Guidance Addresses Partnership Basis Shifting

Michael Schindler, Caleb Egli
| 1/30/2025
Guidance Addresses Partnership Basis Shifting
In summary
  • Recently issued guidance identifies which partnership-related basis-shifting transactions are transactions of interest (TOIs) and, as such, are subject to specific disclosure rules.
  • Failure to comply with the reportable transaction disclosure rules could result in substantial penalties.
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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.

Final partnership basis-shifting TOI regulations

The final regulations identify the following four kinds of partnership adjustments as TOIs provided certain threshold amounts are satisfied:

  • Section 734(b) TOI. A partnership distributes property to a person who is a related partner in a current or liquidating distribution and the partnership increases the basis of one or more remaining properties under Sections 734(b) and (c).
  • Section 732(b) TOI. A partnership distributes property to a partner who is related to one or more partners in a complete liquidation of a partnership interest (or liquidation of the partnership) and the basis of one or more properties is increased under Sections 732(b) and (c).
  • Section 732(d) TOI. A partnership distributes property to a partner who is related to one or more partners and the basis of one or more distributed properties is increased under Section 732(d).
  • Section 743(b) TOI. A partner transfers an interest in a partnership to a related transferee nonrecognition transaction and the basis of one or more of the partnership properties is increased under Section 743(b)(1).

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.

Changes from the proposed regulations

The final regulations made a number of key changes to the proposed regulations, including:

  • Increasing the positive basis adjustment reporting thresholds. Specifically, the threshold for positive basis adjustments in a single tax year was increased from $5 million to $10 million and from $5 million to $25 million for the six-year lookback period.
  • Limiting retroactive reporting to a six-year lookback period. The lookback period is defined as 72 months before the first month of the taxpayer's most recent tax year prior to regulation publication. For calendar year taxpayers, this period is 2019-2024. Transactions occurring before this period will not be subject to reporting requirements in relation to transaction benefits derived during or after this period.
  • Extending reporting deadlines. For instance, the final regulations provide participants with an additional 90 days from publication date to file disclosure statements for TOIs occurring during the six-year lookback period, or July 13, 2025.
  • Making other changes including the following:
    • Modifying Section 743(b) TOIs to include only transactions where the transferor and transferee are related parties. Under the proposed regulations, a TOI could have applied if there were related parties in the partnership even if the transfer was not between related parties.
    • Clarifying that Section 743(b) basis adjustments as a result of the death of a partner are not reportable.
    • Clarifying that the threshold amounts for Section 734(b) and Section 732 TOIs exclude the allocable share of basis increases or decreases born by unrelated partners (other than tax-indifferent parties).
    • Introducing a knowledge requirement for tax-indifferent parties participating in a transaction, requiring that their tax-indifferent status was known or should have been known by any other participant in the transaction.
    • Clarifying that S corporations and partnerships are not treated as tax-indifferent parties unless a principal purpose for the use of the entity is to avoid tax-indifferent party status.

Looking ahead

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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Michael Schindler
Michael Schindler
Principal, Washington National Tax
Caleb Egli Headshot
Caleb Egli
Managing Director, Washington National Tax

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