Proposed Rule2024-13282
Certain Partnership Related-Party Basis Adjustment Transactions as Transactions of Interest
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
June 18, 2024
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains proposed regulations that would identify certain partnership related-party basis adjustment transactions and substantially similar transactions as transactions of interest, a type of reportable transaction. Material advisors and certain participants in these transactions would be required to file disclosures with the IRS and would be subject to penalties for failure to disclose. The proposed regulations would affect participants in these transactions as well as material advisors. This document also provides a notice of a public hearing on the proposed regulations.
Full Text
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<title>Federal Register, Volume 89 Issue 118 (Tuesday, June 18, 2024)</title>
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[Federal Register Volume 89, Number 118 (Tuesday, June 18, 2024)]
[Proposed Rules]
[Pages 51476-51491]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-13282]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-124593-23]
RIN 1545-BR07
Certain Partnership Related-Party Basis Adjustment Transactions
as Transactions of Interest
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and public hearing.
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SUMMARY: This document contains proposed regulations that would
identify certain partnership related-party basis adjustment
transactions and substantially similar transactions as transactions of
interest, a type of
[[Page 51477]]
reportable transaction. Material advisors and certain participants in
these transactions would be required to file disclosures with the IRS
and would be subject to penalties for failure to disclose. The proposed
regulations would affect participants in these transactions as well as
material advisors. This document also provides a notice of a public
hearing on the proposed regulations.
DATES:
Comments due: Written or electronic comments must be received by
August 19, 2024.
Public hearing: A public hearing on this proposed regulation has
been scheduled for Tuesday, September 17, 2024, at 10 a.m. ET. Requests
to speak and outlines of topics to be discussed at the public hearing
must be received by August 19, 2024. If no outlines are received by
August 19, 2024, the public hearing will be cancelled. Requests to
attend the public hearing must be received by 5 p.m. ET on September
13, 2024. The public hearing will be made accessible to people with
disabilities. Requests for special assistance during the public hearing
must be received by 5 p.m. ET on September 12, 2024.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically via the Federal eRulemaking Portal at <a href="https://www.regulations.gov">https://www.regulations.gov</a> (indicate IRS and REG-124593-23) by following the
online instructions for submitting comments. Requests for a public
hearing must be submitted as prescribed in the ``Comments and Requests
for a Public Hearing'' section. Once submitted to the Federal
eRulemaking Portal, comments cannot be edited or withdrawn. The
Department of the Treasury (Treasury Department) and the IRS will
publish for public availability any comments submitted to the IRS's
public docket. Send paper submissions to: CC:PA:01:PR (REG-124593-23),
Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin
Station, Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Elizabeth Zanet of the Office of Associate Chief Counsel (Passthroughs
and Special Industries), (202) 317-6007; concerning the submission of
comments or the hearing, Vivian Hayes at (202) 6901 (not toll-free
numbers) or by email at <a href="/cdn-cgi/l/email-protection#7d0d081f11141e15181c0f14131a0e3d140f0e531a120b"><span class="__cf_email__" data-cfemail="3d4d485f51545e55585c4f54535a4e7d544f4e135a524b">[email protected]</span></a> (preferred).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed additions to the Income Tax
Regulations (26 CFR part 1) under section 6011 of the Internal Revenue
Code (Code). The proposed additions would add Sec. 1.6011-18 to
identify certain partnership related-party basis adjustment
transactions as transactions of interest for purposes of section 6011
(proposed regulations).
I. Disclosure of Reportable Transactions by Participants and Penalties
for Failure To Disclose
Section 6011(a) generally provides that, if required by regulations
prescribed by the Secretary of the Treasury or her delegate
(Secretary), any person made liable for any tax imposed by the Code, or
with respect to the collection thereof, must make a return or statement
according to the forms and regulations prescribed by the Secretary.
Every person required to make a return or statement must include
therein the information required by such forms or regulations.
Section 1.6011-4(a) provides that every taxpayer that has
participated in a reportable transaction within the meaning of Sec.
1.6011-4(b) and who is required to file a tax return must file a
disclosure statement within the time prescribed in Sec. 1.6011-4(e).
Reportable transactions are identified in Sec. 1.6011-4 and include
listed transactions, confidential transactions, transactions with
contractual protection, loss transactions, and transactions of
interest. See Sec. 1.6011-4(b)(2) through (6). Section 1.6011-4(b)(6)
defines a ``transaction of interest'' as a transaction that is the same
as or substantially similar to one of the types of transactions that
the IRS has identified by notice, regulation, or other form of
published guidance as a transaction of interest.
Section 1.6011-4(c)(4) provides that a transaction is
``substantially similar'' if it is expected to obtain the same or
similar types of tax consequences and is either factually similar or
based on the same or similar tax strategy. Receipt of an opinion
regarding the tax consequences of the transaction is not relevant to
the determination of whether the transaction is the same as or
substantially similar to another transaction. Further, the term
substantially similar must be broadly construed in favor of disclosure.
For example, a transaction may be substantially similar to a
transaction of interest even though it may involve different entities
or use different Code provisions.
Section 1.6011-4(c)(3)(i)(E) provides that a taxpayer has
participated in a transaction of interest if the taxpayer is one of the
types or classes of persons identified as participants in the
transaction in the published guidance describing the transaction of
interest.
Section 1.6011-4(d) and (e) provide that the disclosure statement,
Form 8886, Reportable Transaction Disclosure Statement (or successor
form), must be attached to the taxpayer's tax return for each taxable
year in which a taxpayer participates in a reportable transaction. A
copy of the disclosure statement must be sent to the IRS's Office of
Tax Shelter Analysis (OTSA) at the same time that any disclosure
statement is first filed by the taxpayer pertaining to a particular
reportable transaction.
Section 1.6011-4(e)(2)(i) provides that if a transaction becomes a
transaction of interest after the filing of a taxpayer's tax return
(including an amended return) reflecting the taxpayer's participation
in the transaction of interest and before the end of the period of
limitations for assessment for any taxable year in which the taxpayer
participated in the transaction of interest, then a disclosure
statement must be filed with OTSA within 90 calendar days after the
date on which the transaction becomes a transaction of interest. This
requirement extends to an amended return and exists regardless of
whether the taxpayer participated in the transaction in the year the
transaction became a transaction of interest. The Commissioner of
Internal Revenue (Commissioner) may also determine the time for
disclosure of transactions of interest in the published guidance
identifying the transaction.
Participants required to disclose these transactions under Sec.
1.6011-4 who fail to do so are subject to penalties under section 6707A
of the Code. Section 6707A(b) provides that the amount of the penalty
is 75 percent of the decrease in tax shown on the return as a result of
the reportable transaction (or which would have resulted from such
transaction if such transaction were respected for Federal tax
purposes), subject to minimum and maximum penalty amounts. The minimum
penalty amount is $5,000 in the case of a natural person and $10,000 in
any other case. For a transaction of interest, the maximum penalty
amount is $10,000 in the case of a natural person and $50,000 in any
other case.
Additional penalties may also apply. In general, section 6662A of
the Code imposes a 20 percent accuracy-related penalty on any
understatement (as defined in section 6662A(b)(1)) attributable to an
adequately disclosed reportable transaction. If the taxpayer had a
requirement to disclose participation in the reportable transaction but
did not adequately disclose the transaction in accordance
[[Page 51478]]
with the regulations under section 6011, the taxpayer is subject to an
increased penalty rate equal to 30 percent of the understatement. See
section 6662A(c). Section 6662A(b)(2) provides that section 6662A
applies to any item which is attributable to any listed transaction and
any reportable transaction (other than a listed transaction) if a
significant purpose of such transaction is the avoidance or evasion of
Federal income tax.
II. Disclosure of Reportable Transactions by Material Advisors and
Penalties for Failure To Disclose
Section 6111(a) provides that each material advisor with respect to
any reportable transaction must make a return setting forth: (1)
information identifying and describing the transaction, (2) information
describing any potential tax benefits expected to result from the
transaction, and (3) such other information as the Secretary may
prescribe. Such return must be filed not later than the date specified
by the Secretary.
Section 301.6111-3(a) of the Procedure and Administration
Regulations (26 CFR part 301) provides that each material advisor with
respect to any reportable transaction, as defined in Sec. 1.6011-4(b),
must file a return as described in Sec. 301.6111-3(d) by the date
described in Sec. 301.6111-3(e).
Section 301.6111-3(b)(1) provides that a person is a material
advisor with respect to a transaction if the person provides any
material aid, assistance, or advice with respect to organizing,
managing, promoting, selling, implementing, insuring, or carrying out
any reportable transaction, and directly or indirectly derives gross
income in excess of the threshold amount as defined in Sec. 301.6111-
3(b)(3) for the material aid, assistance, or advice. Under Sec.
301.6111-3(b)(2)(i) and (ii), a person provides material aid,
assistance, or advice if the person provides a tax statement, which is
any statement (including another person's statement), oral or written,
that relates to a tax aspect of a transaction that causes the
transaction to be a reportable transaction as defined in Sec. 1.6011-
4(b)(2) through (7).
Material advisors must disclose transactions on Form 8918, Material
Advisor Disclosure Statement (or successor form), as provided in Sec.
301.6111-3(d) and (e). Section 301.6111-3(e) provides that the material
advisor's disclosure statement for a reportable transaction must be
filed with the OTSA by the last day of the month that follows the end
of the calendar quarter in which the advisor becomes a material advisor
with respect to a reportable transaction or in which the circumstances
necessitating an amended disclosure statement occur. A person may
become a material advisor with respect to a transaction that is later
identified as a transaction of interest. See Sec. 301.6111-3(b)(4).
The disclosure statement must be sent to the OTSA at the address
provided in the instructions for Form 8918 (or successor form).
Section 301.6111-3(d)(2) provides that the IRS will issue to a
material advisor a reportable transaction number with respect to the
disclosed reportable transaction. Receipt of a reportable transaction
number does not indicate that the disclosure statement is complete, nor
does it indicate that the transaction has been reviewed, examined, or
approved by the IRS. Material advisors must provide the reportable
transaction number to all taxpayers for whom the material advisor acts
as a material advisor as defined in Sec. 301.6111-3(b). The reportable
transaction number must be provided at the time the transaction is
entered into, or if the transaction is entered into prior to the
material advisor receiving the reportable transaction number, within 60
calendar days from the date the reportable transaction number is mailed
to the material advisor.
Section 6707(a) of the Code provides that a material advisor who
fails to file a timely disclosure, or files an incomplete or false
disclosure statement, is subject to a penalty. Pursuant to section
6707(b)(1), the penalty for reportable transactions other than listed
transactions, including transactions of interest, is $50,000.
Additionally, section 6112(a) of the Code provides that each
material advisor with respect to any reportable transaction, whether or
not required to file a return under section 6111 with respect to such
transaction, must maintain a list (1) identifying each person with
respect to whom such advisor acted as a material advisor with respect
to such transaction and (2) containing such other information as the
Secretary may by regulations require. Material advisors must furnish
such lists to the IRS in accordance with Sec. 301.6112-1(e).
A material advisor may be subject to a penalty under section 6708
of the Code for failing to maintain a list under section 6112(a) and
failing to make the list available upon written request to the
Secretary in accordance with section 6112(b) within 20 business days
after the date of request. Section 6708(a) provides that the penalty is
$10,000 per day for each day of the failure after the 20th day.
However, no penalty will be imposed with respect to the failure on any
day if such failure is due to reasonable cause.
III. Basis Adjustments Under Subchapter K
A. In General
Under subchapter K of chapter 1 of the Code (subchapter K), a
distribution by a partnership of the partnership's property
(partnership property) or a transfer of an interest in a partnership
(partnership interest) may result in an adjustment to the basis of the
distributed property, partnership property, or both.
A distribution of partnership property may result in an adjustment
to the basis of the distributed property under section 732(a), (b), or
(d) of the Code. In the case of a distribution of partnership property
to a partner by a partnership with an election under section 754 of the
Code (section 754 election) in effect, or with respect to which there
is a substantial basis reduction as described in section 734(d) of the
Code, the distribution may also result in an adjustment to the basis of
the partnership's remaining property (remaining partnership property)
under section 734(b).
If a partnership interest is transferred by sale or exchange or on
the death of a partner, and the partnership either has a section 754
election in effect or has a substantial built-in loss with respect to
the transfer of the partnership interest as described in section 743(d)
of the Code, the transfer may result in an adjustment to the basis of
partnership property under section 743(b) with respect to the
transferee partner.
Section 754 provides that if a partnership makes an election in
accordance with regulations prescribed by the Secretary, the basis of
partnership property shall be adjusted, in the case of a distribution
of property, in the manner provided by section 734, and in the case of
a transfer of a partnership interest, in the manner provided in section
743. Unless the election is revoked in accordance with the regulations
under section 754, the section 754 election applies with respect to all
distributions of property by the partnership and to all transfers of
interests in the partnership during the taxable year with respect to
which the election was filed and all subsequent taxable years.
B. Basis Adjustments Under Section 732
Section 732 governs a distributee partner's basis in distributed
property other than money. In the case of a current distribution, and
except as
[[Page 51479]]
provided under section 732(a)(1) and (2) provides that the distributee
partner's basis in distributed property (other than money) is equal to
the partnership's adjusted basis in the distributed property
immediately before the distribution. Under section 732(a)(2), however,
a distributee partner's basis in distributed property is limited to the
adjusted basis of the distributee partner's partnership interest
reduced by any money distributed to such partner in the same
transaction.
In the case of a liquidating distribution, section 732(b) provides
that the distributee partner's basis in distributed property (other
than money) is equal to the adjusted basis of the distributee partner's
partnership interest reduced by any money distributed to such partner
in the same transaction.
In the case of a distribution of more than one property from a
partnership, the basis of the distributed properties to which section
732(a)(2) and (b) apply must be allocated among the distributed
properties under the rules of section 732(c) and the regulations
thereunder.
C. Basis Adjustments Under Section 734
In the case of a distribution of property by a partnership with a
section 754 election in effect, and for which either the distributee
partner recognizes gain or loss on the distribution, or for which the
basis of the distributed property in the distributee partner's hands,
as determined under section 732, differs from the partnership's
adjusted basis in the distributed property immediately before the
distribution, section 734(b) requires the partnership to increase or
decrease (as applicable) the basis of its remaining partnership
property. Also, in the case of a distribution of property by a
partnership that results in a substantial basis reduction under section
734(d), the basis of remaining partnership property must be adjusted
under section 734(b), even if the partnership does not have a section
754 election in effect.
Section 734(b)(1) requires a partnership to increase the basis of
its remaining partnership property if a distribution of partnership
property by the partnership results in the distributee partner
recognizing gain under section 731(a)(1) of the Code, or if property
(other than money) to which section 732(a)(2) or (b) applies is
distributed to the distributee partner and the property's adjusted
basis to the partnership immediately before the distribution is greater
than the distributee partner's basis in the distributed property as
determined under section 732. Section 731(a)(1) requires a distributee
partner to recognize gain in a current or liquidating distribution to
the extent that any money distributed to that partner in the
distribution exceeds the adjusted basis of that partner's partnership
interest immediately before the distribution. The amount of the basis
increase to the partnership's remaining property under section
734(b)(1) following a distribution of partnership property to a partner
is equal to the amount of gain recognized by the distributee partner in
the distribution under section 731(a)(1) and the excess of the
partnership's adjusted basis in the distributed property immediately
before the distribution over the distributee partner's basis in the
distributed property as determined under section 732.
Section 734(b)(2) requires a partnership to decrease the basis of
its remaining property if a distribution of property by the partnership
results in the distributee partner recognizing loss under section
731(a)(2), or if property (other than money) is distributed to the
distributee partner in a distribution to which section 732(b) applies
and the property's adjusted basis to the partnership immediately before
the distribution is less than the distributee partner's basis in the
distributed property as determined under section 732. Under section
731(a)(2), a distributee partner may recognize a loss in a liquidating
distribution of that partner's interest in the partnership to the
extent that such partner received only money, unrealized receivables
described in section 751(c), or inventory items described in section
751(d) of the Code in the distribution. In such a case, the distributee
partner is required to recognize a loss to the extent that such
partner's adjusted basis in the partnership interest exceeds the sum of
any money distributed to that partner in the distribution and the basis
to the distributee partner (determined under section 732) of any
unrealized receivables or inventory received by that partner in the
distribution. The amount of the basis decrease to the partnership's
remaining property under section 734(b)(2) following a distribution of
partnership property to a partner is equal to the amount of loss
recognized by the distributee partner in the distribution under section
731(a)(2) and the excess of the distributee partner's basis in the
distributed property as determined under section 732 over the
partnership's adjusted basis in the distributed property immediately
before the distribution.
A partnership without a section 754 election in effect is subject
to a mandatory basis adjustment under section 734(b)(2) if there is a
substantial basis reduction with respect to a distribution of
partnership property. Under section 734(d), a substantial basis
reduction with respect to a distribution of partnership property occurs
if the sum of the amount of loss recognized to the distributee partner
on the distribution, plus any increase in basis in the distributed
property to the distributee partner under section 732(b), exceeds
$250,000.
D. Basis Adjustments Under Section 743(b)
Generally, if a partnership interest is transferred in a sale or
exchange or on the death of a partner, the transferee partner's basis
in the transferred partnership interest is determined under section 742
of the Code and the basis of partnership property is determined under
section 743(a). Section 742 provides that the transferee partner's
basis in a partnership interest acquired other than by contribution is
determined under part II of subchapter O of chapter 1 of the Code,
beginning at section 1011 of the Code and following. Thus, for example,
a transferee partner's basis in a partnership interest acquired by
purchase generally is cost basis under section 1012 of the Code.
Section 743(a) provides that, in the case of a transfer of a
partnership interest by sale or exchange or on the death of a partner,
the basis of partnership property is not adjusted unless either the
partnership has a section 754 election in effect or the partnership has
a substantial built-in loss with respect to the transfer of the
partnership interest.
Under section 743(b), in the case of a transfer of a partnership
interest by sale or exchange or on the death of a partner, a
partnership with a section 754 election in effect or that has a
substantial built-in loss with respect to the transfer of the
partnership interest must increase or decrease (as applicable) the
adjusted basis of partnership property with respect to the transferee
partner.
Section 743(b)(1) provides that the adjusted basis of partnership
property is increased by the excess of the transferee partner's basis
in the transferred partnership interest over the transferee partner's
proportionate share of the adjusted basis of partnership property.
Section 743(b)(2) provides that the adjusted basis of partnership
property is decreased by the excess of the transferee partner's
proportionate share of the adjusted basis of partnership property over
the transferee partner's basis in the transferred partnership interest.
A partnership without a section 754 election is subject to a
mandatory basis
[[Page 51480]]
adjustment under section 743(b) with respect to a transfer of a
partnership interest if the partnership has a substantial built-in loss
with respect to the transfer of the partnership interest. Under section
743(d)(1), a partnership has a substantial built-in loss with respect
to a transfer of an interest in the partnership if either the
partnership's adjusted basis in its property exceeds the fair market
value of such property by more than $250,000, or the transferee partner
would be allocated a loss of more than $250,000 if the partnership
assets were sold for cash equal to their fair market value immediately
after the transfer.
Under regulations prescribed by the Secretary, a basis adjustment
under section 743(b) is an adjustment to the basis of partnership
property with respect to the transferee partner only. The transferee
partner's proportionate share of the partnership's adjusted basis in
its property generally is determined in accordance with the transferee
partner's interest in the partnership's previously taxed capital
(including the transferee partner's share of partnership liabilities)
under regulations prescribed by the Secretary.
In the case of a transferee partner who acquired all or part of its
partnership interest by a transfer to which no section 754 election was
in effect, and to whom a distribution of property (other than money) is
made with respect to the transferred interest within two years, section
732(d) and the regulations thereunder allow the partner to make an
election to treat as the adjusted basis of the distributed property the
adjusted basis such property would have if the adjustment under section
743(b) were in effect with respect to the partnership property.
Under Sec. 1.732-1(d)(4), the special basis adjustment under
section 732(d) is required to apply to a distribution of property to a
partner who acquired all or part of its interest by a transfer from a
partnership without a section 754 election in effect for the taxable
year of such transfer, whether or not the distribution is made within
two years of such transfer, if at the time the partnership interest was
transferred, (i) the fair market value of all partnership property
(other than money) exceeded 110 percent of its adjusted basis to the
partnership, (ii) an allocation of basis under section 732(c) upon a
liquidation of the transferee partner's interest in the partnership
immediately after the transfer of such interest would have resulted in
a shift of basis from property not subject to an allowance for
depreciation, depletion, or amortization to property subject to such an
allowance, and (iii) a basis adjustment under section 743(b) would
change the basis to the transferee partner of the property actually
distributed.
E. Allocation of Basis Adjustments Under Sections 734 and 743
Section 734(c) states that a basis adjustment under section 734(b)
is allocated among partnership properties under the rules of section
755 of the Code. Section 743(c) states that a basis adjustment under
section 743(b) is allocated among partnership properties under the
rules of section 755.
Section 755(a) generally requires basis adjustments under section
734(b) or section 743(b) to be allocated in a manner that has the
effect of reducing the difference between the fair market value and the
adjusted basis of partnership properties or in any other manner
permitted by regulations. In addition, section 755(b) requires these
basis adjustments to be allocated to partnership property of a like
character or to subsequently acquired partnership property of a like
character if such property is not available or has insufficient basis
at the time of the basis adjustment (because a decrease in the adjusted
basis of the property would reduce the basis of such property below
zero). Section 755(c) provides a special rule that prohibits allocating
a basis decrease under section 734(b) to the stock of a corporation
that is a partner of the partnership (or to any related partner in the
partnership within the meaning of section 267(b) of the Code or section
707(b)(1) of the Code).
F. Common Terminology for Bases With Respect to a Partnership Interest
A partner's adjusted basis in its partnership interest commonly is
referred to as the partner's ``outside basis'' in its partnership
interest. A partnership's adjusted basis in its property commonly is
referred to as the ``inside basis'' of the partnership's property. Each
partner has a share of inside basis. For ease of explanation, this
terminology is used in part IV of this Background section.
IV. Partnership Related-Party Basis Adjustment Transactions
A. Overview
The Treasury Department and the IRS are aware of related persons
using partnerships to engage in transactions that inappropriately
exploit the basis adjustment provisions of subchapter K applicable to
distributions of partnership property or transfers of partnership
interests discussed in part III of this Background section. This
awareness results from the IRS's review of various partnership
transactions involving related parties in which basis adjustments were
created to artificially generate or regenerate Federal income tax
benefits that resulted in significant tax savings without a
corresponding economic outlay. These transactions were carefully
structured to exploit the mechanical basis adjustment provisions of
subchapter K to produce significant tax benefits with little or no
economic impact on the related parties, and in a manner that would not
be a likely arrangement between partners negotiating at arm's-length.
Four variations of the transactions are referred to in this
preamble as ``Partnership Related-Party Basis Adjustment
Transactions.'' The manner in which the transactions exploit the basis
adjustment provisions of sections 732(b) and (d), 734(b), and 743(b),
and the potential for tax abuse presented by the transactions are
described in this part IV and part VI of this Background section.
Generally, in a Partnership Related-Party Basis Adjustment
Transaction, partnership property is distributed to a partner who is
related to one or more other partners, and that distribution 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 section
732 or 734(b) (as applicable); alternatively, a partnership interest is
transferred between related persons or to a transferee partner who is
related to an existing partner in the partnership, and that transfer
results in an increase to the inside basis in partnership property with
respect to the transferee partner under section 743(b).
Partnership Related-Party Basis Adjustment Transactions generally
are structured so that, under the applicable allocation rules (sections
732(c), 734(c), 743(c), and 755), the basis increase is allocated to
property that is eligible for cost recovery allowances (or eligible for
a shorter cost recovery period) or that the partnership or the
distributee partner disposes of in a taxable sale or exchange.
Accordingly, the basis increase results in related partners decreasing
their overall taxable income through additional or accelerated cost
recovery allowances or decreasing their taxable gain or increasing
their taxable loss on the subsequent taxable disposition of the
property subject to the basis increase.
The related partners receive these tax benefits directly in the
case of a distribution of property in which the basis of the
distributed property is
[[Page 51481]]
increased in the distributee partner's hands under section 732(b) or
(d). They receive these benefits indirectly in the case of a transfer
of a partnership interest in which the inside basis of partnership
property is increased for the transferee partner under section 743(b)
or in the case of a distribution of property that results in an
increase to the common basis of partnership property under section
734(b). Whether the tax benefits are received directly or indirectly,
the resulting decrease in taxable income or gain (or increase in
taxable loss) benefits the related-party group as a whole. Further,
because the partners are related, the distributions or transfers may
have little or no effect on the overall economic ownership of the
property yet produce significant tax benefits shared by the related
partners.
A related partner's partnership interest must have certain
characteristics to create the opportunity for a Partnership Related-
Party Basis Adjustment Transaction. In general, these characteristics
are (1) a partner's outside basis in its partnership interest that is
low compared to the partnership's basis in property it distributes to
such partner, (2) a partner's outside basis in its partnership interest
that is high compared to such partner's share of the partnership's
basis in the partnership property (that is, the partner's share of
inside basis), or (3) a partner's outside basis in its partnership
interest that is high compared to the partnership's basis in property
it distributes to such partner in liquidation of the partner's
interest. Partnerships with related parties can create these
characteristics through orchestrated contributions and distributions,
as well as allocations under section 704(b) and (c). 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. In
contrast, for related parties, basis can be manipulated to provide a
material net tax benefit to the related parties, as illustrated in part
IV.B, C, D and E of this Background section.
B. Partnership Related-Party Basis Adjustment Transactions Under
Section 734(b)
In a Partnership Related-Party Basis Adjustment Transaction under
section 734(b), a partnership with a section 754 election in effect and
two or more direct or indirect partners that are related to each other
makes a current or liquidating distribution of partnership property to
one or more of the related partners. Immediately before the
distribution, the partnership's basis in the distributed partnership
property exceeds the distributee partner's basis in its partnership
interest (that is, the partnership distributes property with a
relatively high inside basis to a distributee partner with a relatively
low outside basis). Under section 732(a)(2) or (b), the low-outside
basis partner takes a basis in the distributed property that is lower
than the inside basis of the property immediately before the
distribution.
As a result of the basis decrease to the distributed property in
the hands of the distributee partner under section 732(a)(2) or (b),
the partnership increases the basis of its remaining partnership
properties under section 734(b) by an amount equal to the excess of the
partnership's basis in the distributed property immediately before the
distribution over the basis of the distributed property in the hands of
the distributee partner immediately after the distribution.
As a result of the distribution, under sections 734(c) and 755, the
partnership allocates the basis increase to its remaining partnership
properties; these remaining partnership properties are eligible for
cost recovery allowances or are disposed of by the partnership in a
taxable sale or exchange. The partnership then claims increased cost
recovery allowances or decreased taxable gain (or increased taxable
loss) on the disposition of the partnership property with the increased
basis.
Because the transaction occurs among related persons, any economic
consequences inherent in distributing partnership property to a partner
that will have to reduce the basis of the distributed property under
section 732(a)(2) or (b) can be minimized. For example, the distributed
property might be property that the distributee partner intends to hold
indefinitely and that is not eligible for cost recovery allowances.
Further, because the transaction occurs among related persons, the
overall economic ownership of the property remains substantially the
same as before the transaction.
Related parties may choose to structure a distribution of
partnership property to a related partner so that gain is recognized,
for example, by distributing cash or marketable securities. If the
recognized gain is insignificant compared with the increase in basis
obtained under section 734(b) or is offset because of a tax attribute
of the distributee partner (such as net operating losses), then the
transfer may be considered a Partnership Related-Party Basis Adjustment
Transaction under section 734(b).
C. Partnership Related-Party Basis Adjustment Transactions Under
Section 743(b)
In a Partnership Related-Party Basis Adjustment Transaction under
section 743(b), a partner transfers an interest in a partnership with a
section 754 election in effect to a related transferee or a transferee
that is related to one or more of the partners in a nonrecognition
transaction within the meaning of section 7701(a)(45) of the Code, such
as a transfer under section 351(a) or 721(a) of the Code. Because the
transfer is accomplished through a nonrecognition transaction, the
transferee's basis in the transferred partnership interest generally
will be equal to the transferor partner's basis in the transferred
partnership interest (that is, the transferred partnership interest
will be substituted basis property within the meaning of section
7701(a)(42) of the Code, such as that provided under section 362(a) of
the Code in the case of a transfer of property to a corporation in
exchange for stock under section 351(a), or under section 722 of the
Code in the case of a transfer of property to a partnership in exchange
for a partnership interest under section 721(a)).
In order for the transfer to give rise to a basis increase under
section 743(b)(1), the transferor partner must have an inside-outside
basis disparity with respect to its partnership interest so that the
transferor partner's basis in the partnership interest (that is, the
transferor partner's outside basis that carries over to the transferee
partner) is greater than the transferor partner's share of the
partnership's basis in its properties (that is, the transferor
partner's share of inside basis immediately prior to the transfer).
Because a section 754 election is in effect for the taxable year of the
transfer, section 743(b) requires a basis increase to eliminate the
inside-outside basis disparity of the transferee partner. The basis
increase under section 743(b)(1) is equal to the excess of the
transferee partner's outside basis over its proportionate share of the
inside basis.
As a result of the transfer, under sections 743(c) and 755, the
partnership allocates the basis increase with respect to the transferee
partner to its partnership properties; these properties are eligible
for cost recovery allowances or are disposed of by the partnership in a
taxable sale or exchange. The transferee partner then receives
increased allocations of cost recovery
[[Page 51482]]
allowances or lower allocations of taxable gain (or higher allocations
of taxable loss) on the sale or exchange of the property by the
partnership. Further, because the transaction occurs among related
persons, the overall economic ownership of the partnership among the
related partners remains the same as before the transaction.
Related parties may choose to structure a transfer of a partnership
interest between a related transferor partner and related transferee so
that gain is recognized. If the recognized gain is insignificant
compared with the increase in basis obtained under section 743(b)(1) or
is offset because of a tax attribute of the transferor (such as net
operating losses), then the transfer may be considered a Partnership
Related-Party Basis Adjustment Transaction under section 743(b).
D. Partnership Related-Party Basis Adjustment Transactions Under
Section 732(b)
In a Partnership Related-Party Basis Adjustment Transaction under
section 732(b), a partnership with two or more direct or indirect
partners that are related makes a liquidating distribution of property
to a related partner. Immediately before the distribution, the
partnership's basis in the distributed property was relatively low and
the distributee partner had a relatively high outside basis. Under
section 732(b), the distributee partner's basis in the distributed
property is equal to the partner's outside basis. As a result, the
distributed property's basis is increased by an amount equal to the
excess of the distributee partner's outside basis over the
partnership's basis in the distributed property. As part of the
transaction, under section 732(b) and (c), the distributee partner
allocates the basis increase to its distributed property; this property
is eligible for cost recovery allowances or is property that the
distributee partner disposes of in a taxable sale or exchange.
Accordingly, the distributee partner receives increased cost recovery
allowances or decreases its taxable gain (or increases taxable loss) on
the disposition of the distributed property.
Because the transaction occurs among related parties, any economic
consequences inherent in distributing partnership property that may
result in tax benefits to the distributee, potentially at the expense
of the remaining partners, is minimized. Further, because the
transaction occurs among related persons, the overall economic
ownership of the property among the related partners remains the same
as before the transaction.
As a result of the basis increase to the distributed property, the
partnership may be required to decrease the basis of one or more of its
remaining properties under the elective or mandatory basis adjustment
provisions of section 734(b)(2) or (d). The parties may plan the
transaction so that this reduction in basis will not have an adverse
tax effect on the related parties because the partnership can allocate
the basis reduction to property the partnership intends to hold
indefinitely and that is not eligible for cost recovery allowances.
The related parties may achieve similar results through a
transaction in which the partnership is liquidated. In a Partnership
Related-Party Basis Adjustment Transaction in which a partnership makes
liquidating distributions to all partners, a partner with a high
outside basis (distributee partner) receives a liquidating distribution
of low-inside basis property that is eligible for cost recovery
allowances or that the distributee partner disposes of in a taxable
sale or exchange. The partnership also distributes property to one or
more parties related to the distributee partner (related distributee
partner(s)), and such distribution may require a reduction to the basis
of property under section 732(b) because the related distributee
partner's basis in the partnership interest at the time of liquidation
may be low compared to the partnership's basis in the distributed
property. Similar to the version of the transaction in which only the
distributee partner's partnership interest is liquidated, the property
that is subject to reduction in basis as a result of the liquidation
may be property that the related distributee partner(s) intend to hold
indefinitely and that is not eligible for cost recovery allowances.
E. Partnership Related-Party Basis Adjustment Transactions Under
Section 732(d)
In a Partnership Related-Party Basis Adjustment Transaction under
section 732(d), a partnership with two or more direct or indirect
partners that are related makes a current or liquidating distribution
of property to a related partner. Prior to the distribution, the
related partner acquired all or part of its partnership interest in a
transaction that would have been a Partnership Related Party Basis
Adjustment Transaction under section 743(b) if the partnership had a
section 754 election in effect.
The subsequent property distribution to the related transferee
partner is made within two years of the transfer (in the case of an
elective basis adjustment under section 732(d)) or at any time after
the transfer if at the time of the transfer the fair market value of
the partnership's property (other than money) exceeded 110 percent of
the property's adjusted basis to the partnership (in the case of a
mandatory basis under section 732(d)). In either case, under section
732(d), for purposes of section 732(a), (b), and (c), the adjusted
partnership basis of the distributed property is treated as equal to
the adjusted basis the property would have had if the basis adjustment
under section 743(b) were in effect at the time of the transfer.
As part of the transaction, the related distributee partner
receives property with a higher basis than the property had before the
transaction and either the property is eligible for cost recovery
allowances or the distributee partner recovers the property's basis by
disposing of it in a taxable sale or exchange.
Similar to a Partnership Related-Party Basis Adjustment Transaction
under section 732(b), because the transaction occurs among related
parties, any economic consequences inherent in distributing partnership
property to a partner that, as a result of the distribution, will
receive tax benefits is lessened or eliminated. Further, because the
transaction occurs among related persons, the economic ownership of the
property remains essentially the same as before the transaction.
V. Tax-Indifferent Parties Involved in Partnership Basis Adjustment
Transactions
The Treasury Department and the IRS are aware that persons using
partnerships that include tax-indifferent parties as partners may
undertake transactions that accomplish the same results as the
Partnership Related-Party Basis Adjustment Transactions. These
transactions may take the form of any of the variations of the
transactions described in part IV of this Background section and
produce the same tax benefits for the taxable partners, except that the
partners may not be related and negative tax consequences resulting
from the transactions are borne by the tax-indifferent party. For
example, a partnership with a section 754 election in effect and
unrelated partners, one of which is a tax-indifferent party with a low
outside basis, may distribute high-basis nondepreciable property to the
tax-indifferent party. Under section 732(a)(2) or (b), the distribution
results in the tax-indifferent party taking a basis in the distributed
property that is lower than the partnership's basis in the property
immediately before the
[[Page 51483]]
distribution. Under section 734(b), the partnership must adjust the
basis of its remaining property and, as part of the transaction under
sections 734(c) and 755, it increases the basis of depreciable
property. Since the distributee partner is a tax-indifferent party, it
does not experience any negative tax consequences from receiving
property subject to a basis decrease as a result of the distribution.
At the same time, the partners that are not tax-indifferent receive the
tax benefit of increased cost recovery allowances through the
partnership.
VI. Potential Tax Avoidance Using Partnership Related-Party Basis
Adjustment Transactions
In Partnership Related-Party Basis Adjustment Transactions, related
persons use partnerships to engage in transactions that inappropriately
apply the basis adjustments under section 732, 734(b), or 743(b). These
provisions can be exploited to create inappropriate basis increases to
the partnership's properties, including any distributed property, but
without meaningful change in the economic ownership of the properties
or partnership interests because the parties involved in the
transactions are related. The basis increases may be used to increase
cost recovery allowances or decrease taxable gain or increase taxable
loss on the subsequent taxable disposition of the property by the
partnership or distributee partner.
The Treasury Department and the IRS propose to identify the
Partnership Related-Party Basis Adjustment Transactions and
substantially similar transactions as transactions of interest under
proposed regulations described in the Explanation of Provisions section
of this preamble. Identifying the transactions as transactions of
interest would substantially improve the IRS's ability to detect
abusive transactions and gather information about their prevalence and
the contexts in which they arise.
Explanation of Provisions
I. Partnership Related-Party Basis Adjustment Transactions of Interest
Proposed Sec. 1.6011-18(a) would identify transactions that are
the same as or substantially similar (within the meaning of Sec.
1.6011-4(c)(4)) to transactions described in proposed Sec. 1.6011-
18(c) as transactions of interest for the purposes of Sec. 1.6011-
4(b)(6). Proposed Sec. 1.6011-18(c) would include a relatedness
requirement and a $5 million minimum threshold requirement. Further,
proposed Sec. 1.6011-18(a) would identify transactions that are
substantially similar (within the meaning of Sec. 1.6011-4(c)(4)) to
the transactions described in proposed Sec. 1.6011-18(c) as including
the transactions described in proposed Sec. 1.6011-18(d).
The relatedness requirement would be set forth in proposed Sec.
1.6011-18(b)(8) and (9). Proposed Sec. 1.6011-18(b)(8) would define
``related'' as having a relationship described in section 267(b)
(without regard to section 267(c)(3)) or 707(b)(1). Proposed Sec.
1.6011-18(b)(9) would define ``related partners'' as partners of a
partnership that are related in the following manner--(i) in a
transaction described in proposed Sec. 1.6011-18(c)(1), the
partnership has two or more direct or indirect partners that are
related to each other within the meaning of proposed Sec. 1.6011-
18(b)(8), or (ii) in a transaction described in proposed Sec. 1.6011-
18(c)(2), the transferor of a partnership interest is related to the
transferee, or the transferee is related to one or more of the partners
in the partnership, within the meaning of proposed Sec. 1.6011-
18(b)(8). The relatedness requirement may be met either immediately
before or immediately after a basis adjustment transaction described in
proposed Sec. 1.6011-18(c)(1) or (2).
Proposed Sec. 1.6011-18(c) would provide that a transaction of
interest is a transaction the factual elements of which are described
in proposed Sec. 1.6011-18(c)(1)(i) through (iii) or (c)(2). A basis
adjustment transaction under proposed Sec. 1.6011-18(c)(1)(i) would
occur when a partnership makes a current or liquidating distribution of
property to a partner who is related to one or more partners, the
partnership increases the basis of one or more of its remaining
properties under section 734(b) and (c), and the $5 million threshold
under proposed Sec. 1.6011-18(c)(3) is met.
A basis adjustment transaction under proposed Sec. 1.6011-
18(c)(1)(ii) would occur when a partnership distributes property to a
partner who is related to one or more partners in liquidation of a
partnership interest (or in complete liquidation of the partnership),
the basis of one or more distributed properties is increased under
section 732(b) and (c), and the $5 million threshold under proposed
Sec. 1.6011-18(c)(3) is met.
A basis adjustment transaction under proposed Sec. 1.6011-
18(c)(1)(iii) would occur when a partnership distributes property to a
partner who is related to one or more partners, the basis of one or
more distributed properties is increased under section 732(d), the
related partner acquired all or a part of its interest in the
partnership in a transaction that would have been a transaction
described in proposed Sec. 1.6011-18(c)(2) if the partnership had a
section 754 election in effect for the year of transfer, and the $5
million threshold under proposed Sec. 1.6011-18(c)(3) is met.
A basis adjustment transaction under proposed Sec. 1.6011-18(c)(2)
would occur when a partner transfers an interest in the partnership to
a related transferee or to a person who is related to one or more
existing partners in a nonrecognition transaction, the basis of one or
more partnership properties is increased under section 743(b)(1) and
(c), and the $5 million threshold under proposed Sec. 1.6011-18(c)(3)
is met. Proposed Sec. 1.6011-18(b)(2) would define nonrecognition
transaction as defined in section 7701(a)(45) (other than a transfer on
the death of a partner).
Proposed Sec. 1.6011-18(c)(3) would provide rules for determining
the $5 million threshold. Under proposed Sec. 1.6011-18(c)(3), a basis
adjustment would include basis increases from multiple transactions
described in proposed Sec. 1.6011-18(c)(1) or (2) by the same partner
or partnership during the taxable year that in the aggregate (without
netting for any basis adjustments in the same transaction or another
transaction that reduces basis) and after reducing the resulting
aggregate amount by the gain recognized, if any, on which tax imposed
under subtitle A of the Code (subtitle A) is required to be paid by any
of the related parties to the transaction equal or exceed $5 million.
Accordingly, a transaction of a partner or partnership described in
proposed Sec. 1.6011-18(c)(1) or (2) that results in a basis increase
of less than $5 million during the taxable year would be a transaction
of interest under proposed Sec. 1.6011-18(a) if, in the same taxable
year, the partner or partnership participated in another transaction or
transactions described in proposed Sec. 1.6011-18(c)(1) or (2), and in
the aggregate, the transactions resulted in a basis increase that
equals or exceeds $5 million, without regard to any basis decrease
resulting from the transactions and after reducing the resulting
aggregate amount by the gain recognized, if any, on which tax imposed
under subtitle A is required to be paid by any of the related parties
to the transactions. A threshold of $5 million of basis increases in a
taxable year to which no corresponding tax is paid should be
sufficiently large to capture situations that use the provisions of
subchapter K to produce
[[Page 51484]]
significant tax benefits with little or no economic impact.
If a basis adjustment transaction is described in proposed Sec.
1.6011-18(c)(1)(i) through (iii) or (c)(2), any basis adjustments to
recoverable property must be reported in the taxable year of the basis
adjustment transaction, in each taxable year there is a cost recovery
allowance, and in the taxable year the recoverable property is disposed
of in a transaction in which gain or loss is recognized in whole or in
part. Any basis adjustments to other property must be reported in the
taxable year of the basis adjustment transaction and the taxable year
in which the other property is disposed of in a transaction in which
gain or loss is recognized in whole or in part. See proposed Sec.
1.6011-18(e) and (f).
Proposed Sec. 1.6011-18(b)(7) would define recoverable property as
property of a character subject to an allowance for depreciation,
amortization, or depletion under subtitle A of the Code.
II. Examples of Partnership Related-Party Basis Adjustment Transactions
of Interest
The following examples illustrate the transactions of interest
described in proposed Sec. 1.6011-18(c).
A. Example 1. A Partnership Related-Party Basis Adjustment Transaction
Under Proposed Sec. 1.6011-18(c)(1)(i)
XY Partnership is owned by partners X and Y. The partners are
related to each other within the meaning of proposed Sec. 1.6011-
18(b)(8) and (b)(9)(i). Each partner directly owns 50 percent of the
capital and profits interests in XY Partnership and shares losses
equally. X has an outside basis of $10 million, and Y has an outside
basis of $1 million. XY Partnership owns property it uses in its trade
or business, including Property 1 and Property 2. For Federal income
tax purposes, Property 1 is depreciable property and Property 2 is
nondepreciable property. XY Partnership has an adjusted basis in
Property 1 of zero, and an adjusted basis in Property 2 of $10 million.
XY Partnership has a section 754 election in effect for the taxable
year and makes a current distribution of Property 2 to Y. Under section
732(a)(2), Y's basis in distributed Property 2 is limited to Y's
adjusted basis in its partnership interest of $1 million. As a result
of the distribution to Y, Property 2's adjusted basis is decreased from
$10 million immediately before the distribution to $1 million in Y's
hands. Under section 734(b), XY Partnership must increase the basis of
its remaining property. The amount of the basis increase is equal to
the excess of XY Partnership's basis in Property 2 immediately before
the distribution of $10 million over Y's adjusted basis in Property 2
after the distribution of $1 million, which results in an increase to
the basis of XY Partnership's remaining property of $9 million.
Under sections 734(c) and 755 and the regulations thereunder, XY
Partnership allocates the basis increase of $9 million to Property 1.
As a result, XY Partnership claims depreciation deductions based on an
increased basis in Property 1.
B. Example 2. A Partnership Related-Party Basis Adjustment Transaction
Under Proposed Sec. 1.6011-18(c)(1)(ii)
DEF Partnership is owned by partners D, E and F. The partners are
related to each other within the meaning of proposed Sec. 1.6011-
18(b)(8) and (b)(9)(i). D's outside basis is $7 million. E and F each
have an outside basis of $1 million. DEF Partnership owns only two
properties, Property 1 and Property 2, both of which it uses in its
trade or business. For Federal income tax purposes, Property 1 is
depreciable property and Property 2 is nondepreciable property. DEF
Partnership has an adjusted basis in Property 1 of zero, and an
adjusted basis in Property 2 is $9 million.
DEF Partnership distributes Property 1 to D in liquidation of D's
partnership interest. Under section 732(b), D's basis in distributed
Property 1 is equal to $7 million. As a result, D claims depreciation
deductions based on a $7 million basis in Property 1.
C. Example 3. A Partnership Related-Party Basis Adjustment Transaction
Under Proposed Sec. 1.6011-18(c)(1)(iii)
XYZ Partnership is owned by partners X, Y and Z. The partners are
related to each other within the meaning of proposed Sec. 1.6011-
18(b)(8) and (b)(9)(i). Each partner directly owns one-third of the
capital and profits interests in XYZ Partnership and shares losses
equally.
XYZ Partnership owns Property 1, Property 2, and Property 3.
Property 1 is depreciable property, and XYZ Partnership's adjusted
basis in Property 1 is zero. Property 2 and Property 3 are
nondepreciable property.
X acquired its interest in XYZ Partnership in a nonrecognition
transaction from a person related to X within the meaning of proposed
Sec. 1.6011-18(b)(8). At the time of the transfer, XYZ Partnership did
not have a section 754 election in effect. Immediately after the
transfer, X's outside basis was $12 million and share of inside basis
was $2 million. If XYZ Partnership had a section 754 election in effect
at the time of the transfer, XYZ Partnership would have adjusted X's
share of inside basis under section 743(b). Assume that the adjustment
under section 743(b) would have resulted in a basis increase to
Property 1 of $10 million.
In a taxable year that is within two years of the transfer of the
partnership interest to X, XYZ Partnership makes a current distribution
of Property 1 to X. Under section 732(a)(1), X's adjusted basis in
Property 1 is zero. However, X makes an election under section 732(d)
to adjust the basis of Property 1 to the adjusted basis it would have
if the adjustment under section 743(b) were in effect with respect to
the partnership property at the time X acquired its interest. As a
result of the election under 732(d), because the adjusted basis of
Property 1 under section 743(b) with respect to X would have been
increased by $10 million, X takes a basis in Property 1 equal to $10
million and claims depreciation deductions based on a $10 million basis
in Property 1.
D. Example 4. A Partnership Related-Party Basis Adjustment Transaction
Under Proposed Sec. 1.6011-18(c)(2)
AB Partnership is owned by partners A and B. A owns 95 percent of
the capital and profits interests in AB Partnership and is allocated 95
percent of all losses. B owns 5 percent of the capital and profits
interests in AB Partnership and is allocated 5 percent of all losses.
A's outside basis is $6 million and share of inside basis is $1
million. AB Partnership owns depreciable property it uses in a trade or
business.
In a taxable year in which AB Partnership has a section 754
election in effect, A transfers its entire partnership interest to C, a
person related to A within the meaning of proposed Sec. 1.6011-
18(b)(8) and (b)(9)(ii), in a nonrecognition transaction in which no
gain was recognized. Because AB Partnership has a section 754 election
in effect for the taxable year of the transfer, under section
743(b)(1), AB Partnership increases the basis of the partnership
property with respect to C by $5 million.
Assume that under sections 743(c) and 755 and the regulations
thereunder, the basis increase with respect to C of $5 million is
allocated to partnership property that is depreciable. As a result, C
may be allocated depreciation deductions over the recovery periods of
the partnership properties equal to the amount of the basis increase
under section 743(b)(1).
[[Page 51485]]
III. Substantially Similar Transactions
Proposed Sec. 1.6011-18(a) would provide that substantially
similar transactions include, but are not limited to, the transactions
described in proposed Sec. 1.6011-18(d). For purposes of proposed
Sec. 1.6011-18, transactions would be ``substantially similar''
transactions if the transactions are substantially similar within the
meaning of Sec. 1.6011-4(c)(4).
Under proposed Sec. 1.6011-18(d)(1), a transaction would be
substantially similar to a transaction described in proposed Sec.
1.6011-18(c) if the transaction is a basis adjustment transaction
described in proposed Sec. 1.6011-18(c)(1) or (2), except that it does
not involve related partners and one or more partners of the
partnership is a tax-indifferent party. Under proposed Sec. 1.6011-
18(b)(11), a tax-indifferent party would mean a person that is either
not liable for Federal income tax because of its tax-exempt or, in
certain cases, foreign status or to which gain from a transaction
described in proposed Sec. 1.6011-18(c) would not result in Federal
income tax liability for the person's taxable year within which such
gain is recognized (for example, because the taxpayer has a net
operating loss carryforward or capital loss carryforward).
Under proposed Sec. 1.6011-18(d)(2), a transaction would be
substantially similar to a transaction described in proposed Sec.
1.6011-18(c) in situations in which a partner transfers its partnership
interest in a recognition transaction to a related transferee or to a
person related to one or more existing partners, and the $5 million
threshold under proposed Sec. 1.6011-18(c)(3) is met. Proposed Sec.
1.6011-18(b)(6) would define a recognition transaction as a transaction
other than a nonrecognition transaction as defined in proposed Sec.
1.6011-18(b)(2).
IV. Persons Treated as Participants
Whether a taxpayer has participated in a transaction of interest
described in proposed Sec. 1.6011-18(c) during a taxable year is
determined under proposed Sec. 1.6011-18(e). Participants would
include a participating partner within the meaning of proposed Sec.
1.6011-18(b)(3), a participating partnership within the meaning of
proposed Sec. 1.6011-18(b)(4), and a related subsequent transferee
within the meaning of proposed Sec. 1.6011-18(b)(10). A participant
would also include a tax-indifferent party within the meaning of
proposed Sec. 1.6011-18(b)(11).
Proposed Sec. 1.6011-18(b)(3) would define ``participating
partner'' as any partner that directly receives a distribution of
property or an interest in a participating partnership, or directly
transfers an interest in a participating partnership, in a transaction
described in proposed Sec. 1.6011-18(c), including a person that
becomes or ceases to be a partner as a result of such transaction.
Accordingly, except for in the case of a related subsequent transferee,
the proposed regulations would impose the disclosure requirement only
on the direct distributee, transferor, or transferee in the transaction
of interest identified under proposed Sec. 1.6011-18(a). The person
identified as the participating partner must be the owner for Federal
income tax purposes of the partnership interest. As a result, in the
case of a partnership interest held by a disregarded entity, the
participating partner would be the owner of the disregarded entity for
Federal income tax purposes. In the case of a partnership interest held
by a grantor trust, the participating partner would be the grantor or
owner of the grantor trust. Similar principles would be applied in
determining the participating partner in circumstances similar to the
disregarded entity or grantor trust situations. Under proposed Sec.
1.6011-18(e)(2), a participating partner would participate in a
transaction of interest in any taxable year in which the partner
directly receives a distribution of property or an interest in a
participating partnership, or directly transfers an interest in a
participating partnership, in a transaction described in proposed Sec.
1.6011-18(c).
Proposed Sec. 1.6011-18(b)(4) would define ``participating
partnership'' as any partnership that makes a distribution of property
to a participating partner in a transaction described in proposed Sec.
1.6011-18(c)(1), or a partnership interest of which was transferred in
a transaction described in proposed Sec. 1.6011-18(c)(2). Under
proposed Sec. 1.6011-18(e)(3), a participating partnership would
participate in a transaction of interest in any taxable year in which
(i) the partnership makes a distribution of property to a participating
partner in a transaction described proposed Sec. 1.6011-18(c)(1) or
(ii) a participating partnership interest is transferred in a
transaction described proposed Sec. 1.6011-18(c)(2).
Proposed Sec. 1.6011-18(b)(10) would define ``related subsequent
transferee'' as any person related within the meaning of proposed Sec.
1.6011-18(b)(8) to a participating partner that directly received in a
nonrecognition transaction a transfer (including a distribution) of
property that was subject to an increase in basis as a result of a
transaction described in proposed Sec. 1.6011-18(c). Under proposed
Sec. 1.6011-18(e)(4), any direct transfer, in a nonrecognition
transaction, to a related person of property subject to a basis
increase resulting from a transaction described in proposed Sec.
1.6011-18(c) would result in the related subsequent transferee becoming
a participant in the transaction of interest identified under proposed
Sec. 1.6011-18(a). However, any subsequent transfer (including a
distribution) by the related subsequent transferee to a transferee
would not cause that transferee to become a participant.
Proposed Sec. 1.6011-18(e)(5) would provide that a participating
partnership, participating partner, or related subsequent transferee
also participates in a transaction described in proposed Sec. 1.6011-
18(c) in any taxable year in which its tax return reflects the Federal
income tax consequences of the basis increase from such transaction.
V. Information Disclosure Requirements
Proposed Sec. 1.6011-18(f) would require participants to provide
the information required under Sec. 1.6011-4(d) and the Instructions
to Form 8886 (or successor form). For all participants, describing the
transaction in sufficient detail would include (but would not be
limited to) describing on Form 8886 (or successor form) an increase in
basis resulting from a transaction described in proposed Sec. 1.6011-
18(c) by providing the information required in proposed Sec. 1.6011-
18(f)(1)(i), through (iii).
Proposed Sec. 1.6011-18(f)(1)(i) would require reporting of the
names and identifying numbers (for example, social security number,
employer identification number) of all participants.
Proposed Sec. 1.6011-18(f)(1)(ii) would require participants to
provide all basis adjustments resulting from a transaction described in
Sec. 1.6011-18(c), and basis information, including the participating
partnership's adjusted basis in the distributed property immediately
before the distribution, any adjustments to basis under sections
732(a)(2), (b), (d) or 734(b), any adjustments to basis under section
743(b) with respect to a participating partner that is transferred an
interest in a participating partnership, and with respect to a
participating partner that transfers an interest in a participating
partnership, that participating partner's adjusted basis in the
participating partnership interest and share of the participating
partnership's adjusted basis in its
[[Page 51486]]
property immediately before the transfer.
Proposed Sec. 1.6011-18(f)(1)(iii) would require participants to
provide information on Form 8886 (or successor form) of any Federal
income tax consequences realized during the taxable year as a result of
a transaction described in proposed Sec. 1.6011-18(c), including cost
recovery allowances attributable to an increase in basis described in
proposed Sec. 1.6011-18(c) or taxable gain or loss attributable to the
disposition of property that was subject to an increase in basis
described in proposed Sec. 1.6011-18(c). In the case of Federal income
tax consequences realized after the taxable year of a transaction
described in proposed Sec. 1.6011-18(c), such as cost recovery
allowances or taxable gain or loss on a disposition, a participant must
provide information on the Federal income tax consequences on Form 8886
(or successor form) for the taxable year of realization.
Under proposed Sec. 1.6011-18(f)(2), if the property subject to an
increase in basis as a result of a transaction described in proposed
Sec. 1.6011-18(c) is disposed of in a subsequent taxable year in a
transaction in which gain or loss is recognized in whole or in part, a
participant must send a copy of Form 8886 to OTSA, for the taxable year
of the disposition, in addition to sending a copy to OTSA in the
taxable year of the basis adjustment transaction.
Proposed Sec. 1.6011-18(g) would provide examples of the
participants' disclosure requirements for the taxable year in which the
transaction of interest occurred and the subsequent taxable years in
which a participant continued to realize the Federal income tax
consequences of the transaction of interest.
VI. Effect of Transaction Becoming a Transaction of Interest
Participants required to disclose these transactions under Sec.
1.6011-4 who fail to do so would be subject to penalties under section
6707A. Material advisors required to disclose these transactions under
section 6111 who fail to do so would be subject to penalties under
section 6707. Material advisors required to maintain lists of investors
under section 6112 who fail to do so (or who fail to provide such lists
when requested by the IRS) would be subject to penalties under section
6708(a). In addition, the IRS may impose other penalties on persons
involved in these transactions or substantially similar transactions,
including accuracy-related penalties under section 6662 or section
6662A, the penalty under section 6700 of the Code for promoting abusive
tax shelters, and the penalty under section 6701 of the Code for aiding
and abetting understatement of a tax liability.
In addition, material advisors have disclosure requirements with
regard to transactions occurring in prior years. However,
notwithstanding Sec. 301.6111-3(b)(4)(i) and (iii), material advisors
would be required to disclose only if they have made a tax statement on
or after six years before the date of the Treasury decision adopting
these regulations as final regulations is published in the Federal
Register.
Proposed Applicability Date
Proposed Sec. 1.6011-18(a) would apply to identify certain
partnership related-party basis adjustment transactions described in
proposed Sec. 1.6011-18(c) and substantially similar transactions as
transactions of interest effective as of the date of publication in the
Federal Register of a Treasury decision adopting these regulations as
final regulations.
Special Analyses
I. Regulatory Planning and Review--Economic Analysis
Pursuant to the Memorandum of Agreement, Review of Treasury
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory
actions issued by the IRS are not subject to the requirements of
section 6 of Executive Order 12866, as amended. Therefore, a regulatory
impact assessment is not required.
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) generally
requires that a federal agency obtain the approval of the Office of
Management and Budget (OMB) before collecting information from the
public regardless of whether such collection of information is
mandatory, voluntary, or required to obtain or retain a benefit. An
agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless the collection of
information displays a valid control number assigned by OMB.
The proposed regulations would contain reporting and recordkeeping
requirements that are required to identify increases to the basis of
partnership property in certain transactions involving adjustments to
the basis of partnership property. These collections of information
would generally be used by the IRS for tax compliance purposes and by
taxpayers to facilitate proper reporting and recordkeeping.
The proposed regulations would identify certain transactions as
reportable transactions and require partners and partnerships that
participate in the transactions, and material advisors that provide
advice on the transactions, to meet the reporting requirements under
Sections 6011 and 6111, and material advisors to meet the list
maintenance requirements of Section 6112. The reporting requirements
contained in the proposed regulations would be met by completing Forms
8886 and 8918. These forms have been approved by OMB under control
numbers 1545-1800 and 1545-0865, respectively. Accordingly, the
proposed regulations would not be creating new collection of
information requirements or changing the collection of information
requirements already contained in the burden associated with the
control numbers for Forms 8886 and 8918.
III. Regulatory Flexibility Act
When an agency issues a proposed rulemaking, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) (RFA) requires the agency to
prepare and make available for public comment an initial regulatory
flexibility analysis that describes the impact of the proposed rule on
``small entities.'' 5 U.S.C. 603(a). The term ``small entities'' is
defined in 5 U.S.C. 601 to mean ``small business,'' ``small
organization,'' and ``small governmental jurisdiction,'' which are also
defined in 5 U.S.C. 601. Small business size standards define whether a
business is ``small'' and have been established for types of economic
activities, or industry, generally under the North American Industry
Classification System (NAICS). See 13 CFR part 121 (Small Business Size
Regulations). The size standards look at various factors, including
annual receipts, number of employees, and amount of assets, to
determine whether the business is small. See 13 CFR part 121.201 for
the Small Business Size Standards by NAICS Industry.
Section 605 of the RFA provides an exception to the requirement to
prepare an initial regulatory flexibility analysis if the agency
certifies that the proposed rulemaking will not have a significant
economic impact on a substantial number of small entities. The Treasury
Department and the IRS hereby certify that these proposed regulations
will not have a significant economic impact on a substantial number of
small entities under the RFA.
The IRS's Research, Applied Analytics, and Statistics division
(RAAS) estimates that, in the case of a Partnership Related-Party Basis
Adjustment Transaction identified as a transaction of interest
involving a basis
[[Page 51487]]
adjustment under section 743(b), partnerships with gross receipts or
sales of $25 million or less might comprise two-thirds and partnerships
with gross receipts or sales of over $25 million might comprise one-
third of all partnerships engaging in the transaction. This data
provides an estimate that cannot yet be tested or confirmed without
actual reporting of these transactions. Further, although the estimate
suggests that the majority (two-thirds) of partnerships subject to
reporting might be partnerships with gross receipts or sales of $25
million or less, the estimate does not indicate that the majority of
partnerships subject to reporting will be small entities. The ``$25
million or less'' parameter is used as a reference point that does not
necessarily correlate with the meaning of small entities under the
Small Business Size Regulations. Thus, some or many of the partnerships
in the category having gross receipts or sales of $25 million or less
might be too large to meet the size standards for small businesses
under the Small Business Size Regulations. In addition, the data does
not indicate whether the partnerships with gross receipts or sales of
$25 million or less are part of larger enterprises.
The proposed regulations will not have a significant economic
impact on small entities because the proposed regulations would
implement sections 6111 and 6112 and Sec. 1.6011-4 by specifying the
manner in which and the time at which a Partnership Related-Party Basis
Adjustment Transaction identified as a transaction of interest must be
reported. Accordingly, because the proposed regulations would be
limited in scope to time and manner of information reporting, their
economic impact is expected to be minimal.
The Treasury Department and the IRS expect that the reporting
burden is low because the information sought is necessary for regular
annual return preparation and ordinary recordkeeping. The estimated
burden for any taxpayer required to file Form 8886 is approximately 10
hours, 16 minutes for recordkeeping, 4 hours, 50 minutes for learning
about the law or the form, and 6 hours, 25 minutes for preparing,
copying, assembling, and sending the form to the IRS. RAAS estimates
that the appropriate wage rate for complying with the proposed
regulations is $102.00 (2022 dollars) per hour. Thus, it is estimated
that persons required to comply with the proposed regulations would
incur costs totaling approximately $2,194.70 per filing. This amount is
small in comparison to the $5 million or more of basis increase in a
Partnership Related-Party Basis Adjustment Transaction identified as a
transaction of interest. As a result, the relatively small cost to
comply with the proposed regulations will not pose any significant
economic impact to any small entities that would be subject to the
proposed regulations.
For the reasons stated, a regulatory flexibility analysis under the
RFA is not required. The Treasury Department and the IRS invite
comments on the impact of the proposed regulations on small entities.
Pursuant to section 7805(f) of the Code, this notice of proposed
rulemaking has been submitted to the Chief Counsel for the Office of
Advocacy of the Small Business Administration for comment on its impact
on small business.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA)
requires that agencies assess anticipated costs and benefits and take
certain other actions before issuing a final rule that includes any
Federal mandate that may result in expenditures in any one year by a
State, local, or Tribal government, in the aggregate, or by the private
sector, of $100 million (updated annually for inflation). This proposed
rule does not include any Federal mandate that may result in
expenditures by State, local, or Tribal governments or by the private
sector in excess of that threshold.
V. Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from
publishing any rule that has federalism implications if the rule either
imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. This proposed rule does not have
federalism implications and does not impose substantial direct
compliance costs on State and local governments or preempt State law
within the meaning of the Executive order.
Comments and Public Hearing
Before these proposed amendments to the regulations are adopted as
final regulations, consideration will be given to comments regarding
the notice of proposed rulemaking that are submitted timely to the IRS
as prescribed in the preamble under the ADDRESSES section. The Treasury
Department and the IRS request comments on all aspects of the proposed
regulations. All comments will be made available at <a href="https://www.regulations.gov">https://www.regulations.gov</a>. Once submitted to the Federal eRulemaking Portal,
comments cannot be edited or withdrawn.
A public hearing has been scheduled for September 17, 2024
beginning at 10 a.m. ET, in the Auditorium at the Internal Revenue
Building, 1111 Constitution Avenue NW, Washington, DC. 20224. Due to
building security procedures, visitors must enter at the Constitution
Avenue entrance. In addition, all visitors must present photo
identification to enter the building. Because of access restrictions,
visitors will not be admitted beyond the immediate entrance area more
than 30 minutes before the hearing starts. Participants may
alternatively attend the public hearing by telephone.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit an outline of
the topics to be discussed and the time to be devoted to each topic by
August 19, 2024. A period of 10 minutes will be allotted to each person
for making comments. An agenda showing the scheduling of the speakers
will be prepared after the deadline for receiving outlines has passed.
Copies of the agenda will be available free of charge at the hearing.
If no outline of the topics to be discussed at the hearing is received
by August 19, 2024, the public hearing will be cancelled. If the public
hearing is cancelled, a notice of cancellation of the public hearing
will be published in the Federal Register.
Individuals who want to testify in person at the public hearing
must send an email to <a href="/cdn-cgi/l/email-protection#64141106080d070c0105160d0a0317240d16174a030b12"><span class="__cf_email__" data-cfemail="3a4a4f58565359525f5b4853545d497a534849145d554c">[email protected]</span></a> to have your name added to
the building access list. The subject line of the email must contain
the regulation number REG-124593-23 and the language TESTIFY In Person.
For example, the subject line may say: Request to TESTIFY In Person at
Hearing for REG-124593-23.
Individuals who want to testify by telephone at the public hearing
must send an email to <a href="/cdn-cgi/l/email-protection#b1c1c4d3ddd8d2d9d4d0c3d8dfd6c2f1d8c3c29fd6dec7"><span class="__cf_email__" data-cfemail="c8b8bdaaa4a1aba0ada9baa1a6afbb88a1babbe6afa7be">[email protected]</span></a> to receive the telephone
number and access code for the hearing. The subject line of the email
must contain the regulation number REG-125593-23 and the language
TESTIFY Telephonically. For example, the subject line may say: Request
to TESTIFY Telephonically at Hearing for REG-124593-23.
Individuals who want to attend the public hearing in person without
testifying must also send an email to <a href="/cdn-cgi/l/email-protection#8efefbece2e7ede6ebeffce7e0e9fdcee7fcfda0e9e1f8"><span class="__cf_email__" data-cfemail="9bebeef9f7f2f8f3fefae9f2f5fce8dbf2e9e8b5fcf4ed">[email protected]</span></a> to have
your name added to the building access list. The subject line of the
email must contain the regulation number REG-
[[Page 51488]]
124593-23 and the language ATTEND In Person. For example, the subject
line may say: Request to ATTEND Hearing In Person for REG-124593-23.
Requests to attend the public hearing must be received by 5 p.m. ET on
September 13, 2024.
Individuals who want to attend the public hearing by telephone
without testifying must also send an email to <a href="/cdn-cgi/l/email-protection#7d0d081f11141e15181c0f14131a0e3d140f0e531a120b"><span class="__cf_email__" data-cfemail="34444156585d575c5155465d5a5347745d46471a535b42">[email protected]</span></a> to
receive the telephone number and access code for the hearing. The
subject line of the email must contain the regulation number REG-
124593-23 and the language ATTEND Hearing Telephonically. For example,
the subject line may say: Request to ATTEND Hearing Telephonically for
REG-124593-23. Requests to attend the public hearing must be received
by 5 p.m. ET on September 13, 2024.
Hearings will be made accessible to people with disabilities. To
request special assistance during a hearing please contact the
Publications and Regulations Section of the Office of Associate Chief
Counsel (Procedure and Administration) by sending an email to
<a href="/cdn-cgi/l/email-protection#324247505e5b515a5753405b5c5541725b40411c555d44"><span class="__cf_email__" data-cfemail="14646176787d777c7175667d7a7367547d66673a737b62">[email protected]</span></a> (preferred) or by telephone at (202) 317-6901
(not a toll-free number) at least September 12, 2024.
Drafting Information
The principal author of these proposed regulations is Elizabeth
Zanet, Office of Associate Chief Counsel (Passthroughs and Special
Industries). However, other personnel from the Treasury Department and
the IRS participated in the development of these regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, the Treasury Department and the IRS propose to amend
26 CFR part 1 as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by adding an
entry for Sec. 1.6011-18 in numerical order to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.6011-18 also issued under 26 U.S.C. 6001 and 26 U.S.C.
6011.
* * * * *
0
Par. 2. Section 1.6011-18 is added to read as follows:
Sec. 1.6011-18 Certain partnership related-party basis adjustment
transactions as transactions of interest.
(a) Identification as transaction of interest. Transactions that
are the same as or substantially similar (within the meaning of Sec.
1.6011-4(c)(4)) to the transactions described in paragraph (c) of this
section are identified as transactions of interest for purposes of
Sec. 1.6011-4(b)(6). Transactions that are substantially similar
(within the meaning of Sec. 1.6011-4(c)(4)) to the transactions
described in paragraph (c) of this section include, but are not limited
to, transactions described in paragraph (d) of this section.
(b) Definitions. The following definitions apply for purposes of
this section:
(1) Code means the Internal Revenue Code.
(2) Nonrecognition transaction means a nonrecognition transaction
within the meaning of section 7701(a)(45) of the Code (other than a
transfer on the death of a partner).
(3) Participating partner means any partner that directly receives
a distribution of property or an interest in a participating
partnership, or directly transfers an interest in a participating
partnership, in a transaction described in paragraph (c) of this
section, including a person that becomes or ceases to be a partner as a
result of such transaction. In the case of a participating partnership
interest held by an entity that is disregarded as separate from its
owner within the meaning of Sec. 301.7701-2(c)(2)(i) of this chapter,
participating partner means the owner of the disregarded entity for
Federal income tax purposes. In the case of a participating partnership
interest held by a grantor trust within the meaning of section 671 of
the Code, participating partner means the grantor or other person
designated under sections 671 through 679 of the Code as the owner of
that portion of the trust that holds the participating partnership
interest.
(4) Participating partnership means any partnership--
(i) That makes a distribution of property to a participating
partner in a transaction described in paragraph (c)(1) of this section,
or
(ii) A partnership interest which is transferred in a transaction
described in paragraph (c)(2) of this section.
(5) Participating partnership interest means any partnership
interest in a participating partnership.
(6) Recognition transaction means a transaction other than a
nonrecognition transaction within the meaning of paragraph (b)(2) of
this section.
(7) Recoverable property means property of a character subject to
an allowance for depreciation, amortization, or depletion under
subtitle A of the Code (subtitle A).
(8) Related means having a relationship described in section 267(b)
of the Code (without regard to section 267(c)(3)) or section 707(b)(1)
of the Code.
(9) Related partners mean partners of a partnership that are
related in the following manner:
(i) In the case of a transaction described in paragraph (c)(1) of
this section, the partnership has two or more direct or indirect
partners that are related immediately before or immediately after a
transaction described in paragraph (c)(1) of this section.
(ii) In the case of a transaction described in paragraph (c)(2) of
this section, the transferor of a partnership interest is related to
the transferee, or the transferee is related to one or more of the
partners in the partnership, immediately before or immediately after a
transaction described in paragraph (c)(2) of this section.
(10) Related subsequent transferee means any person who is related
to a participating partner and directly received in a nonrecognition
transaction, a transfer (including a distribution) of property that was
subject to an increase in basis as a result of a transaction described
in paragraph (c) of this section.
(11) Tax-indifferent party means a person that is either not liable
for Federal income tax because of its tax-exempt or, in certain cases,
foreign status or to which gain from a transaction described in
paragraph (c) of this section would not result in Federal income tax
liability for the person's taxable year within which such gain is
recognized.
(c) Transaction description. A transaction is described in this
paragraph (c) if the factual elements of the transaction described in
paragraph (c)(1)(i) through (iii) or (c)(2) of this section are met.
(1) Distributions by partnership. A partnership engages in any of
the transactions described in paragraphs (c)(1)(i) through (iii) of
this section with one or more of the related partners:
(i) The partnership distributes property to a person who is a
related partner in a current or liquidating distribution, the
partnership increases the basis of one or more of its remaining
properties under section 734(b) and (c) of the Code, and the $5 million
threshold described in paragraph (c)(3) of this section is met.
[[Page 51489]]
(ii) The partnership distributes property to a person who is a
related partner in liquidation of the person's partnership interest (or
in complete liquidation of the partnership), the basis of one or more
distributed properties is increased under section 732(b) and (c) of the
Code, and the $5 million threshold described in paragraph (c)(3) of
this section is met.
(iii) The partnership distributes property to a person who is a
related partner, the basis of one or more distributed properties is
increased under section 732(d) of the Code, the related partner
acquired all or a part of its interest in the partnership in a
transaction that would have been a transaction described in paragraph
(c)(2) of this section if the partnership had a section 754 election in
effect for the year of transfer, and the $5 million threshold described
in paragraph (c)(3) of this section is met.
(2) Transfer of partnership interest. A partner transfers an
interest in a partnership to a related partner in a nonrecognition
transaction, the basis of one or more partnership properties is
increased under section 743(b)(1) and (c) of the Code, and the $5
million threshold described in paragraph (c)(3) of this section is met.
(3) $5 million threshold. For the purpose of determining whether a
transaction is described in paragraph (c)(1), (c)(2), (d)(1), or (d)(2)
of this section, the $5 million threshold is met for a taxable year if
the sum of all basis increases resulting from all such transactions of
a partnership or partner during the taxable year (without netting for
any basis adjustment in the same transaction or another transaction
that reduces basis) exceeds by at least $5 million the gain recognized
from such transactions, if any, on which tax imposed under subtitle A
is required to be paid by any of the related partners (or tax-
indifferent party, in the case of a transaction described in paragraphs
(d)(1) and (2) of this section) to such transactions.
(d) Substantially similar transaction. A transaction that is
substantially similar (within the meaning of Sec. 1.6011-4(c)(4)) to a
transaction described in paragraph (c) of this section includes, but is
not limited to:
(1) A transaction that is described in paragraph (c) of this
section except that the partners of the partnership are not related and
one or more partners of the partnership is a tax-indifferent party that
facilitates, by receiving a distribution of property from the
partnership or otherwise, an increase in the basis of partnership
property or an increase in the basis of property held by another
partner in the partnership; and
(2) A transaction in which a partner transfers an interest in a
partnership to a related partner in a recognition transaction, and the
$5 million threshold described in paragraph (c)(3) of this section is
met.
(e) Participation--(1) In general. Whether a taxpayer has
participated in a transaction of interest described in paragraph (c) of
this section during a taxable year is determined under this paragraph
(e).
(2) Participating partners. A participating partner participates in
a transaction of interest described in paragraph (c) of this section in
any taxable year in which the partner directly receives a distribution
of property or an interest in a participating partnership, or directly
transfers an interest in a participating partnership, in a transaction
described in paragraph (c) of this section.
(3) Participating partnerships. A participating partnership
participates in a transaction of interest described in paragraph (c) of
this section in any taxable year in which the partnership makes a
distribution of property to a participating partner in a transaction
described in paragraph (c)(1) of this section, or a participating
partnership interest is transferred in a transaction described in
paragraph (c)(2) of this section.
(4) Related subsequent transferees. A related subsequent transferee
participates in a transaction of interest described in paragraph (c) of
this section in any taxable year in which the related subsequent
transferee directly receives, in a nonrecognition transaction, a
transfer (including a distribution) of property that was subject to an
increase in basis as a result of a transaction described in paragraph
(c) of this section.
(5) Subsequent realization of tax benefit. A participating
partnership, participating partner or related subsequent transferee
also participates in a transaction of interest described in paragraph
(c) of this section in any taxable year in which its tax return
reflects the tax consequences of a basis increase resulting from a
transaction of interest described in paragraph (c) of this section. For
example, if a participating partner sells property the basis of which
has been increased as a result of a transaction of interest described
in paragraph (c) of this section during a taxable year after the year
in which the transaction of interest described in paragraph (c) of this
section resulting in the basis increase occurred, the participating
partner participates in a transaction of interest described in
paragraph (c) of this section during the taxable year(s) in which the
tax consequences of the sale are reported on the participating
partner's tax return.
(f) Disclosure requirements--(1) In general. Participants must
provide the information required under Sec. 1.6011-4(d) and the
Instructions to Form 8886, Reportable Transaction Disclosure Statement
(or successor form) for each taxable year in which the participant
participated in a transaction described in paragraph (c) of this
section as determined under paragraph (e) of this section. For all
participants, describing the transaction in sufficient detail includes
describing the information described in paragraphs (f)(1)(i) through
(iii) of this section, as applicable, on Form 8886 (or successor form)
for the taxable year of a transaction described in paragraph (c) of
this section.
(i) The names and identifying numbers of all participants,
including the participating partnership, participating partners and any
related subsequent transferees or tax-indifferent parties.
(ii) All basis adjustments resulting from a transaction described
in paragraph (c) of this section, and basis information, including the
participating partnership's adjusted basis in the distributed property
immediately before the distribution, any adjustments to basis under
section 732(a)(2), (b), (d) or 734(b), any adjustments to basis under
section 743(b) with respect to a participating partner that is
transferred an interest in a participating partnership, and with
respect to a participating partner that transfers an interest in a
participating partnership, that participating partner's adjusted basis
in the participating partnership interest and share of the
participating partnership's adjusted basis in its property immediately
before the transfer.
(iii) Any Federal income tax consequences realized during the
taxable year, as a result of a transaction described in paragraph (c)
of this section, including cost recovery allowances attributable to an
increase in basis as a result of a transaction described in paragraph
(c) of this section, and taxable gain or taxable loss attributable to
the disposition of property that was subject to an increase in basis as
a result of a transaction described in paragraph (c) of this section.
For example, in the case of a distribution of depreciable property that
was subject to an increase in basis as a result of a transaction
described in paragraph (c) of this section, the Federal
[[Page 51490]]
income tax consequences realized during the taxable year include the
basis increase and cost recovery allowances attributable to the basis
increase during the taxable year.
(2) Disposition in subsequent taxable years. If the property
subject to an increase in basis as a result of a transaction described
in paragraph (c) of this section is disposed of in a transaction in
which gain or loss is recognized in whole or in part in a subsequent
taxable year, the participant must send a copy of Form 8886 to the
Office of Tax Shelter Analysis (OTSA). This requirement is in addition
to the requirement that a participant send a copy of Form 8886 to OTSA
for the taxable year of the basis increase.
(g) Examples. The following examples illustrate the provisions of
this section.
(1) Example 1: Reporting by a participating partner and
participating partnership in the taxable year of the transaction,
including cost recovery allowances--(i) Facts. ABC Partnership is owned
by partners A, B and C. Partners A, B and C are related within the
meaning of paragraphs (b)(8) and (9) of this section. At the beginning
of taxable year 1, ABC Partnership distributes a depreciable asset,
Property X, to Partner A in liquidation of Partner A's interest in ABC
Partnership. The distribution is a transaction described in paragraph
(c)(1)(ii) of this section. As a result of the distribution, the basis
of Property X is increased by $5 million. On its tax return for taxable
year 1, Partner A reports deductions for depreciation expense
attributable to the $5 million increase in the basis of Property X
resulting from the transaction under paragraph (c)(1)(ii) of this
section. ABC Partnership and Partner A have the same taxable year.
(ii) Analysis. Partner A is a participant during taxable year 1
within the meaning of paragraph (e) of this section because it is a
participating partner within the meaning of paragraph (b)(3) of this
section since it directly received a distribution of property during
taxable year 1 in a transaction described in paragraph (c) of this
section. ABC Partnership is a participant during taxable year 1 within
the meaning of paragraph (e) of this section because it is a
participating partnership within the meaning of paragraph (b)(4) of
this section since it made a distribution of property to a
participating partner during taxable year 1 in a transaction described
in paragraph (c) of this section. As part of its disclosure
requirements under paragraph (f) of this section and Sec. 1.6011-4(d)
and (e), Partner A must disclose the distribution as a transaction of
interest under this section on Form 8886 (or successor form) and file
the form with its tax return for taxable year 1. Partner A must include
the information described in paragraph (f) of this section, including
the amount of the deductions attributable to the $5 million increase in
the basis of Property X resulting from the transaction described in
paragraph (c)(1)(ii) of this section. As part of its disclosure
requirements under paragraph (f) of this section and Sec. 1.6011-4(d)
and (e), ABC Partnership must disclose the distribution as a
transaction of interest under this section on Form 8886 (or successor
form) and file the form with its tax return for taxable year 1,
including the information described in paragraph (f) of this section.
In addition, Partner A and ABC Partnership must send a copy of their
respective Form 8886 (or successor form) to OTSA.
(2) Example 2: Reporting of the Federal income tax consequences
(cost recovery allowances) of the transaction in all taxable years--(i)
Facts. Under the same facts as in paragraph (g)(1)(i) of this section
(Example 1), on its tax returns for taxable years 2 through 5, Partner
A reports deductions for depreciation expense attributable to the $5
million increase in the basis of Property X related to the transaction
described in paragraph (c)(1)(ii) of this section, which occurred in
taxable year 1.
(ii) Analysis. As part of its disclosure requirements under
paragraph (f) of this section and Sec. 1.6011-4(d) and (e), Partner A
must disclose the deductions on Form 8886 (or successor form) for
taxable years 2 through 5 as the Federal income tax consequences of the
transaction described in paragraph (c)(1)(ii) of this section. As a
result, for each taxable year 2 through 5, Partner A must file the form
with its tax return for the taxable year with the information described
in paragraph (f) of this section, including the amount of the
deductions attributable to the $5 million increase in the basis of
Property X resulting from the transaction described in paragraph
(c)(1)(ii) of this section.
(3) Example 3: Reporting by a participating partner, participating
partnership, and related subsequent transferee in the taxable year of
the transaction--(i) Facts. The facts are the same as in paragraph
(g)(1)(i) of this section (Example 1), except that at the beginning of
taxable year 1, ABC Partnership distributes a nondepreciable asset,
Land with an adjusted basis of $1 million, to Partner A in liquidation
of Partner A's interest in ABC Partnership. The distribution is a
transaction described in paragraph (c)(1)(ii) of this section. As a
result of the distribution, the basis of Land is increased to $6
million. Subsequently in taxable year 1, Partner A contributes Land to
another partnership, AX Partnership, in a transfer that is treated as a
contribution of property under section 721(a). Partner A and AX
Partnership are related within the meaning of paragraph (b)(8) of this
section. ABC Partnership, Partner A and AX Partnership have the same
taxable year.
(ii) Analysis. Partner A is a participant during taxable year 1
within the meaning of paragraph (e) of this section because it is a
participating partner within the meaning of paragraph (b)(3) of this
section since it directly received a distribution of property during
taxable year 1 in a transaction described in paragraph (c) of this
section. ABC Partnership is a participant during taxable year 1 within
the meaning of paragraph (e) of this section because it is a
participating partnership within the meaning of paragraph (b)(4) of
this section since it made a distribution of property to a
participating partner during taxable year 1 in a transaction described
in paragraph (c) of this section. AX Partnership is a participant
during taxable year 1 within the meaning of paragraph (e) of this
section because it is a related subsequent transferee within the
meaning of paragraph (b)(10) of this section since it directly received
in a nonrecognition transaction, a transfer of property during taxable
year 1 that was subject to an increase in basis as a result of a
transaction described in paragraph (c) of this section. As part of its
disclosure requirements under paragraph (f) of this section and Sec.
1.6011-4(d) and (e), Partner A must disclose the distribution as a
transaction of interest under this section on Form 8886 (or successor
form) and file the form with its tax return for taxable year 1. Partner
A must include the information described in paragraph (f) of this
section. As part of its disclosure requirements under paragraph (f) of
this section and Sec. 1.6011-4(d) and (e), ABC Partnership must
disclose the distribution as a transaction of interest under this
section on Form 8886 (or successor form) and file the form with its tax
return for taxable year 1, including the information described in
paragraph (f) of this section. Further, AX Partnership is subject to
the disclosure requirements under paragraph (f) of this section and
Sec. 1.6011-4(d) and (e). AX Partnership must disclose that it is a
related subsequent transferee within the meaning of paragraph (b)(10)
of this section that received, in a
[[Page 51491]]
nonrecognition transaction, a transfer of property that was distributed
in a transaction of interest under this section on Form 8886 (or
successor form) and file the form with its tax return for taxable year
1. In addition, Partner A, ABC Partnership and AX Partnership must send
a copy of their respective Form 8886 (or successor form) to OTSA.
(4) Example 4: Reporting of the Federal income tax consequences
(reduced taxable gain) of the transaction in the taxable year of
disposition of the property--(i) Facts. Under the same facts as in
paragraph (g)(3)(i) of this section (Example 3), in taxable year 2, AX
Partnership disposes of Land in a taxable sale for its fair market
value of $6 million and recognizes gain of zero.
(ii) Analysis. As part of its disclosure requirements under
paragraph (f) of this section and Sec. 1.6011-4(d) and (e), AX
Partnership must disclose the taxable gain (zero) on the disposition of
Land on Form 8886 (or successor form) for taxable year 2 as the Federal
income tax consequences of the transaction described in paragraph
(c)(1)(ii) of this section. AX must file the form with its tax return
for taxable year 2 and send a copy of the form to OTSA.
(h) Applicability date. This section's identification of
transactions that are the same as or substantially similar (within the
meaning of Sec. 1.6011-4(c)(4)) to the transactions described in
paragraph (c) of this section as transactions of interest for purposes
of Sec. 1.6011-4(b)(6) and sections 6111 and 6112 of the Code is
effective on the date the regulations are published as final
regulations in the Federal Register.
Douglas W. O'Donnell,
Deputy Commissioner.
[FR Doc. 2024-13282 Filed 6-17-24; 8:45 am]
BILLING CODE 4830-01-P
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</html>Indexed from Federal Register on June 18, 2024.
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