Removal of Partnership Basis-Shifting Regs
In summary
- On March 6, the U.S. Department of the Treasury and the IRS issued a notice of proposed rulemaking to remove Biden-era regulations requiring disclosures with respect to a broadly defined category of partnership basis-shifting transactions.
- Removal of the regulations would eliminate the disclosure obligations as if the regulations had never been published.
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On March 6, Treasury and the IRS issued a notice of proposed rulemaking to remove final regulations published on Jan. 14, 2025, that identified a broad category of related-party partnership transactions as reportable basis-shifting transactions that trigger substantial disclosure obligations. The proposed regulations were previewed by the April 17, 2025, release of Notice 2025-23.
Background
On June 18, 2024, Treasury and the IRS published proposed regulations that would identify certain partnership related-party basis-adjustment transactions as reportable transactions of interest, triggering disclosure obligations for transaction participants and material advisers as well as list maintenance obligations for material advisers. The rule was finalized on Jan. 14, 2025 (2025 Regulations).
The 2025 Regulations were criticized for imposing complex and burdensome retroactive disclosure obligations on broad categories of transactions that, in many cases, included ordinary, nonabusive business activities. Those concerned highlighted compliance costs, uncertainty about related-party tests under Section 267 and Section 707, and the administrative burden of preparing disclosure forms for numerous basis adjustments.
In response, Treasury and the IRS published Notice 2025-23, stating an intent to issue proposed regulations to remove the 2025 Regulations, waive reportable transaction penalties, and allow reliance on the notice going back to the effective date of the 2025 Regulations so affected parties could treat them as never having taken effect.
Enforcement of partnership tax issues continues
In June 2024, when the IRS released the notice of proposed rulemaking that was finalized in the 2025 Regulations, it also released Revenue Ruling 2024-14 describing certain partnership basis adjustments in related-party transactions as lacking economic substance. While the 2025 Regulations were identified for removal early in the Trump administration, calls to remove Revenue Ruling 2024-14 went unheeded.
Crowe observation
Taxpayers should not view removal of the 2025 Regulations as a sign that the IRS is backing down from enforcing partnership tax compliance.
Additionally, the IRS continues to pursue litigation challenging partnership transactions it views as abusive. On Feb. 23, the IRS had a significant win in Tax Court in Otay Project LP v. Commissioner. In that case, the court sustained the IRS’ denial of tax benefits from partnership-basis adjustments in a related-party transaction because the court agreed with the IRS that the transaction lacked economic substance.
Looking ahead
Partnerships can breathe a sigh of relief that the onerous and overly broad partnership basis-shifting regulations will have no effect. However, the IRS continues to use existing tools like the economic substance doctrine to challenge partnership transactions it views as abusive. Additionally, taxpayers, including partnerships, continue to receive new notices that they have been selected for examination even though the number of revenue agents at the IRS has dropped significantly. The Bipartisan Budget Act of 2015 partnership audit regime adds further complexity for partnerships and their partners. Taxpayers should consult their tax adviser to understand how they might be affected by these developments.
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