[Federal Register Volume 78, Number 236 (Monday, December 9, 2013)]
[Proposed Rules]
[Pages 73753-73756]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-29177]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-126285-12]
RIN 1545-BL06


Partnerships; Start-Up Expenditures; Organization and Syndication 
Fees

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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

SUMMARY: This document contains proposed regulations concerning the 
deductibility of start-up expenditures and organizational expenses for 
partnerships. The proposed regulations provide guidance regarding the 
deductibility of start-up expenditures and organizational expenses for 
partnerships following a technical termination of a partnership.

DATES: Written or electronic comments must be received by March 10, 
2014.

[[Page 73754]]


ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-126285-12), Room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
126285-12), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC, or sent electronically, via the Federal 
eRulemaking portal at www.regulations.gov (IRS REG-126285-12)

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
David H. Kirk or Rachel Smith at (202) 317-6852; concerning submissions 
of comments or to request a hearing, Oluwafunmilayo Taylor, (202) 317-
6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1) under section 708(b) of the Internal 
Revenue Code (Code).

1. Section 708: Continuation of Partnership

    Section 708(a) generally provides that, for purposes of subchapter 
K of chapter 1 of subtitle A of Title 26, an existing partnership shall 
be considered as continuing if it is not terminated.
    Section 708(b)(1) provides that, for purposes of section 708(a), a 
partnership shall be considered as terminated only if (A) 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 
(B) within a 12-month period there is a sale or exchange of 50 percent 
or more of the total interest in partnership capital and profits.
    Section 1.708-1(b)(4) of the Income Tax Regulations provides that 
if a partnership is terminated by a sale or exchange of an interest, 
the following is deemed to occur: the partnership contributes all of 
its assets and liabilities to a new partnership in exchange for an 
interest in the new partnership; immediately thereafter, the terminated 
partnership distributes interests in the new partnership to the 
purchasing partner and the other remaining partners in proportion to 
their respective interests in the terminated partnership in liquidation 
of the terminated partnership, either for the continuation of the 
business by the new partnership or for its dissolution and winding up.

2. Section 195 Start-Up Expenditures

    Section 195(a) provides that, except as otherwise provided in 
section 195, no deduction shall be allowed for start-up expenditures 
(as defined in section 195(c)(1)). Section 195(b)(1) provides that a 
taxpayer may elect to deduct start-up expenditures as provided in 
section 195(b)(1)(A) and (B).
    Section 195(b)(1)(A) allows an electing taxpayer to deduct start-up 
expenditures in the taxable year in which the active trade or business 
begins. The amount that may be deducted under section 195(b)(1)(A) in 
that year is the lesser of (i) the amount of start-up expenditures with 
respect to the active trade or business, or (ii) $5,000, reduced (but 
not below zero) by the amount by which the start-up expenditures exceed 
$50,000.
    Section 195(b)(1)(B) provides that any start-up expenditures that 
are not deductible under section 195(b)(1)(A) shall be allowed as a 
deduction 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. Section 902(a) of 
the American Jobs Creation Act of 2004, Pub. L. 108-357, 118 Stat. 1418 
(``AJCA''), amended section 195(b)(1) for start-up expenditures paid or 
incurred after October 22, 2004. Prior to the AJCA amendment, section 
195(b)(1) (former section 195(b)(1)) allowed taxpayers to elect to 
treat such expenditures as deferred expenses deductible ratably over a 
period of at least 60 months.
    Section 1.195-1(b) provides that, for start-up expenditures paid or 
incurred after August 16, 2011(the effective date of Sec.  1.195-1(b)), 
a taxpayer is deemed to make an election under section 195(b) to 
amortize start-up expenditures for the taxable year in which the active 
trade or business to which the expenditures relate begins. However, 
taxpayers may apply all provisions of Sec.  1.195-1 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 Sec.  1.195-1(b) is deemed made has not expired.
    Section 195(b)(2) provides that in any case in which a trade or 
business is completely disposed of by the taxpayer before the end of 
the amortization period, any deferred expenses attributable to such 
trade or business that were not allowed as a deduction by reason of 
section 195 may be deducted to the extent allowable under section 165.

3. Section 709: Treatment of Organization and Syndication Fees

    Section 709(a) provides that, except as otherwise provided in 
section 709(b), no deduction shall be allowed for any amounts paid or 
incurred to organize a partnership or to promote the sale of (or to 
sell) an interest in the partnership. Section 709(b) provides that a 
partnership may elect to deduct organizational expenses, within the 
meaning of section 709(b)(3), 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 (i) the amount of the organizational 
expenses of the partnership, or (ii) $5,000, reduced (but not below 
zero) by the amount by which the organizational expenses exceed 
$50,000.
    Section 709(b)(1)(B) provides that any organizational expenses that 
are not deductible under section 709(b)(1)(A) shall be allowed as a 
deduction 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. Prior to October 22, 2004, section 709(b) 
contained a rule similar to former section 195(b)(1).
    Section 1.709-1(b)(2) provides that, for organizational expenses as 
defined in section 709(b)(3) and Sec.  1.709-2(a) paid or incurred 
after August 16, 2011 (the effective date of Sec.  1.709-1(b)(2)), a 
partnership is deemed to make an election under section 709(b) to 
amortize organizational expenses for the taxable year in which the 
partnership begins business. However, taxpayers may apply all 
provisions of Sec.  1.709-1 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 Sec.  1.709-1(b)(2) 
is deemed made has not expired.
    Section 709(b)(2) provides that in any case in which a partnership 
is liquidated before the end of the amortization period, any deferred 
expenses attributable to the partnership that were not allowed as a 
deduction by reason of section 709 may be deducted to the extent 
allowable under section 165. See also Sec.  1.709-1(b)(3). However,

[[Page 73755]]

there is no partnership deduction with respect to its capitalized 
syndication expenses. Id.

Explanation of Provisions

    The Treasury Department and the IRS are aware that some taxpayers 
are taking the position that a technical termination under section 
708(b)(1)(B) entitles a partnership to deduct unamortized start-up 
expenses and organizational expenses to the extent provided under 
section 165. The Treasury Department and the IRS believe this result is 
contrary to the congressional intent underlying sections 195, 708, and 
709. Therefore, the proposed regulations amend Sec.  1.708-1 to provide 
that a new partnership formed due to a transaction, or series of 
transactions, described in section 708(b)(1)(B) must continue 
amortizing the section 195 and section 709 expenses using the same 
amortization period adopted by the terminating partnership.
    The legislative purpose of sections 195 and 709 was to allow 
expenses incurred in the formation of a partnership to be deducted 
ratably over the period during which the partnership benefits from 
those initial expenses. Section 195 and 709 provide that this period 
begins with the commencement of business (which must be an active trade 
or business in the case of section 195) and closes after 180 months, or 
when the business ceases, if earlier. The Treasury Department and the 
IRS believe that a technical termination under section 708(b)(1)(B) 
should not constitute a cessation of a trade or business to which the 
section 195 or section 709 expenses relate, nor does it otherwise 
constitute the type of disposition or liquidation that should trigger 
deduction of deferred section 195 or section 709 expenses.
    Moreover, the Conference Report issued in conjunction with the 
enactment of AJCA treated start-up expenditures under section 195 and 
organizational expenditures under section 709 as analogous to other 
intangible business assets described in section 197, and accordingly 
determined that the period for the amortization of start-up 
expenditures and organizational expenditures should be consistent with 
the fifteen year amortization period for section 197 intangibles. H. 
Rep. No. 108-755, at 776-77 (October 07, 2004). Section 1.197-
2(g)(2)(ii)(B) provides, generally, that in the case of a section 721 
transaction in which an amortizable section 197 intangible is 
transferred to a partnership, the transferee partnership will continue 
to amortize its adjusted basis, to the extent it does not exceed the 
transferor's adjusted basis, ratably over the remainder of the 
transferor's 15-year amortization period. Section 1.197-2(g)(2)(iv)(B) 
provides that in applying Sec.  1.197-2(g)(2)(ii)(B) to a partnership 
that is terminated pursuant to section 708(b)(1)(B), the terminated 
partnership is treated as the transferor and the new partnership is 
treated as the transferee with respect to any section 197 intangible 
held by the terminated partnership immediately preceding the 
termination. Consistent with Congress' intent of aligning the 
amortization of start-up and organizational expenditures with the 
treatment of section 197 intangibles, the new partnership resulting 
from a technical termination under section 708(b)(1)(B) should 
similarly continue to amortize the section 195 and section 709 expenses 
using the same amortization period adopted by the terminated 
partnership.
    Practitioners suggested guidance on this issue to alleviate 
uncertainty regarding the proper treatment of these items when a 
partnership undergoes a technical termination. One alternative to the 
rule set forth above would allow the terminating partnership to 
immediately deduct any unamortized section 195 or section 709 items to 
the extent provided under section 165 on the effective date of the 
termination (as defined in Sec.  1.708-1(b)(3)(ii)). However, the 
Treasury Department and the IRS decline to adopt this alternative, 
which as noted above would be inconsistent with Congress' intent to 
treat section 195 and section 709 items consistently with section 197 
intangibles, and which might provide incentives for taxpayers to 
structure transactions in order to inappropriately accelerate the 
deduction of section 195 or section 709 expenses shortly after those 
expenses are incurred.

Proposed Effective/Applicability Date

    These regulations, when published in their final form in the 
Federal Register, will apply to technical terminations that occur on or 
after December 9, 2013.

Special Analyses

    It has been determined that these proposed regulations are not a 
significant regulatory action as defined in Executive Order 12866, as 
supplemented by Executive Order 13563. 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, and because the regulation does not 
impose a collection of information on small entities, the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to 
section 7805(f) of the Code, these regulations have been submitted to 
the Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small business.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The IRS and the Treasury Department request comments on the 
clarity of the proposed rules and how they can be made easier to 
understand. All comments will be available for public inspection and 
copying. A public hearing may be scheduled if requested in writing by 
any person that timely submits written comments. If a public hearing is 
scheduled, notice of the date, time, and place for the public hearing 
will be published in the Federal Register.

Drafting Information

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

Proposed Amendments to the Regulations

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

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 1.195-2 is added to read as follows:


Sec.  1.195-2  Technical termination of a partnership.

    (a) In general. If a partnership that has elected to amortize 
start-up expenditures under section 195(b) and Sec.  1.195-1 terminates 
in a transaction (or a series of transactions) described in section 
708(b)(1)(B) or Sec.  1.708-1(b)(2), the termination shall not be 
treated as resulting in a disposition of the partnership's trade or 
business for purposes of section 195(b)(2). See Sec.  1.708-1(b)(6) for 
rules concerning the treatment of these start-up expenditures by the 
new partnership.

[[Page 73756]]

    (b) Effective/applicability date. This section applies to a 
technical termination of a partnership under section 708(b)(1)(B) that 
occurs on or after December 9, 2013.
0
Par. 3. Section 1.708-1 is amended by adding paragraph (b)(6) to read 
as follows:


Sec.  1.708-1  Continuation of partnership.

* * * * *
    (b) * * *
    (6) Treatment of certain start-up or organizational expenses 
following a technical termination--(i) In general. If a partnership 
that has elected to amortize start-up expenditures under section 195(b) 
or organizational expenses under section 709(b)(1) terminates in a 
transaction (or a series of transactions) described in section 
708(b)(1)(B) or paragraph (b)(2) of this section, the new partnership 
must continue to amortize those expenditures using the same 
amortization period adopted by the terminating partnership. See section 
195 and Sec.  1.195-1 for rules concerning the amortization of start-up 
expenditures and section 709 and Sec.  1.709-1 for rules concerning the 
amortization of organizational expenses.
    (ii) Effective/applicability date. This paragraph (b)(6) applies to 
a technical termination of a partnership under section 708(b)(1)(B) 
that occurs on or after December 9, 2013.
* * * * *
0
Par. 4. Section 1.709-1 is amended by:
0
1. Designating the text in paragraph (b)(3) as paragraph (b)(3)(i), 
adding a heading to newly designated paragraph (b)(3)(i) and adding 
paragraph (b)(3)(ii);
0
2. Adding a sentence at the end of paragraph (b)(5).
    The additions read as follows:


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

* * * * *
    (b) * * *
    (3) Liquidation of partnership--(i) In general. * * *
    (ii) Technical termination of a partnership. If a partnership that 
has elected to amortize organizational costs under section 709(b) 
terminates in a transaction (or a series of transactions) described in 
section 708(b)(1)(B) or Sec.  1.708-1(b)(2), the termination shall not 
be treated as resulting in a liquidation of the partnership for 
purposes of section 709(b)(2). See Sec.  1.708-1(b)(6) for rules 
concerning the treatment of these organizational costs by the new 
partnership.
    * * *
    (5) * * * Paragraph (b)(3)(ii) of this section applies to a 
technical termination of a partnership under section 708(b)(1)(B) that 
occurs on or after December 9, 2013.

Heather C. Maloy,
Deputy Commissioner for Operations Support.
[FR Doc. 2013-29177 Filed 12-6-13; 8:45 am]
BILLING CODE 4830-01-P