Applying proposed rules addressing abusive basis-shifting practices in transactions between related parties of partnerships retroactively would create significant administrative burdens, policy analysts at tax organizations told the IRS.
On June 17, the IRS issued a batch of guidance for the purposes of Code Sec. 6011 to combat an exploit used by partnerships to generate tax benefits without any substantial economic change for. IRS Commissioner Danny Werfel described basis-shifting as a “shell game where sophisticated tax maneuvers take place by shifting the basis of assets between closely related entities, ultimately allowing these complex partnership arrangements to hide from a tax bill.”
He added that the new guidance should serve as a warning to promotors that the IRS deems these transactions “inappropriate.” It is comprised of a notice of proposed rulemaking (NPRM REG-124593-23), an announcement of forthcoming of two sets of regs (Notice 2024-54), and a revenue ruling (Rev Rul 2024-14, 2024-28 IRB). Generally, the guidance identifies certain partnership related-party basis adjustment transactions and substantially similar transactions as transactions of interest (TOI) and therefore reportable transactions.
“In most commercial transactions involving unrelated parties, the opportunity for abuse is limited because each party has separate, and often competing, economic and tax interests and the parties transact at arm’s length,” the IRS said in the proposed regs. This is not the case for transactions involving related parties, where basis can be “manipulated” to produce a net tax benefit. Under the new rules, material advisors and certain parties related to such transactions would be subject to new disclosure requirements or face penalties.
A public rulemaking hearing is scheduled for September 17 and comments were due August 19. Several commenters raised concerns with the language of applicability date sections in the guidance. The notice, for instance, provides that final regs would apply to tax years ending on or after June 17, 2024.
“That is, once finalized, the regulations would govern the availability and amount of cost recovery deductions and gain or loss calculations for taxable years ending on or after June 17, 2024, even if the relevant covered transaction was completed in a prior taxable year,” read the notice.
Comments submitted August 16 by the New York State Bar Association (NYSBA), took issue with the prior-year provision, citing retroactive impacts on already-effectuated transactions. More specifically, retroactivity here means that “recovery of basis in 2024 and subsequent years, attributable to basis adjustments that occurred in pre-2024 years, would be affected by the new rules,” the NYSBA clarified.
The letter recommended that transactions taking place before June 17, 2024, be spared from this treatment or at least be narrowed in scope. Specifically, the NYSBA suggested the final regs should follow the wording of the revenue ruling to provide that retroactivity is limited to “concerted” efforts to “create disparities between inside and outside basis through various methods.”
Otherwise, the rules would have great administrative consequences for taxpayers, the NYSBA argued, because those affected would be required to “review the history of every asset acquired in, or tracing its basis to, any partnership distribution or partnership interest transfer, no matter how long ago, to determine whether the new rules applied and, if so, how to do the necessary computations to limit basis recovery,” read the letter.
Language in the notice and proposed regs are similar, but the regs apply TOI reporting to transactions in which Treasury and the IRS would have an “appropriate and reasonable interest,” the NYSBA noted. The letter detailed recommendations on how to narrowly tailor which transactions would be impacted and suggested a cutoff retroactive date of January 1, 2023.
Other commenters largely agreed with the NYSBA’s issues with the guidance package’s retroactivity. The American College Trust and Estate Counsel’s (ACTEC) August 16 comment letter said there should not be any disclosure reporting before the effective date of the final regs.
The guidance currently imposes an “unrealistic obligation on partners and partnerships to track past transactions that were carried out according to Code-approved provisions,” according to the ACTEC. “As written, taxpayers are required to analyze all partnership distributions and all transfers of partnership interests to determine whether a basis adjustment was made and whether that basis adjustment affected, or continues to affect, an open tax period.”
Similarly, comments sent August 19 by the National Taxpayers Union (NTU) said it is “one thing to search past tax returns for basis increases that occurred under laws and rules understood to be standard then as well as now.” That is typically fair given what documents would be requested during an audit, the NTU acknowledged.
“It is quite another thing, however, to force taxpayers to examine whether the actions of unrelated partners or tax-indifferent parties might impact the need to file” a Form 8886, Reportable Transaction Disclosure Statement, or a Form 8918, Material Advisor Disclosure Statement, read the NTU’s comments. “Quite suddenly, those with only tenuous connections to a given partnership might be recategorized as liable for filing Form 8886 or Form 8918. This process could mean much higher degrees of forensic financial analysis.”
For more on the proposed regs, see Checkpoint’s Federal Tax Coordinator ¶ S-4445.8.
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