Related Party Partnership Basis Shifting Reporting Regulations

January 23, 2025 – On Jan. 14, the Department of the Treasury and the Internal Revenue Service (IRS) issued final regulations (the 2025 Regulations) that require disclosure to the IRS of certain transactions involving related partners (generally, persons with more than 50% overlapping ownership and certain family members) that result in shifting of basis among partnership assets as “transactions of interests” (TOIs). The 2025 Regulations reflect a concern with certain tax-motivated transactions that the government considers to be abusive and that, they contend, could result in $50 billion in lost revenue over a 10-year period.¹ TOIs addressed in the 2025 Regulations can, for example, shift tax basis from non-depreciable, non-amortizable assets to assets that generate depreciation or amortization deductions. However, the 2025 Regulations extend to transactions that are not tax-motivated and do not produce any tax savings. Importantly, disclosure is required for TOIs that occurred as early as Jan. 1, 2019, or even earlier in the case of non-calendar-year taxpayers, if they meet certain dollar thresholds.

Generally, under the 2025 Regulations, a distribution by a partnership to a partner that is related to another partner in the partnership is a TOI if the applicable threshold described below is satisfied and:

• the distribution results in an increase in the basis of one or more of the partnership’s non-distributed properties (if the partnership has made a Section 754 election, this can occur in a cash distribution that results in gain to the distributee partner or an in-kind distribution that terminates the partnership interest of a distributee whose tax basis in its partnership interest is less than its share of the partnership’s basis in its assets);
• the distribution is in complete liquidation of the distributee partner’s interest in the partnership (or in complete liquidation of the partnership) and the basis of one or more of the distributed properties is increased (this can occur if the distributee partner’s tax basis in its partnership interest exceeds its share of the partnership’s tax basis in its assets); or
• the basis of one or more of the distributed properties is increased pursuant to an election under Section 732(d) of the Internal Revenue Code and the distributee partner acquired its interest within two years prior to the distribution.

A transfer of a partnership interest is a TOI if it is between related parties and occurs in a non-recognition transaction in which the basis of one or more of the partnership properties is increased as a result of a Section 754 election.

The applicable threshold is satisfied if all basis increases from which related partners benefit resulting from TOI transactions of a partnership or a partner during the taxable year (less any gain recognized by related persons on which they are required to pay tax during the taxable year in such transactions, and in certain cases not including basis increases that correspond to decreases in basis of assets distributed to certain unrelated partners or certain unrelated partners’ share of decreases in basis of assets retained by the partnership) exceed $10 million (or $25 million for transactions occurring during the lookback period described below).

A transaction that is substantially similar to the distributions and transfers described above, including any such distribution or transfer if one or more of the partners is a tax-indifferent party (irrespective of whether there are related partners), is also characterized as a TOI. A tax-indifferent partner is a tax-exempt or foreign partner or other partner if all or a portion of the gain that would have resulted from the disposition of any assets the basis of which is reduced in such transaction would not be subject to current U.S. federal income tax (for example, because the partner has a net operating loss or capital loss carryforward) and such tax-indifference is known or should have been known to another party participating in the transaction. A transfer of a partnership interest to a transferee that is related to the transferor in a recognition transaction is also a TOI under the substantially similar rule if the applicable threshold is met.

A taxpayer must report each TOI on IRS Form 8886 (Reportable Transaction Disclosure Statement), which is attached to the taxpayer’s tax return for each tax year in which it participated in, or realized a tax benefit from, the TOI. The maximum non-filing penalty for each TOI per return is $10,000 for individuals and $50,000 for other persons. A material adviser (any person that provided any material assistance or advice with respect to organizing or carrying out the TOI) must report each TOI on Form 8918 (Material Advisor Disclosure Statement) by the last day of the month that follows the end of the calendar quarter in which the adviser became a material adviser with respect to the TOI. Failure to do so could result in the adviser receiving a $50,000 non-filing penalty per TOI. Transactions that occurred during a six-year lookback period — the six years preceding the first month of the taxpayer’s most recent taxable year that began before Jan. 14 (e.g., going back to January 1, 2019, in the case of a calendar year taxpayer) — are TOIs if a $25 million threshold is satisfied, and are reportable by July 14 for taxpayers and July 29 for material advisers.

On June 17, 2024, the IRS announced in Notice 2024-54 (the Notice) that it plans to propose regulations that would limit a taxpayer’s ability to benefit from basis-shifting transactions. The scope of transactions covered by the Notice is similar to the scope of the TOI rules, except that there is no dollar threshold. Significantly, the Notice states that the proposed regulations would apply to all taxable years ending on or after June 17, 2024, including the effect in such years of transactions that occurred in prior years. It is unclear when proposed regulations will be issued, much less when they will be finalized, and they may be substantially modified by the Trump administration.

The 2025 Regulations are complex. We can help you determine whether any of your past or future transactions would be reportable under these rules.