- Treasury Says Partnership Start-Up/Organizational Expenses Not Deductible On Technical Termination
- January 8, 2014
- Law Firm: Kaufman Canoles A Professional Corporation - Norfolk Office
Generally, a partnership cannot deduct expenses incurred to organize and start-up the partnership until the partnership “terminates.” What happens, however, when the partnership does not actually terminate, but is deemed by Congress to terminate under I.R.C. § 708(b)(1)(B) after a sale/exchange of 50% or more of the partnership interests (called a “technical termination”)? In other words, is what’s good for the goose good for the gander?
Treasury has issued proposed regulations that say “no” (or rather, “Congress did not intend for the gander to have it as good as the goose”). Specifically, Congress intended that start-up and organizational expenses should be amortized over the “actual” business life of the partnership (interestingly, Congress also deems the business life to be 15 or fewer years for amortization purposes), and that the actual business life of the partnership does not cease until the business venture actually stops. Thus, if the tax law simply deems the business venture to stop (even though it actually continues), these expenses should not be deductible. Treasury has requested comments on these proposed regulations—which apply to technical terminations occurring after December 8, 2013—by March 10, 2014. To be sure, the IRS can argue that these expenses are not deductible for technical terminations occurring on or before December 8, 2013 (even though the regulations do not apply).
Therefore, if a sale/exchange of 50% or more of your partnership’s interests occurred during the 2013 tax year, you must evaluate your ability to deduct start-up and organizational costs (especially in light of these new proposed regulations).