Recently issued proposed regulations (REG-126285-12) concerning the deductibility of start-up expenditures under Section 195 and organizational expenses for partnerships under Section 709 following a technical termination of a partnership indicate that if a partnership has elected to amortize start-up expenditures or organizational expenses, upon a technical termination of the partnership, the new continuing partnership must continue to amortize those expenditures using the same amortization period adopted by the terminating partnership.
The proposed regulations are aimed at taxpayers who took the position that a technical termination under Section 708(b)(1)(B) entitles a partnership to deduct unamortized start-up expenses and organizational expenses. According to the IRS and the Treasury Department, this result is contrary to the congressional intent underlying Sections 195, 708 and 709. The preamble to the proposed regulations explains that 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."
The IRS and the Treasury Department explained that they believe that a technical termination 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.
The regulations are proposed to be effective for technical terminations that occur on or after Dec. 9, 2013, meaning they would not be prospective when finalized.
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