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New Partnership Must Continue Amortizing Start-up Costs of Terminating Partnership
(Parker Tax Publishing December 2013)

Proposed regulations address the deductibility of start-up expenditures and organizational expenses for partnerships following a technical termination of a partnership. REG-126285-12 (12/9/13).

Under Code Sec. 195, an electing taxpayer can deduct start-up expenditures in the tax year in which the active trade or business begins. The amount that may be deducted in that year is the lesser of (1) the amount of start-up expenditures with respect 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.

Generally, under Code Sec. 709, no deduction is 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. However, a partnership may elect to deduct organizational expenses in the year in which the partnership begins business. The amount that may be deducted is 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. 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 Code Sec. 709 may be deducted to the extent allowable under Code Sec. 165. However, there is no partnership deduction with respect to its capitalized syndication expenses.

Code Sec. 708(b)(1)(B) provides that a partnership is considered as terminated if, 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 (i.e., a technical termination).

According to the IRS, some taxpayers are taking the position that a technical termination entitles a partnership to deduct unamortized start-up expenses and organizational expenses to the extent provided under Code Sec. 165. Because the IRS believes this result is contrary to the congressional intent underlying Code Secs. 195, 708, and 709, it has now issued proposed regulations which provide that a new partnership formed due to a transaction, or series of transactions, resulting from a technical termination of a prior partnership must continue amortizing the start-up and organizational expenses using the same amortization period adopted by the terminating partnership.

For a discussion of the rules relating to a technical termination of a partnership, see Parker Tax ΒΆ26,530.(Staff Editor Parker Tax Publishing)

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Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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