The IRS issued final regulations ( T.D. 9681) on July 22 that adopt proposed regulations issued in December 2013 (REG-126285-12) concerning the deductibility of start-up expenditures under Section 195 and organizational expenses under Section 709 after a technical termination of a partnership under Section 708(b)(1)(B).

The regulations indicate that if a partnership has elected to amortize start-up expenditures or organizational expenses and enters into a transaction that causes the partnership to undergo a technical termination, the new continuing partnership must continue to amortize those expenditures.

The final regulations include one minor change indicating that the new partnership should continue to amortize the start-up expenditures and organizational expenses over the remaining portion of the amortization period adopted by the terminating partnership. The proposed regulations had provided for the new partnership to use the same amortization period adopted by the terminating partnership. The IRS explained that the change was to clarify that the amortization period does not restart for the new partnership.

The 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 preamble of the proposed regulations, this result is contrary to the congressional intent underlying Sections 195, 708 and 709, which "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 Treasury explained that they believe that a technical termination shouldn't constitute a cessation of a trade or business to which the Section 195 or Section 709 expenses relate, nor does the technical termination otherwise constitute the type of disposition or liquidation that should trigger the deduction of deferred Section 195 or Section 709 expenses.

The final regulations are made effective for technical terminations that occur on or after Dec. 9, 2013.

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