Overview
On June 17, 2024, Treasury issued a suite of guidance documents (a revenue ruling, proposed regulations, and a notice of an intent to issue further proposed regulations) on so-called partnership related-party basis-adjustment transactions. In a related announcement, the IRS states: "Treasury estimates these abusive transactions, which cut across a wide variety of industries and individuals, could potentially cost taxpayers more than $50 billion over a 10-year period."1
Such transactions generally involve a tax partnership, related partners (or their equivalent via a tax-indifferent partner), a significant inside-outside basis disparity regarding such partnership, and a nonrecognition transaction (generally a distribution of property or a transfer of an interest in such partnership) that triggers a so-called "shift" of basis from non-amortizable/non-depreciable assets to amortizable/depreciable assets (or to assets that will be subsequently sold in the near term). Such basis "shift" occurs via the normal operation of sections 732, 734, 743, 754, and 755. Treasury's view of the "abuse" involved in these transactions appears not to be focused as much on the related-party transaction triggering the basis adjustment but more on the initial transactions and allocations used to create the significant inside-outside basis disparity that serves as the necessary factual predicate for such later adjustment. That said, the guidance items focus only on the later basis adjustment.
The IRS has been examining taxpayers in respect of this general issue for some time. The revenue ruling outlines several relevant factual scenarios and concludes that the basis adjustment arising from such scenarios should be disregarded via the codified economic substance rules of section 7701(o) and that related strict liability 20%/40% penalties should be imposed. The notice announces an intent to issue future proposed regulations (with a proposed retroactive effective date upon finalization) that would impose mechanical basis adjustments reversing the basis adjustments created by the normal operation of the relevant above-referenced code provisions involved in such transactions. The notice also states that Treasury intends to issue consolidated return regulations (with a proposed prospective effective date upon finalization) that would apply a single entity approach to such transactions involving an affiliated group of corporations (e.g., not respecting the separateness of multiple corporate partners of an internal consolidated partnership that engages in such transactions). Finally, the proposed regulations (with a proposed prospective effective date) identify such transactions as transactions of interest for purposes of annual disclosure requirements for participants and material advisors, which seem to be initially drafted in a manner that could require disclosure in factual circumstances well beyond the transactions described as abusive by Treasury in the revenue ruling, the notice, and the preamble to such proposed regulations.
1 "U.S. Department of the Treasury, IRS Announce New Initiative to Close Loopholes, Ensure Wealthiest Taxpayers Pay What They Owe," U.S. Department of Treasury Press Release (June 17, 2024) https://home.treasury.gov/news/press-releases/jy2408.
