Specific Partnership “Basis Shifting” Transactions Now Targeted by IRS

The Treasury Department and the Internal Revenue Service (IRS) have identified certain transactions involving partnerships and related parties that exploit the basis-adjustment provisions of subchapter K.

These transactions, known as “covered transactions,” involve increases to the basis of property to enhance cost recovery allowances or alter gains/losses upon property disposition.

IRS will challenge inappropriate adjustments

Specific examples of targeted scrutiny cited by the Treasury Department and the IRS include:

• Partnership distributions that result in a basis increase in the partnership’s remaining assets

• Current and liquidating partnership distributions that result in a basis increase in distributed assets

• Transfers of partnership interests that result in a step-up in the “inside basis” of partnership assets

The IRS responded to these transactions with guidance and regulations including Revenue Ruling 2024-14 — which applies the economic substance doctrine to disregard certain basis adjustment transactions — and Proposed Treasury Regulations §1.6011-18, which proposes to treat some of these transactions as “transactions of interest” requiring disclosure. The guidance is partially retroactive and may affect transactions that took place in prior years.

Watch for further guidance on transactions of interest

The Treasury and the IRS intend to issue future regulations to address these covered transactions. The forthcoming “Proposed Related-Party Basis Adjustment Regulations” and “Proposed Consolidated Return Regulations” will aim to address distortions in income from partnership related-party basis shifting transactions.

There has been a consistent trend over the past several years of heightened IRS scrutiny toward partnerships, and that trend is expected to continue. Practitioners should remain attentive with partnership tax matters and consider whether any partnership basis adjustments generated in the context of related partners might fall within the covered transactions.

Please stay tuned to our blog for future developments, and connect with CLA professionals if you have any questions.