[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]
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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.
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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