On Jan. 14, the U.S. Department of the Treasury and the IRS issued final regulations that identify certain partnership related-party basis-shifting transactions and substantially similar transactions as TOIs. TOIs are a type of reportable transaction required to be disclosed by transaction participants and material advisers. Material advisers also are required to maintain and furnish lists of clients to the IRS. The regulations apply to future transactions, as well as transactions occurring within a six-year lookback period. Significant penalties apply for failure to comply with the reportable transaction rules.
The partnership basis-shifting TOI regulations first were proposed in June 2024, along with two other pieces of guidance issued the same day: Notice 2024-54 and Revenue Ruling 2024-14. The IRS also issued a fact sheet on the guidance. Notice 2024-54 previewed two future proposed regulations to address basis-shifting transactions involving partnerships and related parties, including corporations: one to amend Sections 732, 734(b), 743(b), and 755 and another to amend the consolidated return rules under Section 1502. Revenue Ruling 2024-14 describes scenarios in which certain related-party partnership transactions within a consolidated return group involving basis shifting lack economic substance.
Crowe observation
The IRS has indicated that the new guidance was influenced by the findings of IRS exam teams, which have seen repeated instances of basis shifting taking place in sophisticated transactions between related parties.
The final regulations identify the following four kinds of partnership adjustments as TOIs provided certain threshold amounts are satisfied:
Transactions that are substantially similar to these transactions also are treated as a TOI to the extent that they do not involve related partners and that one or more partners of the partnership is a tax-indifferent party. Generally, for this purpose a tax-indifferent party is a party that is either not liable for federal income tax by reason of its tax-exempt status (or in certain cases, foreign status) or to which gain, or a portion of gain that would have resulted in a Section 732(b) TOI or a Section 734(b) TOI if the property subject to a basis decrease were sold immediately after the transaction, would not result in a corresponding federal income tax liability.
The final regulations made a number of key changes to the proposed regulations, including:
The TOI regulations and Revenue Ruling 2024-14 are affirmative steps that Treasury and the IRS have taken to crack down on what they perceive to be abusive or potentially abusive partnership transactions. It is unclear whether the Trump administration will agree with this approach. However, unless the new administration indicates that it is removing or modifying the TOI regulations, taxpayers will be required to disclose TOIs entered into during the lookback period as soon as this summer. Identifying transactions that meet the TOI criteria during the lookback period will be a time-consuming and complex process. Therefore, taxpayers should consult with their tax advisers now to review transactions and determine whether disclosure is required.
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