On January 10, 2025, the Treasury and IRS issued final regulations identifying certain partnership related party "basis shifting" transactions and substantially similar transactions as transactions of interest (TOIs), which are subject to the reportable transaction rules. These rules are aimed at preventing transactions where a taxpayer transfers assets to a related party to achieve a tax benefit when the transaction lacks any meaningful business purpose.
Under the final regulations, the related party basis adjustment disclosure rules require taxpayers and material advisors that engage in TOIs to disclose certain partnership transactions that result in positive basis adjustments, including current and liquidating distributions of property by a partnership with related partners and non-recognition transfers of a partnership interest to a related partner.
The final regulations largely follow the approach of the proposed regulations detailed in the guidance package issued in June 2024, but narrow the scope of those rules. Our prior coverage of the IRS's related party partnership basis shifting guidance package can be found here.
The narrowed scope of the final regulations reflects comments received by Treasury and the IRS on the proposed regulations emphasizing the need to minimize unnecessary burdens on small businesses, restrict retroactive reporting, allow additional time for reporting, and distinguish publicly traded partnerships, among other recommendations.
Key changes from the proposed regulations are as follows:
- The final regulations do not apply to transactions where an increase in basis is $25 million or less for years before 2025 and $10 million or less for years thereafter, whereas the proposed regulations set the threshold at $5 million.
- The final regulations establish a six-year lookback period, representing an improvement over the proposed regulations, which applied to any transaction that could affect a current year's tax liability.
- The final regulations extend the filing deadlines for disclosure statements for both taxpayers and material advisors. Taxpayers have an additional 90 days after January 14, 2025 to submit disclosure statements for TOIs. Material advisors have an additional 90 days to file their disclosure statements for tax statements made before January 14, 2025.
- Because publicly traded partnerships are typically owned by a large number of unrelated owners, the final regulations exempt many owners of publicly traded partnerships from the disclosure requirements, except in the case of certain distributions or transfers.
The final regulations are effective as of January 14, 2025.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
