The IRS announced its intention to issue a forthcoming notice of proposed rulemaking that will remove recently finalized regs identifying certain partnership basis shifting transactions as transactions of interest; the IRS also is offering penalty relief from related disclosure requirements and withdrawing prior guidance. (Notice 2025-23, 2025-19 IRB; 4/18/2025)
In a notice issued Friday, the IRS said it is doing away with regs in effect since mid-January (TD 100028) that apply reportable transaction and disclosure statement requirements to partnership transactions involving basis adjustments under Subchapter K, Code Sec. 732, and Code Sec. 734.
The notice states the IRS will waive Code Sec. 6707A(a) penalties for failure to file a Form 8886, Reportable Transaction Disclosure Statement, or Form 8918, Material Advisor Disclosure Statement. Penalties under Code Sec. 6708 for failure to maintain a Code Sec. 6112 list will also no longer apply.
Notice 2024-54, released last June, discussed the specifics of the partnership basis shifting transactions the IRS found to be “carefully” conducted to exploit Subchapter K.
Such transactions generally entail partnership property that is “distributed to a partner who is related to one or more other partners, and that distributiton results in a person related to the distributee partner, the distributee partner, or both, receiving all or a share of a basis increase in the distributed property or remaining partnership property” under Sections 732 or 743.
A team of Gibson Dunn tax lawyers observed that in “recent years, the IRS has expressed discomfort with basis adjustments that arise in nonrecognition transactions between related persons.” However, the agency could not “point to any law or regulation that prohibits taxpayers from undertaking such transactions,” the Gibson Dunn team said in a client alert published in response to the June guidance.
By making these transactions reportable, the IRS sought to deter related partners from decreasing their overall taxable income using additional or accelerated cost recovery allowances. In addition, the IRS flagged adjustments resulting in related partners decreasing taxable gains or increasing taxable losses on subsequent taxable dispositions of property subject to basis increases.
But stakeholders objected to the retroactive application of the regs that captured basis adjustments for prior tax years. The IRS received several comments during the rulemaking period about the administrative challenges partnerships would face in complying with the reporting rules.
This feedback, in conjunction with an executive order from President Trump directing agencies to eliminate burdensome regs, prompted the IRS to roll back the rules crafted by the Biden administration. The regs, according to the notice, are harmful to “many ordinary-course and tax-compliant business activities, creating costly compliance obligations and uncertainty for businesses.”
For more on the guidance the IRS has set for removal regarding partnership basis adjustments, see Checkpoint’s Federal Tax Coordinator ¶ B-4072.
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