IRS Announces Removal of Regs on Partnership Basis Shifting Transaction Reporting

(Parker Tax Publishing April 2025)

The IRS announced that intends to publish a notice of proposed rulemaking proposing to remove the partnership related-party basis shifting regulations in Reg. Sec. 1.6011-18, which were issued in January 2025 in T.D. 10028 (Basis Shifting TOI Regulations). The IRS also provides immediate relief from penalties to participants in and material advisors to transactions identified as transactions of interest in the Basis Shifting TOI Regulations; in addition, the IRS withdrew Notice 2024-54, which describes certain proposed regulations that the IRS intended to issue addressing partnership related-party basis shifting transactions. Notice 2025-23.

Background

On January 10, 2025, the IRS issued final regulations in T.D. 10028 (Basis Shifting TOI Regulations) identifying certain partnership related-party basis shifting transactions as transactions of interest (TOIs) subject to the reportable transaction rules in Code Sec. 6011, Code Sec. 6112, and Reg. Sec. 1.6011-4(b)(6).

Observation: The transactions identified in the Basis Shifting TOI Regulations generally involved either a tax-free distribution of partnership property to a related partner, or the tax-free transfer of a partnership interest by a related partner to a related transferee. The tax-free distribution or transfer would generate an increase to the basis of the distributed property or partnership property of $10 million or more ($25 million or more in the case of a TOI undertaken in a tax year before 2025) under the rules of Code Sec. 732, 734, or Code Sec. 743(b), but for which no corresponding tax would be paid. The IRS's view when issuing the Basis Shifting TOI Regulations was that the basis increase to the distributed or partnership property allowed the related parties to significantly decrease taxable income through increased cost recovery allowances (such as depreciation deductions) or decrease taxable gain (or increase taxable loss) on the disposition of the property subject to the basis increase.

On February 19, 2025, the President issued Executive Order 14219, Ensuring Lawful Governance and Implementing the President's "Department of Government Efficiency" Deregulatory Initiative (Executive Order 14219). Executive Order 14219 directs agencies to initiate a review process for the identification and removal of certain regulations and other guidance that meet any of the factors set forth in Executive Order 14219. Pursuant to the review directed by Executive Order 14219, the IRS has identified the Basis Shifting TOI Regulations for removal as described in Notice 2025-23.

Notice 2025-23

The IRS intends to publish a notice of proposed rulemaking (forthcoming NPRM) proposing to remove the Basis Shifting TOI Regulations. Pursuant to Executive Order 14219, the IRS has identified the Basis Shifting TOI Regulations as appropriate for removal. According to the IRS, taxpayers and their material advisors have criticized the Basis Shifting TOI Regulations as imposing complex, burdensome, and retroactive disclosure obligations on many ordinary-course and tax-compliant business activities, creating costly compliance obligations and uncertainty for businesses.

The forthcoming NPRM will have a proposed applicability date of April 17, 2025, corresponding to the date Notice 2025-23 was issued to the public. The forthcoming NPRM will propose that taxpayers and material advisors may choose to apply the final regulations retroactively to January 14, 2025, the applicability date of the Basis Shifting TOI Regulations. Taxpayers and material advisors may rely on Notice 2025-23 until the forthcoming NPRM is finalized.

Given its intent to propose the removal of the Basis Shifting TOI Regulations, the IRS will, in the interest of sound tax administration, waive penalties under Code Sec. 6707A(a) for any failure to file a Form 8886, Reportable Transaction Disclosure Statement, that is otherwise required because of the Basis Shifting TOI Regulations.

The IRS will also waive penalties under Code Sec. 6707(a) for any failure to file a Form 8918, Material Advisor Disclosure Statement, as well as penalties under Code Sec. 6708 for any failure to maintain a list under Code Sec. 6112, that is otherwise required because of the Basis Shifting TOI Regulations.

In Notice 2024-54, the IRS announced its intention to publish the Basis Shifting TOI Regulations, as well as regulations under Code Sec. 1502 to address basis shifting transactions among members of consolidated groups. In Notice 2025-23, the IRS announced that, after the review directed by Executive Order 14219, Notice 2024-54 is hereby withdrawn.

For a discussion of partnership related-party basis shifting transactions of interest, see Parker Tax ¶24,670.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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