The American Institute of CPAs recently submitted a comment letter to the Department of the Treasury and the Internal Revenue Service in response to their release of a guidance package addressing certain basis-shifting transactions involving partnerships and related parties.

On June 17, 2024, Treasury and the IRS issued a guidance package targeting related parties and partnerships, which structure transactions to take advantage of the basis-adjustment provisions of subchapter K. The guidance package exceeded its intended scope by including real, substantive transactions, that would be considered reportable transactions causing undue hardship to taxpayers, especially due to the retroactive nature of the proposed rules.

Additionally, the Supreme Court’s decision in Loper Bright overturned the “Chevron deference” doctrine, meaning courts now interpret statutes without assuming agency interpretations are correct. The AICPA urges the Treasury and IRS to reconsider the guidance package, questioning if it represents the best interpretation of the statutes under § 7805, given the lack of specific regulatory authority in sections 732, 734(b), 743(b), and 755.

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The AICPA recommends the following:

Eliminate the Retroactive Nature of the Rules – final regulations should eliminate the retroactive application of the proposed rules and state that they apply prospectively for participating parties and material advisors. In addition, the disclosure requirements under the Proposed Regulations should only apply in the year of the Transaction of Interest (TOI).
Exclude Certain Types of Transactions – final regulations should significantly narrow the scope of the Proposed Regulations to only capture “carefully structured” transactions that “exploit the mechanical basis adjustments provisions of subchapter K.” In doing so, the final regulations would exclude common transaction and normal basis adjustments captured under the proposed rules as drafted.
Significantly Increase the $5 Million Threshold – final regulations should reflect a threshold of at least $50 million. This Threshold should be applied on a transaction-by-transaction basis and look to gain recognition by any party.
Modify the Distribution Transaction of Interest Related Party Definition – final regulations should modify the Distribution TOI Related Party Definition to provide that in addition to being related to each other, related partners must also own 80% or more of the capital of profits interests of the partnership.

“Our recommendations would eliminate the retroactivity of the rules, significantly increase the $5 million transaction threshold, and exclude certain types of transactions from being subject to the rules,” says Kristin Esposito, AICPA’s Director of Tax Policy & Advocacy. “This would considerably ease the administrative burden on our members.”

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