ways. First, the proposed regulations clarify that 
a taxpayer who is uncertain as to the year in which the active trade or 
business begins need not file an election for each possible taxable 
year. Rather, a section 195 election for a particular trade or business 
will be effective if the trade or business becomes active in the year 
for which the election is filed or in any subsequent year. In 
developing this notice of proposed rulemaking, more burdensome methods 
of making the election were considered and rejected. For example, an 
approach that would have required taxpayers to file an election 
statement each year was rejected. Second, the proposed regulations also 
allow taxpayers who have made timely elections under section 195 to 
file a revised statement with a subsequent return to include any start-
up expenditures not included in the original statement.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in EO 12866. Therefore, 
a regulatory assessment is not required. It is hereby certified that 
these regulations do not have a significant impact on a substantial 
number of small entities. This certification is based upon the fact 
that the time required to prepare and file the election statement is 
minimal and will not have a significant impact on those small entities 
that choose to make the election. Therefore, a Regulatory Flexibility 
Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is 
not required. Pursuant to section 7805(f) of the Internal Revenue Code, 
this notice of proposed rulemaking will be submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted (in the 
manner described in the ADDRESSES caption) timely to the IRS. All 
comments will be available for public inspection and copying.
    A public hearing has been scheduled for Tuesday, June 2, 1998, at 
10:00 a.m. in the NYU Classroom, Room 2615, Internal Revenue Building, 
1111 Constitution Avenue, NW., Washington, DC. Because of access 
restrictions, visitors will not be admitted beyond the Internal Revenue 
Building lobby more than 15 minutes before the hearing starts.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing.
    Persons that wish to present oral comments at the hearing must 
submit comments by April 13, 1998 and submit an outline of the topics 
to be discussed and the time to be devoted to each topic by April 13, 
1998.
    A period of 10 minutes will be allotted to each person for making 
comments.
    An agenda showing the scheduling of the speakers will be prepared 
after the deadline for receiving outlines has passed. Copies of the 
agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of these regulations is David Selig, Office of 
the Assistant Chief Counsel (Passthroughs and Special Industries), IRS. 
However, other personnel from the IRS and Treasury Department 
participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Section 1.195-1 is added to read as follows:


Sec. 1.195-1  Election to amortize start-up expenditures.

    (a) In general. Under section 195(b), a taxpayer may elect to 
amortize start-up expenditures (as defined in section 195(c)(1)). A 
taxpayer who elects to amortize start-up expenditures must, at the time 
of the election, select an amortization period of not less than 60 
months, beginning with the month the active trade or business begins. 
The election applies to all of the taxpayer's start-up expenditures. 
The election is irrevocable and the amortization period selected by the 
taxpayer in making the election may not subsequently be changed.
    (b) Time and manner of making election. The election to amortize 
start-up expenditures under section 195 shall be made by attaching a 
statement containing the information described in paragraph (c) of this 
section to the taxpayer's return. The statement must be filed no later 
than the date prescribed by law for filing the return (including any 
extensions of time) for the taxable year when the active trade or 
business begins. The statement may be filed with a return for any 
taxable year prior to the year in which the taxpayer's active trade or 
business begins, but no later than the date prescribed in the preceding 
sentence. Accordingly, an election under section 195 filed in a taxable 
year prior to the year in which the taxpayer's active trade or business 
begins will become effective in the month for the later year in which 
the taxpayer's active trade or business begins.
    (c) Information required. The statement shall set forth a 
description of the trade or business to which it relates with 
sufficient detail so that expenses relating to the trade or business 
can be identified properly for the taxable year in which the statement 
is filed and for all future taxable years to which it relates. To the 
extent known at the time the statement is filed, the statement also 
shall include a description of each start-

[[Page 1935]]

 up expenditure incurred (whether or not paid); the month when the 
active trade or business began (or was acquired); and the number of 
months (not less than 60) over which the expenditures are to be 
amortized. A revised statement to include any start-up expenditures not 
included in the taxpayer's original election statement may be filed 
with a return filed after the return that contained the election.
    (d) Effective date. This section applies to elections filed on or 
after the date final regulations are published in the Federal Register.
Michael P. Dolan,
Deputy Commissioner of Internal Revenue.
[FR Doc. 98-598 Filed 1-12-98; 8:45 am]
BILLING CODE 4830-01-U