The Treasury Department and the IRS issued final regulations on Jan. 10 that identify certain partnership related-party basis shifting transactions as “transactions of interest.”
The IRS defines a transaction of interest as “a transaction that the IRS and the Treasury Department believe is a transaction that has the potential for tax avoidance or evasion but lack sufficient information to determine whether the transaction should be identified specifically as a tax avoidance transaction.”
Last June, Treasury and the IRS proposed new guidance aimed at stopping the use of basis shifting—transactions where an individual or business moves assets to a related party to avoid paying taxes. The tax agency intends to shut down this particular tax loophole used by wealthy individuals and large partnerships that “has been overlooked for more than a decade and allowed tax abuse to go on for far too long,” IRS Commissioner Danny Werfel said in June.
In these complex moves, the IRS says high-income taxpayers and corporations strip basis from assets they own where the basis isn’t generating tax benefits and then move the basis to assets they own where it will generate tax benefits without causing any meaningful change to the economics of their businesses. These basis shifting transactions allow closely related parties to avoid taxes.
The crackdown on basis shifting transactions could net more than $50 billion in revenue over 10 years, the IRS said.
One of the pieces of guidance the IRS released last June pertains to the final regulations the agency and Treasury issued on Jan. 10. Last year’s notice of proposed rulemaking (NPRM) would require taxpayers and their material advisors to report if they and their clients are participating in partnership basis shifting transactions. The goal of the NPRM is to provide the IRS with additional information to better assess the scale and characteristics of the abuse and help direct IRS enforcement resources, Treasury said in June. The threshold for reporting would be set at $5 million or more of positive basis adjustments generated through covered transactions in a single tax year and for which no tax was paid.
After the NPRM was issued, the IRS said it received comments on the proposed regulations stating that the final regulations should avoid unnecessary burdens for small, family-run businesses; limit retroactive reporting; provide more time for reporting; and differentiate publicly traded partnerships, among other suggested changes. The final regulations address these comments and include certain changes reflecting the comments, the IRS said last Friday.
The following are some key takeaways from the final regs issued on Jan. 10:
Increased dollar threshold for basis increase in a transaction of interest: Treasury and the IRS increased the threshold amount for a basis increase in a transaction of interest from $5 million to $25 million for tax years before 2025 and $10 million for tax years thereafter.
Limited retroactive reporting for open tax years: To address comments on creating an unnecessary burden for taxpayers subject to the disclosure rules of the final regulations, Treasury and the IRS limited reporting for open tax years to those that fall within a six-year lookback window. The six-year lookback window 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 transaction of interest during the six-year lookback period is $25 million.
Additional time for reporting: The final regulations give taxpayers and material advisors more time to file disclosure statements. Taxpayers have an additional 90 days from the final regulation’s publication date to file disclosure statements for transactions of interest in open tax years for which a tax return has already been filed and that fall within the six-year lookback window. Material advisors have an additional 90 days to file their disclosure statements for tax statements made before the final regulations.
Many publicly traded partnerships excluded: Because publicly traded partnerships are typically owned by a large number of unrelated owners, the final regulations exclude many owners of publicly traded partnerships from the disclosure rules.
In a statement on Jan. 10, the IRS said about the final regs, “Today, Treasury and IRS issued regulations finalizing the proposed regulations, with several important changes, including those described above. The final regulations identify certain partnership related-party basis adjustment transactions, and substantially similar transactions, as transactions of interest. They 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 advisors are subject to the disclosure requirements for reportable transactions.
“The identified transactions generally 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 statement continues. “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 transaction of interest undertaken in a tax year before 2025) under the rules of Internal Revenue Code sections 732(b) or (d), 734(b) or 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,” the IRS added.
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