[Federal Register Volume 73, Number 131 (Tuesday, July 8, 2008)]
[Rules and Regulations]
[Pages 38910-38915]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-15459]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9411]
RIN 1545-BE78


Elections Regarding Start-up Expenditures, Corporation 
Organizational Expenditures, and Partnership Organizational Expenses

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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[[Page 38911]]

SUMMARY: This document contains final and temporary regulations 
relating to elections to deduct start-up expenditures under section 195 
of the Internal Revenue Code (Code), organizational expenditures of 
corporations under section 248, and organizational expenses of 
partnerships under section 709. The American Jobs Creation Act of 2004 
amended these three sections of the Code to provide similar rules for 
deducting these types of expenses that are paid or incurred after 
October 22, 2004. The regulations affect taxpayers that pay or incur 
these expenses and provide guidance on how to elect to deduct the 
expenses in accordance with the new rules. The text of these temporary 
regulations also serves as the text of the proposed regulations set 
forth in the notice of proposed rulemaking on this subject in the 
Proposed Rules section in this issue of the Federal Register.

DATES: Effective Date: These regulations are effective on July 8, 2008.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
1.195-1T(d), 1.248-1T(f), and 1.709-1T(b)(5).

FOR FURTHER INFORMATION CONTACT: Grace Matuszeski, (202) 622-7900 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document amends the Income Tax Regulations (26 CFR part 1) 
under sections 195, 248, and 709 of the Code to reflect amendments made 
by section 902 of the American Jobs Creation Act of 2004 (Pub. L. 108-
357, 118 Stat. 1418) (the Act). The amendments made by section 902 of 
the Act are effective for amounts paid or incurred after October 22, 
2004, the date of the enactment of the Act.
    As amended by section 902(a) of the Act, section 195(b) allows an 
electing taxpayer to deduct, in the taxable year in which the taxpayer 
begins an active trade or business, an amount equal to the lesser of 
(1) the amount of the start-up expenditures that relate to the active 
trade or business, or (2) $5,000, reduced (but not below zero) by the 
amount by which the start-up expenditures exceed $50,000. The remainder 
of the start-up expenditures is deductible ratably over the 180-month 
period beginning with the month in which the active trade or business 
begins.
    As amended by section 902(b) of the Act, section 248(a) allows an 
electing corporation to deduct, in the taxable year in which the 
corporation begins business, an amount equal to the lesser of (1) the 
amount of the organizational expenditures of the corporation, or (2) 
$5,000, reduced (but not below zero) by the amount by which the 
organizational expenditures exceed $50,000. The remainder of the 
organizational expenditures is deductible ratably over the 180-month 
period beginning with the month in which the corporation begins 
business.
    As amended by section 902(c) of the Act, section 709(b) allows an 
electing partnership to deduct, in the taxable year in which the 
partnership begins business, an amount equal to the lesser of (1) the 
amount of the organizational expenses of the partnership, or (2) 
$5,000, reduced (but not below zero) by the amount by which the 
organizational expenses exceed $50,000. The remainder of the 
organizational expenses is deductible ratably over the 180-month period 
beginning with the month in which the partnership begins business.

Explanation of Provisions

    This Treasury decision revises the regulations under sections 195, 
248, and 709 to reflect the amendments made by section 902 of the Act. 
This Treasury decision also updates the manner in which taxpayers elect 
to deduct costs under sections 195, 248, and 709. Under these 
regulations, taxpayers are no longer required to file a separate 
election statement to deduct costs under sections 195, 248, and 709. 
The manner of filing these elections is changed because of various 
electronic return filing initiatives and in acknowledgment that the 
vast majority of taxpayers that incur costs that may be deducted under 
sections 195, 248, and 709 elect to deduct those costs. The change also 
reduces the administrative burden of making the elections.
    The temporary regulations under sections 195, 248, and 709 apply to 
expenditures paid or incurred after September 8, 2008. However, 
taxpayers may apply all the provisions of these regulations to 
expenditures paid or incurred under sections 195, 248, and 709 after 
October 22, 2004, provided the period of limitations on assessment of 
tax has not expired for the year the election under section 195, 248, 
or 709 is deemed made. Expenditures paid or incurred on or before 
October 22, 2004, may be amortized over a period of not less than 60 
months as provided for under prior law.

Temporary Regulations Under Section 195

    Section 195(a) provides that, except as otherwise provided in 
section 195, no deduction shall be allowed for start-up expenditures. 
Under section 195(b)(1), a taxpayer may elect to deduct start-up 
expenditures as provided in sections 195(b)(1)(A) and (B). Section 
195(b)(1)(A) allows an electing taxpayer to deduct start-up 
expenditures in the year in which the active trade or business to which 
the expenditures relate begins. The amount that may be deducted under 
section 195(b)(1)(A) in that year is the lesser of the amount of the 
start-up expenditures or $5,000, reduced (but not below zero) by the 
amount by which the start-up expenditures exceed $50,000. Any start-up 
expenditures that are not deductible under section 195(b)(1)(A) may be 
deducted by the taxpayer under section 195(b)(1)(B) ratably over the 
180-month period beginning with the month in which the active trade or 
business begins. All start-up expenditures incurred by the taxpayer 
that relate to the active trade or business are considered in 
determining whether the start-up expenditures exceed $50,000, including 
expenditures incurred on or before October 22, 2004.
    For start-up expenditures as defined in section 195(c)(1) paid or 
incurred after September 8, 2008, the temporary regulations under 
section 195 provide that a taxpayer is deemed to make an election under 
section 195(b) to deduct start-up expenditures for the taxable year in 
which the active trade or business to which the expenditures relate 
begins. Therefore, under the temporary regulations a taxpayer is no 
longer required to attach a statement to the return or specifically 
identify the deducted amount as start-up expenditures for the election 
under section 195(b) to be effective. A taxpayer may choose to forgo 
the deemed election by clearly electing to capitalize its start-up 
expenditures on a timely filed Federal income tax return (including 
extensions) for the taxable year in which the active trade or business 
begins. The election to capitalize start-up expenditures is made in 
accordance with the form and instructions used by the taxpayer to file 
its Federal income tax return. An election either to deduct start-up 
expenditures under section 195(b) or to capitalize start-up 
expenditures is irrevocable and applies to all start-up expenditures of 
the taxpayer that are related to the active trade or business.
    In general, a change in the characterization of an item as a start-
up expenditure, or a change in the determination of the taxable year in 
which the active trade or business begins, will be treated as a change 
in method of accounting with a section 481(a) adjustment.

[[Page 38912]]

Temporary Regulations Under Section 248

    In general, the organizational expenditures of a corporation are 
not deductible except as provided in section 248. Under section 248(a), 
a corporation may elect to deduct organizational expenditures as 
provided in sections 248(a)(1)(A) and (B). Section 248(a)(1)(A) allows 
an electing corporation to deduct organizational expenditures in the 
year in which the corporation begins business. The amount that may be 
deducted under section 248(a)(1)(A) in that year is the lesser of the 
amount of the organizational expenditures of the corporation or $5,000, 
reduced (but not below zero) by the amount by which the organizational 
expenditures exceed $50,000. Any organizational expenditures that are 
not deductible under section 248(a)(1)(A) may be deducted by the 
corporation under section 248(a)(1)(B) ratably over the 180-month 
period beginning with the month in which the corporation begins 
business. All organizational expenditures incurred by the corporation 
are considered in determining whether the organizational expenditures 
exceed $50,000, including expenditures incurred on or before October 
22, 2004.
    For organizational expenditures as defined in section 248(b) and 
Sec.  1.248-1(b) paid or incurred after September 8, 2008, the 
temporary regulations under section 248 provide that a corporation is 
deemed to make an election under section 248(a) to deduct 
organizational expenditures for the taxable year in which the 
corporation begins business. Therefore, under the temporary regulations 
a corporation is no longer required to attach a statement to the return 
or specifically identify the deducted amount as organizational 
expenditures for the election under section 248(a) to be effective. A 
corporation may choose to forgo the deemed election by clearly electing 
to capitalize its organizational expenditures on a timely filed Federal 
income tax return (including extensions) for the taxable year in which 
the corporation begins business. The election to capitalize 
organizational expenditures is made in accordance with the form and 
instructions used by the corporation to file its Federal income tax 
return. An election either to deduct organizational expenditures under 
section 248(a) or to capitalize organizational expenditures is 
irrevocable and applies to all organizational expenditures of the 
corporation.
    In general, a change in the characterization of an item as an 
organizational expenditure, or a change in the determination of the 
taxable year in which the corporation begins business, will be treated 
as a change in method of accounting with a section 481(a) adjustment.

Temporary Regulations Under Section 709

    Section 709(a) provides that, except as otherwise provided in 
section 709(b), no deduction shall be allowed for organizational 
expenses. Under section 709(b), a partnership may elect to deduct 
organizational expenses as provided in section 709(b)(1)(A) and (B). 
Section 709(b)(1)(A) allows an electing partnership to deduct 
organizational expenses in the year in which the partnership begins 
business. The amount that may be deducted under section 709(b)(1)(A) in 
that year is the lesser of the amount of the organizational expenses of 
the partnership or $5,000, reduced (but not below zero) by the amount 
by which the organizational expenses exceed $50,000. Any organizational 
expenses that are not deductible under section 709(b)(1)(A) may be 
deducted by the partnership under section 709(b)(1)(B) ratably over the 
180-month period beginning with the month in which the partnership 
begins business. All organizational expenses incurred by the 
partnership are considered in determining whether the organizational 
expenses exceed $50,000, including expenses incurred on or before 
October 22, 2004.
    For organizational expenses as defined in section 709(b)(3) and 
Sec.  1.709-2(a) paid or incurred after September 8, 2008, the 
temporary regulations under section 709 provide that a partnership is 
deemed to make an election under section 709(b) to deduct 
organizational expenses for the taxable year in which the partnership 
begins business. Therefore, under the temporary regulations a 
partnership is no longer required to attach a statement to the return 
or specifically identify the deducted amount as organizational expenses 
for the election under section 709(b) to be effective. A partnership 
may choose to forgo the deemed election by clearly electing to 
capitalize its organizational expenses on a timely filed Federal income 
tax return (including extensions) for the taxable year in which the 
partnership begins business. The election to capitalize organizational 
expenses is made in accordance with the form and instructions used by 
the partnership to file its Federal income tax return. An election 
either to deduct organizational expenses under section 709(b) or to 
capitalize organizational expenses is irrevocable and applies to all 
organizational expenses of the partnership.
    In general, a change in the characterization of an item as an 
organizational expense, or a change in the determination of the taxable 
year in which the partnership begins business, will be treated as a 
change in method of accounting with a section 481(a) adjustment.

Examples

    The temporary regulations under sections 195, 248, and 709 contain 
examples that illustrate how the election is made, how to calculate the 
amount of the deduction that is allowed in the year in which the 
election is made, and how to effect subsequent redeterminations in the 
characterization of an item or the year in which the trade or business 
begins.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations. Please refer to 
the cross-referenced notice of proposed rulemaking published elsewhere 
in this issue of the Federal Register for applicability of the 
Regulatory Flexibility Act (5 U.S.C. chapter 6). Pursuant to section 
7805(f) of the Code, these final and temporary regulations have been 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their impact on small business.

Drafting Information

    The principal author of these regulations is Grace Matuszeski of 
the Office of the Associate Chief Counsel (Income Tax & Accounting). 
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.

Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:

[[Page 38913]]

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:


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


0
Par. 2. Section 1.195-1 is revised to read as follows:


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

    [Reserved]. For further guidance, see Sec.  1.195-1T.

0
Par. 3. Section 1.195-1T is added to read as follows:


Sec.  1.195-1T  Election to amortize start-up expenditures (temporary).

    (a) In general. Under section 195(b), a taxpayer may elect to 
amortize start-up expenditures as defined in section 195(c)(1). In the 
taxable year in which a taxpayer begins an active trade or business, an 
electing taxpayer may deduct an amount equal to the lesser of the 
amount of the start-up expenditures that relate to the active trade or 
business, or $5,000 (reduced (but not below zero) by the amount by 
which the start-up expenditures exceed $50,000). The remainder of the 
start-up expenditures is deductible ratably over the 180-month period 
beginning with the month in which the active trade or business begins. 
All start-up expenditures that relate to the active trade or business 
are considered in determining whether the start-up expenditures exceed 
$50,000, including expenditures incurred on or before October 22, 2004.
    (b) Time and manner of making election. A taxpayer is deemed to 
have made an election under section 195(b) to amortize start-up 
expenditures as defined in section 195(c)(1) for the taxable year in 
which the active trade or business to which the expenditures relate 
begins. A taxpayer may choose to forgo the deemed election by clearly 
electing to capitalize its start-up expenditures on a timely filed 
Federal income tax return (including extensions) for the taxable year 
in which the active trade or business to which the expenditures relate 
begins. The election either to amortize start-up expenditures under 
section 195(b) or to capitalize start-up expenditures is irrevocable 
and applies to all start-up expenditures that are related to the active 
trade or business. A change in the characterization of an item as a 
start-up expenditure is a change in method of accounting to which 
sections 446 and 481(a) apply if the taxpayer treated the item 
consistently for two or more taxable years. A change in the 
determination of the taxable year in which the active trade or business 
begins also is treated as a change in method of accounting if the 
taxpayer amortized start-up expenditures for two or more taxable years.
    (c) Examples. The following examples illustrate the application of 
this section:

    Example 1. Expenditures of $5,000 or less. Corporation X, a 
calendar year taxpayer, incurs $3,000 of start-up expenditures after 
October 22, 2004, that relate to an active trade or business that 
begins on July 1, 2009. Under paragraph (b) of this section, 
Corporation X is deemed to have elected to deduct start-up 
expenditures under section 195(b) in 2009. Therefore, Corporation X 
may deduct the entire amount of the start-up expenditures in 2009, 
the taxable year in which the active trade or business begins.
    Example 2. Expenditures of more than $5,000 but less than or 
equal to $50,000. The facts are the same as in Example 1 except that 
Corporation X incurs start-up expenditures of $41,000. Under 
paragraph (b) of this section, Corporation X is deemed to have 
elected to deduct start-up expenditures under section 195(b) in 
2009. Therefore, Corporation X may deduct $5,000 and the portion of 
the remaining $36,000 that is allocable to July through December of 
2009 ($36,000/180 x 6 = $1,200) in 2009, the taxable year in which 
the active trade or business begins.
    Example 3. Subsequent change in the characterization of an item. 
The facts are the same as in Example 2 except that Corporation X 
determines in 2011 that Corporation X incurred $10,000 for an 
additional start-up expenditure erroneously deducted in 2009 under 
section 162 as a business expense. Under paragraph (b) of this 
section, Corporation X is deemed to have elected to amortize start-
up expenditures under section 195(b) in 2009, including the 
additional $10,000 of start-up expenditures. Corporation X is using 
an impermissible method of accounting for the additional $10,000 of 
start-up expenditures and must change its method under Sec.  1.446-
1(e) and the applicable general administrative procedures in effect 
in 2011.
    Example 4. Subsequent redetermination of year in which business 
begins. The facts are the same as in Example 2 except that, in 2010, 
Corporation X deducted the start-up expenditures allocable to 
January through December of 2010 ($36,000/180 x 12 = $2,400). In 
addition, in 2011 it is determined that Corporation X actually began 
business in 2010. Under paragraph (b) of this section, Corporation X 
is deemed to have elected to deduct start-up expenditures under 
section 195(b) in 2010. Corporation X impermissibly deducted start-
up expenditures in 2009, and incorrectly determined the amount of 
start-up expenditures deducted in 2010. Therefore, Corporation X is 
using an impermissible method of accounting for the start-up 
expenditures and must change its method under Sec.  1.446-1(e) and 
the applicable general administrative procedures in effect in 2011.
    Example 5. Expenditures of more than $50,000 but less than or 
equal to $55,000. The facts are the same as in Example 1 except that 
Corporation X incurs start-up expenditures of $54,500. Under 
paragraph (b) of this section, Corporation X is deemed to have 
elected to deduct start-up expenditures under section 195(b) in 
2009. Therefore, Corporation X may deduct $500 ($5,000-4,500) and 
the portion of the remaining $54,000 that is allocable to July 
through December of 2009 ($54,000/180 x 6 = $1,800) in 2009, the 
taxable year in which the active trade or business begins.
    Example 6. Expenditures of more than $55,000. The facts are the 
same as in Example 1 except that Corporation X incurs start-up 
expenditures of $450,000. Under paragraph (b) of this section, 
Corporation X is deemed to have elected to deduct start-up 
expenditures under section 195(b) in 2009. Therefore, Corporation X 
may deduct the amounts allocable to July through December of 2009 
($450,000/180 x 6 = $15,000) in 2009, the taxable year in which the 
active trade or business begins.

    (d) Effective/applicability date. This section applies to start-up 
expenditures paid or incurred after September 8, 2008. However, 
taxpayers may apply all the provisions of this section to start-up 
expenditures paid or incurred after October 22, 2004, provided that the 
period of limitations on assessment of tax for the year the election 
under paragraph (b) of this section is deemed made has not expired. 
Otherwise, for start-up expenditures paid or incurred prior to 
September 8, 2008, see Sec.  1.195-1 in effect prior to that date 
(Sec.  1.195-1 as contained in 26 CFR part 1 edition revised as of 
April 1, 2008).
    (e) Expiration date. This section expires on July 7, 2011.

0
Par. 4. Section 1.248-1 is amended by revising paragraphs (a) and (c), 
and adding paragraphs (d), (e), (f), and (g) to read as follows:


Sec.  1.248-1  Election to amortize organizational expenditures.

    (a) [Reserved]. For further guidance, see Sec.  1.248-1T(a).
* * * * *
    (c) through (g) [Reserved]. For further guidance, see Sec.  1.248-
1T(c) through (g).

0
Par. 5. Section 1.248-1T is added to read as follows:


Sec.  1.248-1T  Election to amortize organizational expenditures 
(temporary).

    (a) In general. Under section 248(a), a corporation may elect to 
amortize organizational expenditures as defined in section 248(b) and 
Sec.  1.248-1(b). In the taxable year in which a corporation begins 
business, an electing corporation may deduct an amount equal to the 
lesser of the amount of the organizational expenditures of the 
corporation, or $5,000 (reduced (but not below zero) by the amount by 
which the organizational expenditures exceed $50,000). The remainder of 
the

[[Page 38914]]

organizational expenditures is deducted ratably over the 180-month 
period beginning with the month in which the corporation begins 
business. All organizational expenditures of the corporation are 
considered in determining whether the organizational expenditures 
exceed $50,000, including expenditures incurred on or before October 
22, 2004.
    (b) [Reserved]. For further guidance, see Sec.  1.248-1(b).
    (c) Time and manner of making election. A corporation is deemed to 
have made an election under section 248(a) to amortize organizational 
expenditures as defined in section 248(b) and Sec.  1.248-1(b) for the 
taxable year in which the corporation begins business. A corporation 
may choose to forgo the deemed election by clearly electing to 
capitalize its organizational expenditures on a timely filed Federal 
income tax return (including extensions) for the taxable year in which 
the corporation begins business. The election either to amortize 
organizational expenditures under section 248(a) or to capitalize 
organizational expenditures is irrevocable and applies to all 
organizational expenditures of the corporation. A change in the 
characterization of an item as an organizational expenditure is a 
change in method of accounting to which sections 446 and 481(a) apply 
if the corporation treated the item consistently for two or more 
taxable years. A change in the determination of the taxable year in 
which the corporation begins business also is treated as a change in 
method of accounting if the corporation amortized organizational 
expenditures for two or more taxable years.
    (d) Determination of when corporation begins business. The 
deduction allowed under section 248 must be spread over a period 
beginning with the month in which the corporation begins business. The 
determination of the date the corporation begins business presents a 
question of fact which must be determined in each case in light of all 
the circumstances of the particular case. The words ``begins 
business,'' however, do not have the same meaning as ``in existence.'' 
Ordinarily, a corporation begins business when it starts the business 
operations for which it was organized; a corporation comes into 
existence on the date of its incorporation. Mere organizational 
activities, such as the obtaining of the corporate charter, are not 
alone sufficient to show the beginning of business. If the activities 
of the corporation have advanced to the extent necessary to establish 
the nature of its business operations, however, it will be deemed to 
have begun business. For example, the acquisition of operating assets 
which are necessary to the type of business contemplated may constitute 
the beginning of business.
    (e) Examples. The following examples illustrate the application of 
this section:

    Example 1. Expenditures of $5,000 or less. Corporation X, a 
calendar year taxpayer, incurs $3,000 of organizational expenditures 
after October 22, 2004, and begins business on July 1, 2009. Under 
paragraph (c) of this section, Corporation X is deemed to have 
elected to deduct organizational expenditures under section 248(a) 
in 2009. Therefore, Corporation X may deduct the entire amount of 
the organizational expenditures in 2009, the taxable year in which 
Corporation X begins business.
    Example 2. Expenditures of more than $5,000 but less than or 
equal to $50,000. The facts are the same as in Example 1 except that 
Corporation X incurs organizational expenditures of $41,000. Under 
paragraph (c) of this section, Corporation X is deemed to have 
elected to deduct organizational expenditures under section 248(a) 
in 2009. Therefore, Corporation X may deduct $5,000 and the portion 
of the remaining $36,000 that is allocable to July through December 
of 2009 ($36,000/180 x 6 = $1,200) in 2009, the taxable year in 
which Corporation X begins business.
    Example 3. Subsequent change in the characterization of an item. 
The facts are the same as in Example 2 except that Corporation X 
determines in 2011 that Corporation X incurred $10,000 for an 
additional organizational expenditure erroneously deducted in 2009 
under section 162 as a business expense. Under paragraph (c) of this 
section, Corporation X is deemed to have elected to amortize 
organizational expenditures under section 248(a) in 2009, including 
the additional $10,000 of organizational expenditures. Corporation X 
is using an impermissible method of accounting for the additional 
$10,000 of organizational expenditures and must change its method 
under Sec.  1.446-1(e) and the applicable general administrative 
procedures in effect in 2011.
    Example 4. Subsequent redetermination of year in which business 
begins. The facts are the same as in Example 2 except that, in 2010, 
Corporation X deducted the organizational expenditures allocable to 
January through December of 2010 ($36,000/180 x 12 = $2,400). In 
addition, in 2011 it is determined that Corporation X actually began 
business in 2010. Under paragraph (c) of this section, Corporation X 
is deemed to have elected to deduct organizational expenditures 
under section 248(a) in 2010. Corporation X impermissibly deducted 
organizational expenditures in 2009, and incorrectly determined the 
amount of organizational expenditures deducted in 2010. Therefore, 
Corporation X is using an impermissible method of accounting for the 
organizational expenditures and must change its method under Sec.  
1.446-1(e) and the applicable general administrative procedures in 
effect in 2011.
    Example 5. Expenditures of more than $50,000 but less than or 
equal to $55,000. The facts are the same as in Example 1 except that 
Corporation X incurs organizational expenditures of $54,500. Under 
paragraph (c) of this section, Corporation X is deemed to have 
elected to deduct organizational expenditures under section 248(a) 
in 2009. Therefore, Corporation X may deduct $500 ($5,000-4,500) and 
the portion of the remaining $54,000 that is allocable to July 
through December of 2009 ($54,000/180 x 6 = $1,800) in 2009, the 
taxable year in which Corporation X begins business.
    Example 6. Expenditures of more than $55,000. The facts are the 
same as in Example 1 except that Corporation X incurs organizational 
expenditures of $450,000. Under paragraph (c) of this section, 
Corporation X is deemed to have elected to deduct organizational 
expenditures under section 248(a) in 2009. Therefore, Corporation X 
may deduct the amounts allocable to July through December of 2009 
($450,000/180 x 6 = $15,000) in 2009, the taxable year in which 
Corporation X begins business.

    (f) Effective/applicability date. This section applies to 
organizational expenditures paid or incurred after September 8, 2008. 
However, taxpayers may apply all the provisions of this section to 
organizational expenditures paid or incurred after October 22, 2004, 
provided that the period of limitations on assessment of tax for the 
year the election under paragraph (c) of this section is deemed made 
has not expired. Otherwise, for organizational expenditures paid or 
incurred prior to September 8, 2008, see Sec.  1.248-1 in effect prior 
to that date (Sec.  1.248-1 as contained in 26 CFR part 1 edition 
revised as of April 1, 2008).
    (g) Expiration date. This section expires on July 7, 2011.

0
Par. 6. Section 1.709-1 is amended by revising paragraph (b) and 
removing paragraph (c) to read as follows:


Sec.  1.709-1  Treatment of organization and syndication costs.

* * * * *
    (b) [Reserved]. For further guidance, see Sec.  1.709-1T.

0
Par. 7. Section 1.709-1T is added to read as follows:


Sec.  1.709-1T  Treatment of organizational expenses and syndication 
costs (temporary).

    (a) [Reserved]. For further guidance, see Sec.  1.709-1(a).
    (b) Election to amortize organizational expenses--(1) In general. 
Under section 709(b), a partnership may elect to amortize 
organizational expenses as defined in section 709(b)(3) and Sec.  
1.709-2(a). In the taxable year in which a partnership begins business, 
an

[[Page 38915]]

electing partnership may deduct an amount equal to the lesser of the 
amount of the organizational expenses of the partnership, or $5,000 
(reduced (but not below zero) by the amount by which the organizational 
expenses exceed $50,000). The remainder of the organizational expenses 
is deductible ratably over the 180-month period beginning with the 
month in which the partnership begins business. All organizational 
expenses of the partnership are considered in determining whether the 
organizational expenses exceed $50,000, including expenses incurred on 
or before October 22, 2004.
    (2) Time and manner of making election. A partnership is deemed to 
have made an election under section 709(b) to amortize organizational 
expenses as defined in section 709(b)(3) and Sec.  1.709-2(a) for the 
taxable year in which the partnership begins business. A partnership 
may choose to forgo the deemed election by clearly electing to 
capitalize its organizational expenses on a timely filed Federal income 
tax return (including extensions) for the taxable year in which the 
partnership begins business. The election either to amortize 
organizational expenses under section 709(b) or to capitalize 
organizational expenses is irrevocable and applies to all 
organizational expenses of the partnership. A change in the 
characterization of an item as an organizational expense is a change in 
method of accounting to which sections 446 and 481(a) apply if the 
partnership treated the item consistently for two or more taxable 
years. A change in the determination of the taxable year in which the 
partnership begins business also is treated as a change in method of 
accounting if the partnership amortized organizational expenses for two 
or more taxable years.
    (3) Liquidation of partnership. If there is a winding up and 
complete liquidation of the partnership prior to the end of the 
amortization period, the unamortized amount of organizational expenses 
is a partnership deduction in its final taxable year to the extent 
provided under section 165 (relating to losses). However, there is no 
partnership deduction with respect to its capitalized syndication 
expenses.
    (4) Examples. The following examples illustrate the application of 
this section:

    Example 1. Expenditures of $5,000 or less. Partnership X, a 
calendar year taxpayer, incurs $3,000 of organizational expenses 
after October 22, 2004, and begins business on July 1, 2009. Under 
paragraph (b)(2) of this section, Partnership X is deemed to have 
elected to deduct organizational expenses under section 709(b) in 
2009. Therefore, Partnership X may deduct the entire amount of the 
organizational expenses in 2009, the taxable year in which 
Partnership X begins business.
    Example 2. Expenditures of more than $5,000 but less than or 
equal to $50,000. The facts are the same as in Example 1 except that 
Partnership X incurs organizational expenses of $41,000. Under 
paragraph (b)(2) of this section, Partnership X is deemed to have 
elected to deduct organizational expenses under section 709(b) in 
2009. Therefore, Partnership X may deduct $5,000 and the portion of 
the remaining $36,000 that is allocable to July through December of 
2009 ($36,000/180 x 6 = $1,200) in 2009, the taxable year in which 
Partnership X begins business.
    Example 3. Subsequent change in the characterization of an item. 
The facts are the same as in Example 2 except that Partnership X 
realizes in 2011 that Partnership X incurred $10,000 for an 
additional organizational expense erroneously deducted in 2009 under 
section 162 as a business expense. Under paragraph (b)(2) of this 
section, Partnership X is deemed to have elected to amortize 
organizational expenses under section 709(b) in 2009, including the 
additional $10,000 of organizational expenses. Partnership X is 
using an impermissible method of accounting for the additional 
$10,000 of organizational expenses and must change its method under 
Sec.  1.446-1(e) and the applicable general administrative 
procedures in effect in 2011.
    Example 4. Subsequent redetermination of year in which business 
begins. The facts are the same as in Example 2 except that, in 2010, 
Partnership X deducted the organizational expenses allocable to 
January through December of 2010 ($36,000/180 x 12 = $2,400). In 
addition, in 2011 it is determined that Partnership X actually began 
business in 2010. Under paragraph (b)(2) of this section, 
Partnership X is deemed to have elected to deduct organizational 
expenses under section 709(b) in 2010. Partnership X impermissibly 
deducted organizational expenses in 2009, and incorrectly determined 
the amount of organizational expenses deducted in 2010. Therefore, 
Partnership X is using an impermissible method of accounting for the 
organizational expenses and must change its method under Sec.  
1.446-1(e) and the applicable general administrative procedures in 
effect in 2011.
    Example 5. Expenditures of more than $50,000 but less than or 
equal to $55,000. The facts are the same as in Example 1 except that 
Partnership X incurs organizational expenses of $54,500. Under 
paragraph (b)(2) of this section, Partnership X is deemed to have 
elected to deduct organizational expenses under section 709(b) in 
2009. Therefore, Partnership X may deduct $500 ($5,000-4,500) and 
the portion of the remaining $54,000 that is allocable to July 
through December of 2009 ($54,000/180 x 6 = $1,800) in 2009, the 
taxable year in which Partnership X begins business.
    Example 6. Expenditures of more than $55,000. The facts are the 
same as in Example 1 except that Partnership X incurs organizational 
expenses of $450,000. Under paragraph (b)(2) of this section, 
Partnership X is deemed to have elected to deduct organizational 
expenses under section 709(b) in 2009. Therefore, Partnership X may 
deduct the amounts allocable to July through December of 2009 
($450,000/180 x 6 = $15,000) in 2009, the taxable year in which 
Partnership X begins business.

    (5) Effective/applicability date. This section applies to 
organizational expenses paid or incurred after September 8, 2008. 
However, taxpayers may apply all the provisions of this section to 
organizational expenses paid or incurred after October 22, 2004, 
provided that the period of limitations on assessment of tax for the 
year the election under paragraph (b)(2) of this section is deemed made 
has not expired. Otherwise, for organizational expenses paid or 
incurred prior to September 8, 2008, see Sec.  1.709-1 in effect prior 
to that date (Sec.  1.709-1 as contained in 26 CFR part 1 edition 
revised as of April 1, 2008).
    (6) Expiration date. This section expires on July 7, 2011.

Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
    Approved: June 30, 2008.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E8-15459 Filed 7-7-08; 8:45 am]
BILLING CODE 4830-01-P