Basis-shifting transaction reporting addressed in final regs.

The IRS issued final regulations (T.D. 10028) Friday that identify certain partnership related-party basis-shifting transactions and substantially similar transactions as transactions of interest (TOIs), which subjects them to the rules for reportable transactions.

The final regulations apply to related partners and partnerships that participated in the identified transactions through distributions of partnership property or the transfer of an interest in the partnership by a related partner to a related transferee. The affected taxpayers and their material advisers are subject to the disclosure requirements for reportable transactions. 

The final regulations make several important changes to the proposed regulations (REG-124593-23) that the IRS issued in June 2024, including an increased dollar threshold for basis increase in a TOI. Instead of the $5 million threshold in the proposed regulations, the final regulations set a threshold of $25 million for tax years before 2025 and $10 million for later tax years.

Changes from proposed regulations

Changes in the final regulations include:

• Limiting reporting for open tax years to those that fall within a six-year lookback window, which is the 72-month period before the first month of a taxpayer’s most recent tax year that began before the publication of the final regulations. In addition, the threshold amount for a basis increase in a TOI during the six-year lookback period is $25 million. 

• Giving taxpayers an additional 90 days from the final regulations’ publication date for taxpayers to file disclosure statements for TOIs in open tax years for which a tax return has already been filed and that fall within the six-year lookback window. The final regulations also give material advisers an additional 90 days to file their disclosure statements for tax statements made before the publication of the final regulations. 

• Excluding many owners of publicly traded partnerships (PTPs) from the disclosure rules because PTPs are typically owned by a large number of unrelated owners.

Background

The proposed regulations for T.D. 10028 were one of three notices of proposed rulemaking that the IRS released in June, along with a revenue ruling.

They were part of the IRS’s plan to close a tax loophole in several actions that agency leaders said could add over $50 billion to U.S. government coffers over 10 years. IRS Commissioner Danny Werfel described basis shifting as “a shell game, where sophisticated tax maneuvers take place by shifting the basis of assets between closely related entities, ultimately allowing the high-income [taxpayers] to hide from a tax bill.”

Specifically, Treasury said the regulations proposed in June, now made final, would provide the IRS with information “to better assess the scale and characteristics of the abuse and help direct IRS enforcement resources.”

Identified transactions

The identified transactions typically result from either a tax-free distribution of partnership property to a partner that is related to one or more partners of the partnership or the tax-free transfer of a partnership interest by a related partner to a related transferee.

The tax-free distribution or transfer generates an increase to the basis of the distributed property or partnership property of $10 million or more ($25 million or more in the case of a TOI undertaken in a tax year before 2025) under the rules of Sec. 732(b) or (d), Sec. 734(b), or Sec. 743(b) but for which no corresponding tax is paid. 

The basis increase to the distributed or partnership property allows the related parties to significantly decrease taxable income through increased cost-recovery allowances (such as depreciation deductions) or decrease taxable gain (or increase taxable loss) on the disposition of the property subject to the basis increase.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.