A new partnership formed because of a “technical termination” must continue amortizing any startup and organizational expenses over the remaining portion of the amortization period adopted by the terminating partnership, according to final regulations issued by the IRS.
A “technical termination” occurs if a partnership is terminated by a sale or an exchange of a 50-percent-or-greater interest. The partnership is deemed to contribute all of its assets and liabilities to a new partnership in exchange for an interest in the new partnership.
Immediately afterwards, the terminated partnership – in liquidation of that partnership – is deemed to distribute interests in the new partnership to the purchasing partner and other remaining partners in proportion to their respective interests in the terminated partnership.
The final regulations apply to technical terminations occurring on or after Dec. 9, 2013.
A partnership is considered to terminate only if:
- 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
- There is a sale or exchange of 50 percent or more of the total interest in partnership capital and profits within a 12-month period.
The IRS has become aware that some taxpayers were taking the position that a technical termination entitled a partnership to deduct unamortized startup and organizational expenses. The IRS believes this result is contrary to congressional intent.
Under the final regulations, a new partnership formed as a result of a sale or an exchange of 50 percent or more of the total interest in partnership capital and profits within a 12-month period must continue amortizing the startup and organization expenses over the remaining portion of the amortization period adopted by the terminating partnership.