Rule2025-00324
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
January 14, 2025
Effective
January 14, 2025
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains final regulations that 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 are required to file disclosures with the IRS and are subject to penalties for failure to disclose. The final regulations affect participants in these transactions as well as material advisors.
Full Text
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<title>Federal Register, Volume 90 Issue 8 (Tuesday, January 14, 2025)</title>
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[Federal Register Volume 90, Number 8 (Tuesday, January 14, 2025)]
[Rules and Regulations]
[Pages 2958-2977]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-00324]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 10028]
RIN 1545-BR07
Certain Partnership Related-Party Basis Adjustment Transactions
as Transactions of Interest
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final rule.
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SUMMARY: This document contains final regulations that 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 are required to file disclosures with the IRS and
are subject to penalties for failure to disclose. The final regulations
affect participants in these transactions as well as material advisors.
DATES:
Effective date: These regulations are effective on January 14,
2025.
Applicability date: For the date of applicability, see Sec.
1.6011-18(h) and (i).
FOR FURTHER INFORMATION CONTACT: Concerning these final regulations,
contact Elizabeth Zanet of the Office of Associate Chief Counsel
(Passthroughs and Special Industries), (202) 317-6007 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
Authority
This document amends the Income Tax Regulations (26 CFR part 1) by
adding final regulations under section 6011 of the Internal Revenue
Code (Code). The document adds Sec. 1.6011-18 to identify certain
partnership related-party basis adjustment transactions and
substantially similar transactions as transactions of interest, a type
of
[[Page 2959]]
reportable transaction (final regulations). These regulations are
issued pursuant to the authority conferred on the Secretary of the
Treasury or her delegate (Secretary) under the following provisions of
the Code.
Section 6001 of the Code provides an express delegation of
authority to the Secretary of the Treasury or her delegate (Secretary),
requiring every taxpayer to keep the records, render the statements,
make the returns, and comply with the rules and regulations that the
Secretary deems necessary to demonstrate tax liability, as prescribed,
either by notice served or by regulations.
Section 6011(a) provides an express grant of regulatory authority
for the Secretary to prescribe regulations requiring any person who is
liable for any tax imposed by the Code, or with respect to the
collection thereof, to make a return or statement according to the
forms and regulations prescribed by the Secretary. Section 6011(a) adds
that every person who is required to make a return or statement must
include the information required by forms or regulations.
In addition, section 6707A(c)(1) of the Code defines the term
``reportable transaction'' for purposes of imposing penalties under
section 6707A(a) relating to persons who fail to include on any return
or statement any information with respect to a reportable transaction
that is required under section 6011 to be included with such return or
statement. In doing so, it provides an express delegation of authority
to the Secretary, stating that, ``[t]he term 'reportable transaction'
means any transaction with respect to which information is required to
be included with a return or statement because, as determined under
regulations prescribed under section 6011, such transaction is of a
type which the Secretary determines as having a potential for tax
avoidance or evasion.''
Section 6111(a) provides an express grant of regulatory authority
for the Secretary to require that each material advisor with respect to
any reportable transaction make a return setting forth any information
as the Secretary may prescribe. Such return must be filed not later
than the date specified by the Secretary.
Finally, section 7805(a) of the Code authorizes the Secretary to
``prescribe all needful rules and regulations for the enforcement of
[the Code], including all rules and regulations as may be necessary by
reason of any alteration of law in relation to internal revenue.''
Background
I. 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 key factor is
whether an election made by the partnership in accordance with
regulations prescribed by the Secretary under section 754 of the Code
(section 754 election) is in effect.
Section 754 provides that if a section 754 election is in effect
for a partnership, the basis of its partnership property will be
adjusted, in the case of a distribution of property, in the manner
provided by section 734 of the Code, and in the case of a transfer of a
partnership interest, in the manner provided in section 743 of the
Code. Unless a section 754 election is revoked in accordance with the
regulations under section 754, the section 754 election applies to all
distributions of property by the partnership and to all transfers of
interests in the partnership in the taxable year for which the section
754 election was properly made and all subsequent taxable years.
In the case of a distribution of partnership property to a partner
by a partnership for which a section 754 election is in effect, or with
respect to which there is a substantial basis reduction as described in
section 734(d), the distribution may result in an adjustment to the
basis of the partnership's remaining property (remaining partnership
property) under section 734(b). A distribution of partnership property
may also result in an adjustment to the basis of the distributed
property under section 732(a), (b), or (d) of the Code.
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), the transfer may result in an adjustment to the basis of
partnership property under section 743(b) with respect to the
transferee partner.
B. Basis Adjustments Under Section 732
Section 732 applies to determine a distributee partner's basis in
distributed property other than money. In the case of a distribution of
partnership property other than in liquidation of the distributee
partner's partnership interest (current distribution), and except as
provided under section 732(a)(2), section 732(a)(1) 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 distribution of partnership property in
liquidation of the distributee partner's partnership interest
(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). Section 732(d) through
(f) provide additional rules applicable to certain distributed
property. See also Sec. Sec. 1.732-1 through 1.732-3.
C. Basis Adjustments Under Section 734
In the case of a distribution of property by a partnership for
which a section 754 election is 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 no section 754 election is in
effect for the partnership.
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
[[Page 2960]]
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 in the distribution only money,
unrealized receivables described in section 751(c) of the Code, or
inventory items described in section 751(d). 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 items 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 for which no section 754 election is 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 the transferee partner's 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 a section 754 election is in effect for the partnership, 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 for which a section 754 election is 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 for which no section 754 election is in effect is
subject to a mandatory basis 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.
The flush language at the end of section 743(b) provides that,
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. See generally Sec. 1.743-
1. 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 Sec. 1.743-1(d).
In the case of a transferee partner who acquired all or part of the
partner's partnership interest by a transfer with respect to which no
section 754 election was in effect for the partnership, 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 the partner's partnership interest
by a transfer from a partnership
[[Page 2961]]
for which no section 754 election is 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 prescribed by the Secretary. 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 that is related to a 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.
II. Proposed Regulations
On June 18, 2024, the Department of the Treasury (Treasury
Department) and the IRS published a notice of proposed rulemaking (REG-
124593-23) in the Federal Register (89 FR 51476) containing proposed
regulations under section 6011 (proposed regulations).\1\ The proposed
regulations would have added Sec. 1.6011-18 identifying certain
partnership related-party basis adjustment transactions as
``transactions of interest'' for purposes of sections 6011, 6111, and
6112 and Sec. 1.6011-4(b)(6). The provisions of the proposed
regulations are explained in greater detail in the preamble to the
proposed regulations.
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\1\ On July 24, 2024, a notice of correction was published in
the Federal Register (89 FR 59864) to correct minor typographical
errors in the preamble of REG-124593-23.
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The Treasury Department and the IRS received written comments in
response to the proposed regulations. The comments are available for
public inspection at <a href="http://www.regulations.gov">www.regulations.gov</a> or upon request. A public
hearing on the proposed regulations was conducted in person and
telephonically on September 17, 2024, during which two presenters
provided comments. After full consideration of the comments received,
these final regulations adopt the proposed regulations with
modifications in response to the comments as described in the Summary
of Comments and Explanation of Revisions.
Summary of Comments and Explanation of Revisions
This Summary of Comments and Explanation of Revisions summarizes
the comments received in response to the proposed regulations, and
describes and responds to comments concerning: (1) transactions of
interest generally, (2) the usefulness and burden of reporting the
transactions of interest identified by the proposed regulations, (3)
the specific transactions of interest identified by the proposed
regulations, (4) the proposed $5 million threshold amount for reporting
(proposed $5 million threshold amount), (5) the relatedness standard,
(6) substantially similar transactions, and (7) participation in a
transaction of interest identified by the proposed regulations. In
general, as described herein, the final regulations adopt several
commenters' suggestions, which limit the scope of the transactions
identified by the proposed regulations in an effort to exclude from
additional reporting certain common business transactions that do not
meet large economic thresholds.
Comments merely summarizing the statute or proposed regulations,
recommending revisions to the Code, addressing unrelated issues, or
recommending changes to IRS forms or procedures are generally not
addressed in this Summary of Comments and Explanation of Revisions or
adopted in these final regulations. Additionally, this Treasury
decision does not address comments addressing the issues and rules
specific to Notice 2024-54, 2024-28 IRB 24, which the Treasury
Department and the IRS continue to consider. Unless otherwise indicated
in this Summary of Comments and Explanation of Revisions, provisions of
the proposed regulations with respect to which no comments were
received are adopted without substantive change.
I. Transactions of Interest Generally
A. General Reporting Rules Under Sec. 1.6011-4
Section 1.6011-4(e)(2)(i) requires a taxpayer to report a
transaction entered into prior to the publication of guidance
identifying the transaction as a transaction of interest after the
filing of the taxpayer's tax return (including an amended return)
reflecting the taxpayer's participation in the transaction of interest
(later identified transaction) if the statute of limitations for
assessment of tax is still open when the transaction becomes a
transaction of interest. Under Sec. 1.6011-4(e)(2)(i), taxpayers are
generally required to report a later identified transaction by filing a
disclosure statement with the Office of Tax Shelter Analysis (OTSA)
within 90 calendar days after the date on which a transaction becomes a
transaction of interest.
Some commenters asserted that taxpayers should not be required to
report later identified transactions because taxpayers were not on
notice that certain partnership related-party basis adjustment
transactions would be identified as transactions of interest. These
commenters asserted that certain of the transactions identified in the
proposed regulations are typical business transactions for which
taxpayers would not have known to keep records. Two commenters
requested that the required time for filing a disclosure statement with
the OTSA should be expanded to one year. Another commenter recommended
that the final regulations apply prospectively to transactions of
interest that occur in taxable years beginning on or after the date of
the final regulations.
[[Page 2962]]
Although the reporting required by Sec. 1.6011-4(e)(2)(i) may
apply to transactions undertaken before the identification of the
transactions as transactions of interest, the disclosure obligation is
prospective rather than retroactive, since it arises only when the
transaction becomes a transaction of interest after the final
regulations are published in the Federal Register. Additionally,
taxpayers have been on notice since the issuance of the proposed
regulations that reporting of partnership related-party basis
adjustment transactions may soon be required. Nevertheless, given the
additional time that taxpayers may need to identify and prepare
disclosures for already-completed transactions, Sec. 1.6011-18(h)(1)
provides an extension of time of 90 additional calendar days after the
date specified in Sec. 1.6011-4(e)(2)(i) for taxpayers to meet their
obligations to disclose to the OTSA their participation in such later
identified transactions.
B. Material Advisor Rules
The proposed regulations provided no special rules for material
advisors. One commenter requested that the final regulations add an
``actual knowledge'' qualifier for material advisors such that advisors
would be required to disclose and list only those transactions
described by the proposed regulations that would be reportable based on
their actual knowledge. The rules for material advisors under sections
6111 and 6112, and the corresponding regulations under Sec. Sec.
301.6111-3 and 301.6112-1 of the Procedure and Administration
Regulations (26 CFR part 301), which apply to all transactions of
interest, do not have a knowledge qualifier. After consideration of
this comment, the Treasury Department and the IRS have determined that
adding a knowledge qualifier for this transaction of interest is not
warranted. Accordingly, this comment is not adopted in the final
regulations.
One commenter requested that the final regulations apply reporting
requirements for material advisors only prospectively for transactions
of interest that occur in taxable years beginning on or after the date
of the final regulations, or, alternatively, that material advisors be
permitted to report transactions of interest to the OTSA within one
year as opposed to by the last day of the month following the end of
the calendar quarter in which the final regulations are published.
Section 301.6111-3 sets forth the requirements for disclosures from
material advisors. In particular, Sec. 301.6111-3(e) provides that a
material advisor's disclosure statement 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 became a material advisor with respect to the
transaction. Section 301.6111-3(b)(4)(iii) provides that for a
transaction that was not a reportable transaction but is identified as
a transaction of interest in published guidance after the occurrence of
the events described in Sec. 301.6111-3(b)(4)(i), the person will be
treated as becoming a material advisor on the date the transaction is
identified as a transaction of interest. Additionally, material
advisors have been on notice since the issuance of the proposed
regulations that reporting of partnership related-party basis shifting
transactions may soon be required. However, given the additional time
that may be needed for material advisors to identify and prepare
disclosures for already-completed transactions, Sec. 1.6011-18(h)(2)
provides an extension of 90 additional calendar days after the date
specified in Sec. 301.6111-3(e) for material advisors to meet their
disclosure obligations.
II. Usefulness and Burden of Reporting the Transactions of Interest
Identified by the Proposed Regulations
A. Comments Suggesting the IRS Already Has the Information It Needs
One commenter stated that the Treasury Department and the IRS
already have sufficient information to determine that the transactions
identified by the proposed regulations are abusive and thus the
proposed regulations are unnecessary.\2\ This commenter stated that the
Treasury Department and the IRS have already concluded that the
transactions identified in the proposed regulations are abusive through
IRS positions taken in litigation and the issuance of Rev. Rul. 2024-
14, 2024-28 IRB 18 (advising taxpayers that the IRS would challenge
certain partnership related-party basis adjustment transactions under
the codified economic substance doctrine in section 7701(o) of the
Code). The commenter also asserted that transactions of interest are
reserved for transactions that have the potential for tax avoidance,
but that the Treasury Department and the IRS failed to articulate a
rational connection between ``the facts found and the choice made.''
Another commenter suggested that the proposed regulations relied on the
application of Rev. Rul. 2024-14, implying that the proposed
regulations cannot have effect if the IRS does not prevail in pending
litigation.
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\2\ The commenter also argued that it would be inappropriate to
identify the transactions identified in the proposed regulations as
listed transactions under Sec. 1.6011-4(b)(2). This comment is not
relevant to these final regulations, which solely identify certain
transactions as transactions of interest and not as listed
transactions.
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The Treasury Department and the IRS do not agree with these
comments. The final regulations identify certain partnership related-
party basis adjustment transactions as transactions of interest under
Sec. 1.6011-4(b)(6), rather than as listed transactions under Sec.
1.6011-4(b)(2). This is because the Treasury Department and the IRS
have determined that these transactions have the potential for tax
avoidance through the IRS's examination of certain transactions that
are abusive but are not aware of the entire universe of partnership
related-party basis adjustment transactions and whether every
transaction is per se abusive. As explained in the preamble to the
proposed regulations, the Treasury Department and the IRS have become
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 and wish to gather additional
information. This awareness results from the IRS's examination of
various partnership transactions involving related parties in which
basis in distributed property or partnership property is shifted in a
manner that results in significant tax benefits attributable to the
basis shift for the related parties but with little or no tax or
economic cost (abusive partnership related-party basis adjustment
transactions), thus artificially generating (or regenerating) Federal
income tax benefits that results in significant tax savings without a
corresponding economic outlay. The transactions identified as
transactions of interest in these final regulations have the potential
for tax avoidance because they share certain indicia with these abusive
partnership related-party transactions. Rev. Rul. 2024-14 contains
several examples of abusive transactions discovered by the IRS, and the
legal analysis it contains is independent of the requirement to
disclose the transactions described in these regulations as
transactions of interest. In other words, the issuance of a revenue
ruling does not preclude further scrutiny of partnership related-party
basis adjustment transactions by identifying those transactions as
transactions of interest. Similarly, pending litigation is irrelevant
to the
[[Page 2963]]
identification of these transactions as transactions of interest.
Accordingly, the final regulations do not adopt these comments.
A few commenters questioned why the Treasury Department and the IRS
need to identify certain partnership related-party basis adjustment
transactions as transactions of interest if these transactions are
already disclosed as part of the Form 1120, U.S. Corporation Income Tax
Return, or Form 1065, U.S. Return of Partnership Income. These
commenters generally contended that existing reporting requirements
already accomplish the objectives of the proposed regulations and that
adding these transactions as transactions of interest is therefore
unnecessary. One commenter recommended that instead of identifying the
transactions described in the proposed regulations as transactions of
interest, the Form 1065 should be modified to ask questions to
determine whether partnership related-party basis adjustment
transactions occurred during the taxable year.
The Forms 1120 and 1065, including statements or schedules required
to be attached thereto, are filed as a part of a taxpayer's tax return
and do not include all the information contained on Form 8886,
Reportable Transaction Disclosure Statement. The Forms 1120 and 1065
also do not alert the OTSA to the taxpayer's participation in a
transaction of interest, nor does the filing of a tax return result in
disclosure and other obligations of material advisors to the
transaction. Moreover, the purpose of the reporting requirements for a
transaction of interest is to allow the OTSA and the IRS to learn
detailed information about the identified transaction using limited
resources, and without having to distill information obtained through
annual filing requirements or to open taxpayer examinations.
Accordingly, these comments are not adopted in the final regulations.
B. Comments Addressing Compliance Burdens and Costs
Several commenters asserted that complying with the reporting
requirements for the transactions identified by the proposed
regulations would be unduly burdensome and result in excessive costs
for small businesses. One commenter asserted that the proposed
regulations stray from Congressional intent of simplicity by subjecting
family business owners and their advisors to substantial reporting
obligations and penalties. Another commenter asserted that the proposed
regulations would result in many protective disclosures that the
Treasury Department and the IRS could not handle.
The impact on taxpayers who engage in legitimate business
transactions with related parties resulting in positive partnership
basis adjustments that meet the increased threshold amounts in these
final regulations (applicable threshold amounts) discussed in Part IV
of this Summary of Comments and Explanation of Revisions, or who may
decide they need to file a protective disclosure, is far outweighed by
the benefit of requiring disclosure for the identified transactions,
which have the potential for tax avoidance. Combatting abusive tax
avoidance is a priority for the Federal Government and partnership
transactions that shift basis among related parties without a
corresponding economic or tax impact have the potential for tax
avoidance. Moreover, the identification of the transactions described
in these final regulations should not impact small business owners. If
a taxpayer is engaging in one or more of the complex transactions
identified by these final regulations with a related party that results
in positive basis adjustments in a single taxable year that exceed the
applicable threshold amounts of $10 million or more (or $25 million for
later identified transactions), the taxpayer is not likely a small
business owner and the reporting obligations outlined in these final
regulations should not be unduly burdensome. Accordingly, these
comments are not adopted in the final regulations.
C. Comments Requesting That the Proposed Regulations Be Withdrawn or
Reissued
A few commenters suggested that the proposed regulations be
withdrawn, stating that they are overbroad. One commenter suggested
that due to the number of their recommendations, the proposed
regulations should be reproposed. Another commenter suggested that the
proposed regulations be withdrawn and reproposed after the forthcoming
proposed regulations described in Notice 2024-54 are finalized. The
final regulations are narrowly tailored to identify transactions in
which taxpayers may be exploiting the mechanical basis adjustment
provisions in subchapter K to produce significant tax benefits with
little to no economic cost to the partners. Taxpayers are able to
engage in these transactions because the parties are related. In most
cases, these transactions would not likely occur between partners
negotiating on an arm's length basis. The purpose of the final
regulations is to determine the ways in which related taxpayers are
inappropriately shifting basis using the provisions of subchapter K,
how they are creating opportunities to engage in transactions that
generate inappropriate basis shifts (for example, how inside-outside
basis disparities are being created), and the economic impact of the
Federal income tax consequences created by the basis shifting
transactions (for example, the extent to which gain is reduced or cost
recovery is increased). It is in the interest of sound tax
administration to gather this information now. As disclosures pursuant
to this regulation will inform the Treasury Department and the IRS on
transactions for which further examination or further guidance may be
warranted, it does not make sense to withdraw the proposed regulations
and wait to repropose them until the forthcoming regulations described
in Notice 2024-54 are both proposed and finalized. Moreover, these
final regulations are separate from, and do not rely on, the
forthcoming proposed regulations described in Notice 2024-54. The
comments to these proposed regulations have been helpful and have
allowed the Treasury Department and the IRS to make several
modifications in response to comments that limit the scope of the
rules, as described in this Summary of Comments and Explanation of
Revisions.
III. Transactions of Interest Identified in the Proposed Regulations
The proposed regulations would have identified four kinds of
partnership related-party basis adjustment transactions as transactions
of interest. A basis adjustment transaction under proposed Sec.
1.6011-18(c)(1)(i) would occur if a 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), and a proposed $5
million threshold amount is met (section 734(b) TOI). A basis
adjustment transaction under proposed Sec. 1.6011-18(c)(1)(ii) would
occur if 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 a
proposed $5 million threshold amount is met (section 732(b) TOI). A
basis adjustment transaction under proposed Sec. 1.6011-18(c)(1)(iii)
would occur if a partnership distributes property to a partner who is
related to
[[Page 2964]]
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 a proposed $5 million threshold amount is met (section
732(d) TOI). A basis adjustment transaction under proposed Sec.
1.6011-18(c)(2) would occur if 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 (as
defined in proposed Sec. 1.6011-18(b)(6)), the basis of one or more
partnership properties is increased under section 743(b)(1) and (c),
and a proposed $5 million threshold amount is met (section 743(b) TOI).
A. General Reporting Exclusions
1. Tax-Avoidance Indicators
One commenter recommended requiring reporting only for transactions
with defined indicators of potential tax avoidance or evasion, rather
than the involvement of a related or tax-indifferent party, but did not
suggest other indicators or explain how the current indicators are
insufficient. The Treasury Department and the IRS have made
modifications to the proposed regulations as described herein to better
target the identification of transactions for which reporting is
required.
2. Basis Shifts Between Assets of Like Character
One commenter recommended excluding transactions identified as a
basis adjustment transaction of interest in cases in which (1) basis is
shifted between assets of like character (that is, capital asset to
capital asset or ordinary income asset to ordinary income asset), (2)
basis is shifted from non-recoverable property to non-recoverable
property or the basis adjustment does not provide a shorter recovery
period, and (3) the property receiving the basis increase is not sold
within two years of the basis increase. The Treasury Department and the
IRS agree that a basis shift to a like-kind asset that has the same or
a longer recovery period than the asset to which the basis was shifted
from presents less risk of tax avoidance. However, the Treasury
Department and the IRS do not agree that it would be appropriate in
such circumstances to require reporting only if the property is
disposed of within two years after the basis increase as there is still
a potential for abuse if the property is disposed of after two years. A
two-year rule would allow related taxpayers to increase the basis in
property in anticipation of a future sale and would exclude
transactions that present significant risks of tax avoidance.
Accordingly, it is in the interest of sound tax administration to
identify certain partnership related-party basis adjustment
transactions as transactions of interest in the year of the basis shift
and the commenter's recommendation is not adopted in the final
regulations.
3. Requiring Knowledge or Intent
A few commenters recommended including an intent requirement for
the transactions identified by the proposed regulations as transactions
of interest. One commenter recommended that taxpayers that are unaware
of or have no reason to know that a transaction identified by the
proposed regulations is reportable be excused from disclosure. Another
commenter recommended including a subjective test for intent and
providing safe harbors and exceptions for business separations and
succession-planning transactions.
Including an intent requirement for the transactions identified by
the proposed regulations would introduce a subjective element, which is
inconsistent with the IRS's need to gather additional information on
the identified transactions to ascertain their potential for tax
avoidance. Including an intent requirement in these regulations would
also frustrate the IRS's ability to determine which of the basis
adjustment transactions are impermissible tax avoidance transactions
and to effectively and efficiently address the tax avoidance. Moreover,
the general transaction of interest reporting requirements under
section 6011 do not include a knowledge component; taxpayers are
required to report the tax consequences of their transactions
identified as transactions of interest regardless of whether they are
aware of the reporting requirements. As further described in Parts
III.A.4 and III.E of this Summary of Comments and Explanation of
Revisions, it is not appropriate to incorporate an exception or safe
harbor for business separations or succession-planning transactions
into the final regulations as these transactions are no less likely to
be structured to avoid tax, and thus may also have the potential for
tax avoidance. Accordingly, these comments are not adopted in the final
regulations.
4. Excluding Certain Basis-Adjustment Transactions
One commenter recommended excluding certain basis-adjustment
transactions that cure inside-outside basis disparities created by
section 734(b) adjustments, section 704(c) methods, contributions,
distributions, and revaluations. Another commenter recommended that the
final regulations consider common reasons why an inside-outside basis
disparity might arise, such as transaction costs required to be
capitalized to outside basis, certain income exclusions related to
foreign corporations owned through a partnership, or the use of various
section 704(c) methods. This commenter recommended that certain
acquisitions of partnership businesses that may involve or create
related-partner relationships, including distributions of lower-tier
partnership interests to an upper-tier partnership and liquidations of
blocker subsidiaries, be excluded as transactions of interest. Another
commenter requested that the final regulations exclude partnership-
incorporation transactions, including transactions described in Rev.
Rul. 84-111, 1984-2 C.B. 88, Situation 2 (assets-up incorporation) and
Situation 3 (interests-over incorporation). A few commenters requested
that the final regulations exclude from the transactions identified as
section 732(b) TOIs and section 734(b) TOIs any basis adjustments
resulting from an actual or deemed distribution in the case of a
partnership merger or division done for commercial reasons, such as to
allow a partial sale and continuation of certain investments held by a
private equity or other investment fund.
In response to comments received on the proposed regulations, these
final regulations adopt several suggestions to limit the scope of the
transactions identified by the proposed regulations to exclude from
reporting common business transactions that do not meet large, economic
thresholds. However, providing a blanket exclusion for certain
transactions that may be common business transactions under specific
circumstances, but may also have the potential for tax avoidance, would
defeat the purpose of identifying the transactions as transactions of
interest. For example, a partnership merger or division involving
related parties may be undertaken with the intent to increase the basis
of an asset that is subsequently disposed of in a recognition
transaction or to increase cost recovery deductions. Moreover, one of
the purposes of the final regulations is to gather additional
information on
[[Page 2965]]
how taxpayers are creating opportunities to shift basis between related
parties using the provisions of subchapter K (for example, information
related to how inside-outside basis disparities are being created).
Providing an exclusion from reporting for transactions that cure
inside-outside disparities created through certain section 704(c)
methods, contributions, adjustments, distributions or revaluations
would nullify most of the disclosures required by the final regulations
as these are the techniques used to create opportunities for
partnership related-party basis shifting. For these reasons, the
commenters' suggestions for exclusions of certain transactions are not
adopted in the final regulations.
5. Publicly Traded Partnerships
One commenter expressed concern that publicly traded partnerships
within the meaning of section 7704 of the Code (PTPs) are unable to
identify the buyers and sellers of interests therein, making it
impossible to determine whether a transfer is made between related
parties. This commenter stated that PTPs frequently engage in
transactions that result in section 743(b) adjustments as part of
normal public trading and capital-markets transactions and that the
final regulations should add carveouts for transactions of PTPs. At a
minimum, the commenter recommended that the final regulations implement
an ownership threshold for related partners of five percent or more of
the PTP to allow such persons to be identified by disclosures required
to be made to the U.S. Securities and Exchange Commission. Another
commenter recommended that basis adjustments resulting from an
acquisition of a unit in a PTP, including as part of any redemption of
publicly traded units by the PTP, should be excluded from the
transactions identified as transactions of interest.
The Treasury Department and the IRS agree that due to PTPs having a
large number of PTP unitholders that are not related partners within
the meaning of the final regulations, and the unlikelihood that
unrelated PTP unitholders would engage in the transactions identified
as transactions of interest in the final regulations, it is appropriate
to exclude basis adjustments involving a transfer of or a distribution
with respect to partnership interests in a PTP, except basis
adjustments resulting from certain material transactions involving
partnership interests held by related partners in a PTP. Accordingly,
the final regulations provide that in the case of a PTP, a
participating partner means a partner of the PTP but only to the extent
that the partner engages in a private transfer (as described in Sec.
1.7704-1(e)), redemption and repurchase agreement (as described in
Sec. 1.7704-1(f)), or private placement (as described in Sec. 1.7704-
1(h)) of a partnership interest with a related partner and the
transaction is not otherwise excluded as a transaction of interest
described in the final regulations.
B. Cash as Property for Purposes of Section 734(b) TOIs
One commenter requested that the final regulations clarify that
cash is not included as ``property'' for purposes of a section 734(b)
TOI and thus positive basis adjustments resulting from a distribution
of cash be excluded from transactions identified as transactions of
interest. Another commenter asked for clarification that cash
distributions in excess of basis that result in positive basis
adjustments under section 734(b) are identified as transactions of
interest only to the extent that the distributions are made to a tax-
indifferent party.
As a general matter, the text of section 734 makes no distinction
between cash and other partnership property. A cash distribution to a
related partner could be treated as a section 734(b) TOI to the extent
that any basis increases generated under section 734(b)(1) exceed the
gain recognized under section 731(a)(1) (or otherwise) with respect to
which any tax imposed under subtitle A of the Code (subtitle A) is
required to be paid by the related partners. However, the Treasury
Department and the IRS note that if gain is recognized on a
distribution of cash that results in a basis adjustment under section
734(b)(1)(A) and tax imposed under subtitle A is required to be paid on
such gain by any of the related partners, that portion of the basis
adjustment would not be counted towards the overall applicable
threshold amount in determining whether disclosure of a transaction of
interest is required.
C. Acquisition and Integration Transactions for Purposes of Section
743(b) TOIs
A few commenters recommended excluding from a section 743(b) TOI
transactions in which a party purchases a partnership interest in an
arm's-length transaction, receives a basis adjustment under section
743(b), then transfers the partnership interest to a related person in
a nonrecognition transaction (for example, a transfer to a corporation
under section 351(a) or to a partnership under section 721(a)) that
causes a re-computation and re-allocation of the section 743(b)
adjustment for the benefit of the related-party transferee. Under the
proposed regulations, assuming the proposed $5 million threshold amount
was met, such a transaction would be reportable if the nonrecognition
transfer to the related transferee results in a positive basis
increase.
The Treasury Department and the IRS agree that a positive section
743(b) basis adjustment acquired through an arm's-length transaction
(for example, a transaction that would not be a reportable transaction
under these final regulations, without regard to the six-year lookback
period) to which a related transferee succeeds should not be a
reportable transaction, except to the extent of any additional positive
basis adjustment resulting from the nonrecognition transfer. This is
because if the original section 743(b) adjustment was acquired through
an arm's length transaction that would not be reportable under the
final regulations, a corresponding amount of gain should have been
recognized and tax imposed under subtitle A should have been paid by
the original transferor. Thus, a subsequent nonrecognition transfer by
the original transferee that results in the same section 743(b)
adjustment has little potential for tax abuse. Accordingly, the final
regulations provide that if a partner receives an interest in a
partnership from a person in a recognition transaction (first transfer)
and the basis of one or more partnership properties is increased under
section 743(b)(1) and (c), and subsequently the partner (transferor)
transfers the partnership interest to a person related to the
transferor (transferee) in a nonrecognition transaction (subsequent
transfer), the subsequent transfer is a transaction of interest only if
the transferee's basis adjustment under section 743(b)(1) and (c)
resulting from the subsequent transfer exceeds the amount of the
transferor's remaining basis adjustment that is attributable to the
transferred partnership interest (excess amount), and the applicable
threshold amount is met. The final regulations further provide that
only the excess amount is counted towards the applicable threshold
amount and that a transferor's remaining basis adjustment is equal to
the amount of the transferor's basis adjustment under section 743(b)(1)
and (c) resulting from the first transfer as adjusted under section
1016(a)(2) to reflect any recovery of the basis adjustment or as
otherwise adjusted prior to the subsequent transfer.
[[Page 2966]]
D. Transfers Between Unrelated Partners for Purposes of Section 743(b)
TOIs
Many commenters recommended excluding transfers between unrelated
parties from a section 743(b) TOI if the transferee is related to one
or more existing partners. Several of these commenters recommended that
the transaction identified by proposed Sec. 1.6011-18(c)(2) should be
limited to transfers between related transferors and transferees. The
Treasury Department and the IRS agree with this suggestion as transfers
between related parties have a clear potential for tax avoidance
whereas transfers between unrelated parties if the transferee is
related to one or more existing partners may be much harder to
structure to achieve the desired tax avoidance. Additionally, an
unrelated transferor may not have reason to know that a transferee is
related to one or more existing partners. Accordingly, the definition
of ``related partner'' in Sec. 1.6011-18(b)(9) in the final
regulations provides that in the case of a section 743(b) TOI, a
related partner means a transferor and transferee of a partnership
interest that are related to each other immediately before or
immediately after a section 743(b) TOI. The definition in the final
regulations does not include a transferee that is unrelated to a
transferor but is related to one or more of the partners in the
partnership.
E. Transfers Upon Death
For purposes of a section 743(b) TOI, proposed Sec. 1.6011-
18(b)(2) would have defined a nonrecognition transaction as defined in
section 7701(a)(45)--that is, any disposition of property in a
transaction in which gain or loss is not recognized in whole or in part
for purposes of subtitle A--other than a transfer on the death of a
partner.
One commenter requested clarification that a step up in basis that
results from the transfer of an interest on the death of a partner is
not a transaction of interest. Another commenter requested
clarification that the following transactions are ``transfers on the
death of a partner'' excluded from the definition of a nonrecognition
transaction under the final regulations: (1) any deemed transfer to
what had been a grantor trust, including an intentionally defective
grantor trust; and (2) a transfer on the death of a beneficiary of a
trust that is a partner. This same commenter requested clarification
that a ``transfer on the death of a partner'' is neither a
``nonrecognition transaction,'' nor a ``recognition transaction'' as
defined in the proposed regulations. Section 1.6011-18(c)(4) of the
final regulations clarifies that transfers on the death of a partner
are not identified as transactions of interest or as substantially
similar transactions. Section 1.6011-18(b)(13) of the final regulations
also provides that the term ``transfer on the death of a partner''
means a transfer of a partnership interest from a partner to the
partner's estate or a deemed transfer from a grantor trust owned by the
partner to a trust that becomes a separate entity for Federal income
tax purposes by reason of the partner's death.
One commenter recommended excluding distributions of partnership
property to transferees of an interest in a partnership owned (or
deemed owned) by a decedent at the time of death that occur during the
administration of the decedent's estate, or a trust created by the
decedent. This commenter also recommended excluding transfers of
partnership interests owned (or deemed owned) by a decedent that occur
during the administration of the decedent's estate or by a trust that
was created by the decedent. Although not specifically stated in the
commenter's letter, presumably, both of the commenter's recommendations
would not be relevant in cases in which a section 754 election was made
at the time of the decedent's death because there would be no disparity
between the outside basis in the decedent's partnership interest and
its share of inside basis in the partnership's properties. The Treasury
Department and the IRS agree that transfers of partnership interests
resulting from the death of a partner should be excluded from the
transactions identified as transactions of interest and thus these
transfers are not identified as such by the final regulations. However,
if a section 754 election is not made for the taxable year that
includes the death of the partner, subsequent transactions that
generate positive basis adjustments, such as distributions of
partnership property to the estate or transfers of partnership
interests to beneficiaries that may resolve an inside-outside basis
disparity created by a step-up to the basis of the decedent's
partnership interest upon death, will be included as transactions of
interest, provided that the applicable threshold amount is met. The
Treasury Department and the IRS appreciate that a section 754 election,
once made, is irrevocable without seeking permission from the IRS, and
that a section 754 election at the time of a partner's death may
require the partnership to maintain a separate set of calculations of
the transferee beneficiaries' distributive shares of partnership items
that reflect the section 743(b) adjustment. But making a section 754
election at the time of death would be the mechanism by which to avoid
the reporting requirements imposed by the regulations (assuming the
applicable threshold amount is met). Providing an exception to
reporting for transactions that result in basis adjustments because a
section 754 election was not made on the death of a partner due to
potential administrative burdens would result in additional requests
for reporting exceptions in other fact patterns in which a section 754
election was not made on an original transaction due to potential
administrative burdens, and a subsequent nonrecognition transaction
results in a basis adjustment that would otherwise be reportable.
Including such exceptions in the final regulations would defeat the
purpose of identifying the transactions of interest, as there may be
circumstances in which the lack of a section 754 election was part of a
strategy to generate more beneficial results using a transaction
identified as a transaction of interest by the regulations. Thus, these
final regulations do not exclude transactions in which a basis increase
arises because a section 754 election was not made for a transaction
that would have provided a basis adjustment to offset an inside-outside
basis disparity. The Treasury Department and the IRS note that relief
under Sec. Sec. 301.9100-1 through 301.9100-3 may be available for
section 754 elections should a partnership fail to make the election in
the time prescribed by the Code and regulations.
IV. Threshold Amount for Reporting
A. Amount Generally
Under proposed Sec. 1.6011-18(c)(3), a partnership related-party
basis adjustment transaction would have included those transactions in
which the total basis increases from all transactions described in
proposed Sec. 1.6011-18(c)(1) or (2), (d)(1) or (2) engaged in by the
same partner or partnership during the taxable year (without netting
for any basis adjustment that results in a basis decrease in the same
transaction or another transaction), reduced 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 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 resulted in a
basis increase of less than $5 million during the taxable year would
have been a transaction of
[[Page 2967]]
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.
Many commenters recommended increasing the proposed $5 million
threshold amount, asserting that the $5 million threshold was too low,
particularly considering the aggregation requirement, and would catch
common business transactions. Several commenters recommended increasing
the proposed $5 million threshold amount to an amount between $10
million and $100 million. One commenter recommended making the
threshold amount $10 million for transactions of interest occurring
after the applicability date of these final regulations and $50 million
for transactions of interest occurring before that date.
The Treasury Department and the IRS have determined that increasing
the proposed $5 million threshold amount is appropriate to reduce the
administrative burden imposed on taxpayers. The purpose of these final
regulations is to learn more about partnership related-party basis
adjustment transactions and the Treasury Department and the IRS are
conscious of overburdening taxpayers in that pursuit. Accordingly, the
final regulations provide that, in the case of related-party basis
adjustment transactions occurring within the six-year lookback period
described in Sec. 1.6011-18(c)(3)(ii), the applicable threshold amount
is $25 million. For related-party basis adjustment transactions
occurring after the six-year lookback period, the final regulations
provide an applicable threshold amount of $10 million. In each case,
the applicable threshold amount is met for a taxable year if the sum of
all related-party basis increases (as determined under Part IV.B. of
this Summary of Comments and Explanation of Revisions) resulting from
all transactions described in the final regulations of a participant
during the taxable year (without netting for any downward basis
adjustment in the same transaction or another transaction) exceeds by
at least the applicable threshold amount 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)
who are a party to such transactions. If the applicable threshold
amount is met for a taxable year, all transactions of the participant
described in the final regulations for the taxable year are reportable
as transactions of interest regardless of whether an individual
transaction meets the applicable threshold amount.
B. Calculation of Threshold Amount
Commenters also recommended changing how the threshold amount is
calculated. A few commenters recommended allowing basis increases to be
offset by basis decreases for purposes of determining whether the
threshold amount has been reached. Another commenter recommended taking
basis increases into account only to the extent that corresponding
basis decreases are borne by related parties. The same commenter
recommended exempting transactions from the proposed regulations for
which only a small portion (for example, 10 percent) of an overall
basis decrease impacts parties related to those with corresponding
basis increases, or vice versa. One commenter recommended that if its
recommendation to limit reporting to the year of the transaction of
interest is not adopted, that the threshold amount look to net taxable
income--that is, reporting should be required only if the tax benefit
reduced taxable income by the threshold amount. This commenter also
suggested eliminating aggregation of basis increases. Another commenter
recommended using a threshold amount that is not related to basis (for
example, the book value of distributed property).
The Treasury Department and the IRS agree that the calculation of
the applicable threshold amount for purposes of section 734(b) TOIs
should include only related partners' shares of basis increases and not
the shares of unrelated parties, who can negotiate transactions at
arm's length to protect their interests. The Treasury Department and
the IRS also agree that the calculation of the applicable threshold
amount for purposes of section 732(b) TOIs should exclude basis
increases that correspond to basis decreases borne by unrelated
partners (other than tax-indifferent parties) as basis decreases borne
by unrelated partners should be negotiated at arm's length unless the
unrelated partner is a tax-indifferent party. Accordingly, Sec.
1.6011-18(c)(3)(iii) of the final regulations provide that in the case
of a section 734(b) TOI, other than a substantially similar transaction
described in Sec. 1.6011-18(d)(1), for determining whether the
applicable threshold amount is met for a taxable year, a basis increase
is an increase to the adjusted basis of the partnership's property
under section 734(b)(1) and (c) only to the extent of each related
partner's share of the basis increase. Section 1.6011-18(c)(3)(iv) of
the final regulations provides that in the case of a section 732(b)
TOI, other than a substantially similar transaction described in Sec.
1.6011-18(d)(1), for determining whether the applicable threshold
amount is met for a taxable year, a basis increase is an increase to
the basis of property distributed to one of the related partners under
section 732(b) or (c), but excluding the amount of any basis increase
that corresponds to a decrease to the basis of property distributed to
unrelated partners (other than tax-indifferent parties) under section
732(b) and (c) or to unrelated partners' (other than tax-indifferent
parties') shares of a corresponding decrease to the basis of the
partnership's remaining property under section 734(b)(2) and (c). In
the case of a substantially similar transaction described in Sec.
1.6011-18 (d)(1), for purposes of determining whether the applicable
threshold amount is met for a taxable year, a basis increase is an
increase to the basis of property distributed to one of the partners
under section 732(b) or (c) only to the extent of a corresponding
decrease to the basis of property distributed to a tax-indifferent
party under section 732(b) and (c) or to one or more tax-indifferent
party's shares of a corresponding decrease to the basis of the
partnership's remaining property under section 734(b)(2) and (c). For
purposes of all of these rules, a partner's share of a basis decrease
is determined immediately after the distribution under rules similar to
the rules of Sec. 1.197-2(h)(12)(iv)(D).
The Treasury Department and the IRS do not agree, however, that
additional changes to the calculation of the applicable threshold
amount, such as eliminating aggregation, calculating the applicable
threshold amount based on increases to taxable income, or using an
economic threshold that is based on book amounts, are appropriate in
light of the modifications made. If aggregation were eliminated from
the calculation of the applicable threshold amount, taxpayers would be
incentivized to separate transactions described in the final
regulations into multiple transactions that result in positive basis
adjustments in an amount below the applicable threshold amount to avoid
reporting obligations.
[[Page 2968]]
Incentivizing such behavior would defeat the purpose of the final
regulations, which is to gather information on partnership related-
party basis adjustment transactions. Additionally, calculating the
applicable threshold amount based on taxable income or book amounts
would introduce unnecessary complexity for both taxpayers and the IRS
in identifying the transactions described in the final regulations. The
calculation of the applicable threshold amount in the final regulations
represents an appropriate methodology for quantifying the magnitude of
partnership related-party basis adjustment transactions a taxpayer
engages in for a taxable year. As described in Part IV.A of this
Summary of Comments and Explanation of Revisions, the increases to the
threshold amount made by these final regulations should also address
concerns that the applicable threshold amount is overly inclusive.
Finally, one commenter requested clarification that substantially
similar transactions are subject to the threshold amount. The Treasury
Department and the IRS clarify that a transaction cannot be a
substantially similar transaction if the applicable threshold amount is
not met. As described in part VI of this Summary of Comments and
Explanation of Revisions, transactions would be ``substantially
similar'' transactions if they are (1) expected to obtain the same or
similar types of tax consequences as the transactions described in the
final regulations, (2) factually similar or based on the same or
similar tax strategy, and (3) the applicable threshold amount is met.
V. Relatedness Standard
Proposed Sec. 1.6011-18(b)(8) would have defined ``related'' as
having a relationship described in section 267(b) (without regard to
section 267(c)(3)) or section 707(b)(1). Proposed Sec. 1.6011-18(b)(9)
would have defined ``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). Under the proposed
regulations, this relatedness requirement would have been met if the
requisite relatedness exists either immediately before or immediately
after a partnership related-party basis adjustment transaction
described in proposed Sec. 1.6011-18(c)(1) or (2).
Several commenters recommended changes to the relatedness
requirement, stating that it was overbroad and difficult to comply with
as partnerships and partners may not be able to identify their related
parties. One commenter recommended importing concepts found in section
1563(a)(2) of the Code (related to brother-sister controlled groups of
corporations) that would limit the definition of related partnerships
by taking into account common ownership of capital or profits interests
in the partnerships only to the extent that such ownership is identical
with respect to each partnership.
In the case of transactions of interest involving section 734(b) or
section 732(b) or (d), one commenter recommended requiring related
partners to own 80 percent or more of the capital or profits interests
of the partnership. Similarly, another commenter recommended that for
all purposes of the final regulations, reporting should be required
only if related parties own 80 percent or more of the capital or
profits of a participating partnership. This commenter also recommended
that the standard for relatedness be modified by substituting ``80
percent'' for ``50 percent'' in the relevant relationships defined
within sections 267(b) or section 707(b)(1).
The Treasury Department and the IRS appreciate that the standard of
relatedness used in the proposed regulations, combined with the scope
of the transactions identified as transactions of interest, the
proposed $5 million threshold amount, and the proposed definition of
participation could result in administrative burdens on partnerships
and their partners. The final regulations address these burdens by
limiting the scope of the transactions identified, increasing the
applicable threshold amounts, and limiting the application of the
subsequent realization of tax benefit rule as described in Part VII.A.
of this Summary of Comments and Explanation of Revisions. For example,
in response to comments requesting that the standard of relatedness be
narrowed, in the case of a section 734(b), 732(b) or 732(d) TOI, the
final regulations provide that only directly related partners (and not
also indirectly related partners) are considered in determining whether
partners are related within the meaning of Sec. 1.6011-18(b)(8) of the
final regulation.
The final regulations do not adopt the additional changes to the
standard of relatedness recommended by commenters because the Treasury
Department and the IRS are concerned that counting only identical
ownership as between related partnerships, or requiring related
partners to own 80 percent or more of the capital or profits interests
in a partnership, would more easily permit partnership structures with
only marginally different ownership, including through the use of
accommodation parties, to avoid such higher ownership thresholds
without substantially affecting the partners' economics. Likewise, the
Treasury Department and the IRS are concerned that increasing the
relatedness standard from 50 percent to 80 percent could allow
taxpayers to structure their affairs to stay below an 80-percent-
relatedness standard, while simultaneously engaging in abusive
partnership related-party basis adjustment transactions. Adding an
ownership threshold or increasing the relatedness standard would
frustrate the purpose of identifying the transactions described in the
proposed regulations as transactions of interest. Accordingly, the
commenters' recommendations are not adopted in the final regulations.
A commenter recommended excluding transactions between family
members from those defined as transactions of interest and focusing
instead on transactions involving controlled corporations described in
section 267(f). The commenter noted that if relatedness is determined
immediately before or after a transaction, parties undergoing divorce
may be subject to these rules even though they have competing interests
and will not be related after the divorce. Another commenter
recommended excluding brothers and sisters from a person's family for
purposes of determining relatedness, stating that, in the commenter's
experience, siblings often have a contentious business relationship and
are less likely to engage in transactions that confer large, gratuitous
economic or tax benefits to one another. The Treasury Department and
the IRS do not agree that familial relationships, including sibling
relationships, should be excluded from the definition of relatedness.
Family members, including siblings, often work in concert in ways that
arm's-length parties do not. For those reasons, Congress included these
familial relationships as part of the limitation rules in sections 267
and 707(b). Additionally, section 1041 of the Code is intended to
address transfers of
[[Page 2969]]
property between spouses incident to divorce. For these reasons, the
final regulations retain familial relationships, including sibling
relationships, in the definition of relatedness.
VI. Substantially Similar Transactions
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. 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)--that
is, if they are expected to obtain the same or similar types of tax
consequences and are either factually similar or based on the same or
similar tax strategy. Proposed Sec. 1.6011-18(a) would have provided
that substantially similar transactions include, but are not limited
to, the transactions described in proposed Sec. 1.6011-18(d).
Some commenters recommended clarifying or narrowing the definition
of ``substantially similar'' transactions generally. Several commenters
noted that the broad definition of ``substantially similar
transactions'' in Sec. 1.6011-4 increases uncertainty and compliance
costs. Suggestions to amend Sec. 1.6011-4, including that provision's
definition of a ``substantially similar'' transaction, are outside the
scope of these final regulations. As a result, the commenters'
suggestions are not adopted in the final regulations.
A. Tax-Indifferent Parties
Under proposed Sec. 1.6011-18(d)(1), a transaction would have been
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 have meant 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).
Two commenters recommended eliminating transactions involving tax-
indifferent parties from those identified as transactions of interest.
Many commenters noted that partners and partnerships may be unaware
that a person engaging in a transaction identified by the proposed
regulations is a tax-indifferent party. Some commenters requested
clarification to the definition of tax-indifferent party, such as
whether it includes direct or indirect partners that are exempt from
Federal income tax under section 115 of the Code (relating to the
income of State, territorial, or local governments), entities treated
as partnerships or S corporations for Federal tax purposes, or a person
that, due to tax attributes or for other reasons, is subject to tax on
only part of its income. One commenter requested confirmation that the
definition of a tax-indifferent party does not include a party with a
capital loss carryover. The commenter raised that a capital loss
carryover may be unrelated to a partner's partnership interest and
unknown by other partners, particularly if the partner is unrelated.
One commenter recommended limiting the rule to situations in which
the tax-indifferent party knows or has reason to know of the tax
benefits arising in connection with its participation in a basis-
adjustment transaction and that the other partners that are party to
the transaction know of the partner's tax-indifferent status. One
commenter recommended an exception for taxpayers who do not have
knowledge or reason to know that its transaction is reportable because
a person that is a party to the transaction is tax-indifferent. Another
commenter recommended modifying the tax-indifferent party rule to apply
only to situations in which the taxpayer knowingly participates in the
transaction to which the tax-indifferent party facilitates a basis
step-up.
Eliminating the tax-indifferent party rule would frustrate the
purpose of identifying substantially similar transactions to the
identified transactions of interest that use tax-indifferent parties
instead of related parties to achieve the same economic or tax results.
Accordingly, the Treasury Department and the IRS decline to eliminate
the tax-indifferent party rule entirely in the final regulations.
However, in response to these comments, the Treasury Department and the
IRS have determined that certain changes to the scope of transactions
of interest involving tax-indifferent parties are appropriate.
Accordingly, the final regulations include a knowledge element in
the definition of a tax-indifferent party. Section 1.6011-18(b)(12) of
the final regulations provides that a tax-indifferent party means a
person that is either not liable for Federal income tax by reason of
its tax-exempt or, in certain cases, foreign status, or to which any
gain, or portion of any gain, that would have resulted from a section
732(b) TOI or a section 734(b) TOI if the property subject to a basis
decrease in such transaction were sold immediately after such
transaction, would not result in Federal income tax liability for the
person's taxable year within which such gain would have been
recognized, and whose status as a tax-indifferent party is known or
should be known to any other person that participates in the
transaction or to a partner in a partnership that participates in such
a transaction. Thus, a tax-indifferent party would include a person
that is partially taxable, for example, due to tax attributes, to the
extent that the person's status as a tax-indifferent party is known or
should be known by any other person participating in the transaction or
to a partner in a partnership that participates in such a transaction.
Because partnerships or S corporations are generally not liable for
tax, and because the tax status of their partners or shareholders could
be diverse, the final regulations also provide that partnerships or S
corporations are not tax-indifferent parties except in cases in which a
principal purpose of the use of the partnership or S corporation is to
avoid tax-indifferent party status.
Additionally, the final regulations limit the scope of a
substantially similar transaction with a tax-indifferent party under
Sec. 1.6011-18(d)(1) by limiting the calculation of the applicable
threshold amount to basis increases that correspond to a basis decrease
to the tax-indifferent party for sections 732 and 734 TOIs. See Part
IV.B. of this Summary of Comments and Explanation of Revisions. These
modifications are intended to address concerns that the tax-indifferent
party rules in the proposed regulations were overbroad.
The final regulations also clarify that a transaction with a tax-
indifferent party includes a transaction in which the tax-indifferent
party facilities the increase in the basis of partnership property in a
section 732 TOI by having a share of a corresponding decrease to the
basis of partnership property.
B. Recognition Transactions
Proposed Sec. 1.6011-18(d)(2) would have defined as a
substantially similar transaction a transaction in which a partner
transfers the partner's partnership interest in a recognition
[[Page 2970]]
transaction to a related transferee or to a person related to one or
more existing partners, and the proposed $5 million threshold amount
was met. Proposed Sec. 1.6011-18(b)(6) would have defined a
``recognition transaction'' as a transaction other than a
nonrecognition transaction.
One commenter requested clarification that proposed Sec. 1.6011-
18(d)(2) applies only to transfers between related parties, meaning the
transferor and transferee must be related. The Treasury Department and
the IRS agree with this comment and have made clarifying changes to
confirm that the rule in Sec. 1.6011-18(d)(2) does not apply to
transfers of partnership interests between persons that are not
related.
VII. Participation in a Transaction of Interest Identified by the
Proposed Regulations
A. Subsequent Realization of Tax Benefit Rule
Under proposed Sec. 1.6011-18(e)(2)-(4), a participating
partnership, participating partner, or related subsequent transferee
would have participated in a transaction of interest in any taxable
year in which it participates in a transaction described in proposed
Sec. 1.6011-18(c). Additionally, under proposed Sec. 1.6011-18(e)(5),
a participating partnership, participating partner, or related
subsequent transferee would have participated in a transaction of
interest in any taxable year in which its tax return reflected the tax
consequences of a basis increase resulting from a transaction described
in proposed Sec. 1.6011-18(c) (subsequent realization of tax benefit
rule). Therefore, under the proposed regulations, as a result of the
subsequent realization of tax benefit rule, a transaction described in
proposed Sec. 1.6011-18(c) that occurred many years ago could require
reporting if a taxpayer's tax return in an open tax year reflected the
tax consequences (such as cost-recovery deductions) arising from the
transaction of interest.
Several commenters recommended eliminating the retroactive effect
of the subsequent realization of tax benefit rule. These commenters
stated that complying with the rule would be burdensome given that it
could require taxpayers and their advisors to reconstruct transactions
and their resulting tax consequences from many years ago. Commenters
asserted that, in many cases, taxpayers and their advisors will not
have sufficient information to comply with the rule.
Several commenters recommended that the proposed regulations apply
prospectively to transactions that occur in taxable years beginning on
or after the date the final regulations are adopted, whereas one
commenter recommended applying the proposed regulations solely to
transactions effected on or after January 1, 2023. One commenter
recommended applying the subsequent realization of tax benefit rule
only to partnership related-party basis adjustment transactions that
occur within partnership tax years that remain open under the period of
limitations set forth in section 6235 of the Code. Section 6235
provides rules on the period of limitations for making adjustments with
respect to partnerships subject to the Centralized Partnership Audit
Regime under the Bipartisan Budget Act of 2015 (BBA partnerships).
Under section 6235(a)(1), the time for the IRS to make an adjustment
for a taxable year of a BBA partnership generally is the later of the
date which is three years after the latest of (1) the date on which the
partnership return for the taxable year was filed, (2) the return due
date for the taxable year, or (3) the date on which the partnership
filed an administrative adjustment request under section 6227 of the
Code with respect to the taxable year. In the case of a BBA partnership
that makes a substantial omission of gross income within the meaning of
section 6501(e)(1), section 6235(c)(2) provides that the period of
limitations on making adjustments is six years instead of three years.
The Treasury Department and the IRS do not agree with eliminating
all reporting that would occur under the subsequent realization of tax
benefit rule as this would defeat the purpose of providing the IRS with
information regarding transactions with tax consequences occurring over
more than one taxable year. However, the Treasury Department and the
IRS agree that it is appropriate to limit the retroactive information
effect of the subsequent realization of tax benefit rule because of
administrative concerns with compliance for transactions that would
meet the elements of Sec. 1.6011-18(c) and (d) except that they
occurred many years ago.
In determining the appropriate limitation for the subsequent
realization of tax benefit rule, limiting the look back period to the
prior six years as recommended by one commenter allows the IRS to
preserve its ability to assess tax in cases in which the statute of
limitations for assessment of tax is six years pursuant to section
6501(e) or section 6235(c)(2). In addition, a six-year lookback period
aligns with the requirement under Sec. 301.6112-1(b)(2) that material
advisors of transactions of interests maintain lists of advisees, but
not if the person entered into the transaction more than six years from
the date the transaction was identified as a transaction of interest
under published guidance. Accordingly, the final regulations adopt a
six-year lookback period for required disclosures. Under the final
regulations at Sec. 1.6011-18(f)(2), for a taxable year described in
Sec. 1.6011-4(e)(2)(i), a participant must provide the information
described in the final regulations only if the transaction of interest
occurred within the six-year lookback period. Section 1.6011-18(b)(11)
of the final regulations provides that the six-year lookback period
means the seventy-two months immediately preceding the first month of
the taxpayer's most recent taxable year that began before January 14,
2025. The final regulations include examples demonstrating the six-year
lookback period rule.
B. Limiting the Definition of Participation
Several commenters recommended requiring reporting only in the
taxable year the transaction of interest occurs and eliminating the
subsequent realization of tax benefit rule. These commenters asserted
that reporting only in the year in which the transaction of interest
first arises would reduce compliance burdens and costs for taxpayers
and limit the potential for missed reporting. One commenter suggested
adopting a one-time disclosure mechanism like that adopted in Form
1065, Schedule B, questions 11 and 12 for the ``drop and swap'' or
``swap and drop'' transactions to which section 1031 of the Code
applies. Another commenter recommended requiring reporting only at the
partnership level to avoid duplicative reporting. Reporting by all
participants in any taxable year in which the participant's tax return
reflects the tax consequences of a basis increase resulting from a
transaction of interest is the most appropriate for tax compliance and
administration. Accordingly, the commenters' recommendations are not
adopted in the final regulations.
Special Analyses
I. Paperwork Reduction Act
The collection of information contained in these final regulations
is reflected in the collection of information for Form 8886 and Form
8918, Material Advisor Disclosure Statement, that have been reviewed
and approved by the
[[Page 2971]]
Office of Management and Budget (OMB) in accordance with the Paperwork
Reduction Act (44 U.S.C. 3507(c)) under control numbers 1545-1800 and
1545-0865.
To the extent there is a change in burden as a result of these
final regulations, the change in burden will be reflected in the
updated burden estimates for the Forms 8886 and 8918. The requirement
to maintain records to substantiate information on Forms 8886 and 8918
is already contained in the burden associated with the control number
for the forms and remains unchanged.
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 OMB control number.
II. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) (5 U.S.C. chapter 6) requires
agencies to ``prepare and make available for public comment an initial
regulatory flexibility analysis,'' which will ``describe the impact of
the rule on small entities.'' Section 605(b) of the RFA allows an
agency to certify a rule if the rulemaking is not expected to have a
significant economic impact on a substantial number of small entities.
The Secretary of the Treasury hereby certifies that these final
regulations will not have a significant economic impact on a
substantial number of small entities pursuant to the RFA. This
certification is based on IRS data that estimates the percentage of
partnerships that would have been required to file a disclosure
statement under the proposed regulations and those that may be required
to file a disclosure statement under the final regulations.
The IRS's Research, Applied Analytics, and Statistics division
(RAAS) provided data that indicated the percentage of partnerships with
gross receipts or sales of $25 million or less that might have been
subject to the disclosure obligations under the proposed regulations
because of a basis adjustment under section 743(b) of more than $5
million during the taxable year. In addition, RAAS provided data that
indicated the percentage of partnerships with gross receipts or sales
of $25 million or more that might have been subject to the disclosure
obligations under the proposed regulations because of a basis
adjustment under section 743(b) of more than $5 million during the
taxable year. The data suggested that of all partnerships with related
parties and a basis adjustment under section 743(b) of more than $5
million during the taxable year, approximately two-thirds of the
partnerships would have gross receipts or sales of $25 million or less
and approximately one-third would have gross receipts or sales of $25
million or more. The Treasury Department and the IRS determined that
the data did not indicate that the proposed regulations would have a
significant economic impact on a substantial number of small entities
because not all partnerships with gross receipts or sales of $25
million or less are considered small businesses,\3\ and the data did
not provide information on whether the partnerships with gross receipts
or sale of $25 million or less were part of larger enterprises.
---------------------------------------------------------------------------
\3\ See, 13 CFR 121.201.
---------------------------------------------------------------------------
As discussed in Part II of the Summary of Comments and Explanation
of Revisions, several commenters stated that the scope of the proposed
regulations would be overbroad and the number of entities that would be
subject to disclosure was underestimated. In addition, commenters
asserted that taxpayers would be subject to substantial costs for
complying with the proposed regulations because compliance required
reviewing transactions from prior taxable years to determine whether a
continuing tax benefit was attributable to a transaction identified as
a transaction of interest under the proposed regulations. These
comments are addressed in Parts II and VII of the Summary of Comments
and Explanation of Revisions.
One commenter asserted that the Treasury Department and the IRS
underestimated the likely cost of complying with the proposed
regulations. Specifically, the commenter asserted that the likely wage
of tax preparers and costs of due diligence, as well as the number of
parties affected by each transaction of interest were underestimated.
As indicated in the Summary of Comments and Explanation of
Revisions, the final regulations include changes that should
significantly limit the total number of entities and more specifically,
small businesses, subject to the disclosure obligations. Most
significantly, the applicable threshold amount is increased from $5
million to $10 million; the period for reporting under Sec. 1.6011-
4(e)(2)(i) is limited to a six-year lookback period and the applicable
threshold amount for the six-year lookback period is $25 million; in
the case of a section 734(b) TOI, the applicable threshold amount is
determined by generally only taking into account only the amount of the
basis increase shared by related partners; in the case of a section
732(b) TOI, the applicable threshold amount is determined by generally
only taking into account only the amount of the basis increase that
corresponds to a basis decrease shared by the related partners.
In addition, more recent data from the IRS indicates that, in the
case of partnerships with gross assets of less than $25 million that
reported basis adjustments under section 734(b) or section 743(b) for
the taxable year, the average basis adjustment was less than the
applicable threshold amount of $10 million or more in the final
regulations. Thus, the Treasury Department and the IRS anticipate that
many partnerships with gross assets of less than $25 million should not
be subject to the disclosure obligations under the final regulations.
Further, the data indicates that partnerships with gross assets of more
than $25 million that reported basis adjustments under section 734(b)
or section 743(b) for the taxable year that met the applicable
threshold amount of $10 million or more in the final regulations
represent less than one percent of all partnerships that filed tax
returns for the taxable year. Accordingly, as a result of the changes
made to the final regulations in response to comments received on the
proposed regulations, the disclosure obligations in the final
regulations should affect a low percentage of partnerships and most of
those partnerships will be partnerships with less than $25 million of
gross assets.
The final regulations should not have a significant economic impact
on small entities subject to the reporting requirements of the final
regulations because the final regulations merely implement sections
6011, 6111 and 6112 and Sec. 1.6011-4 by specifying the manner in
which and the time at which a transaction identified as a transaction
of interest in the final regulations must be reported. Accordingly,
because the final regulations will 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 estimated that the appropriate wage rate for complying with
the proposed regulations is $102.00 (2022
[[Page 2972]]
dollars) per hour. Thus, it was estimated that persons required to
comply with the proposed regulations would have incurred costs totaling
approximately $2,194.70 per filing. One commenter indicated that this
per hour dollar amount is too small and that a better estimate is
approximately $177.29 per hour or approximately $3,814.69 per filing
(subject to the taxpayer potentially seeking specialists with a higher
hourly fee to comply with the proposed regulations). Either of these
amounts is small in comparison to an aggregate basis increase of $10
million or more as the result of a transaction identified as a
transaction of interest under the final regulations. Thus, the
relatively small cost to comply with the final regulations will not
pose any significant economic impact to any small entities that would
be subject to the final regulations.
For the reasons stated, a regulatory flexibility analysis under the
RFA is not required. Pursuant to section 7805(f) of the Code, the
proposed rule preceding this rulemaking was submitted to the Chief
Counsel for the Office of Advocacy of the Small Business Administration
for comment on its impact on small business, and no comments were
received.
III. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 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 in 1995 dollars, updated annually for
inflation. This 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.
IV. 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. These final regulations do not have
federalism implications and do not impose substantial direct compliance
costs on State and local governments or preempt state law within the
meaning of the Executive order.
V. Regulatory Planning and Review
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.
VI. Congressional Review Act
Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.),
the Office of Information and Regulatory Affairs has designated this
rule as not a ``major rule,'' as defined by 5 U.S.C. 804(2).
Statement of Availability of IRS Documents
Guidance cited in this preamble is published in the Internal
Revenue Bulletin and is available from the Superintendent of Documents,
U.S. Government Publishing Office, Washington, DC 20402, or by visiting
the IRS website at <a href="https://www.irs.gov">https://www.irs.gov</a>.
Drafting Information
The authors of these regulations are Elizabeth Zanet and Cameron
Williamson, Office of the Associate Chief Counsel (Passthroughs and
Special Industries). However, other personnel from the Treasury
Department and the IRS participated in their development.
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.
(3) Participating partner means--
(i) Except as provided in paragraph (b)(3)(ii), (iii), or (iv) of
this section, any partner that directly receives a distribution of
property from, or an interest in, a participating partnership, or
directly transfers an interest in a participating partnership, in a
transaction described in paragraph (c) or (d) of this section,
including a person that becomes or ceases to be a partner as a result
of such transaction.
(ii) 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.
(iii) In the case of a participating partnership interest held by a
trust for which the grantor or another person is treated as the owner
of the trust that holds the participating partnership interest as
provided in 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 the trust that holds the participating
partnership interest.
(iv) In the case of a publicly traded partnership within the
meaning of section 7704 of the Code, participating partner means a
partner of the publicly traded partnership but only to the extent that
the partner engages in a private transfer (as described in Sec.
1.7704-1(e)), redemption or repurchase agreement (as described in Sec.
1.7704-1(f)), or private placement (as described in Sec. 1.7704-1(h))
of a partnership interest with a related partner and the transaction is
not otherwise excluded as a transaction described in paragraph (c) or
(d) of this section.
(4) Participating partnership means any partnership--
(i) That makes a distribution of property to a participating
partner in a
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transaction described in paragraph (c)(1) or (d)(1) of this section, or
(ii) A partnership interest in which is transferred by a
participating partner in a transaction described in paragraph (c)(2) or
(d)(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 means:
(i) In the case of a transaction described in paragraph (c)(1) of
this section, two or more direct partners of a partnership 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) or
(d)(2) of this section, a transferor and transferee of a partnership
interest that are related to each other immediately before or
immediately after a transaction described in paragraph (c)(2) of this
section.
(10) Related subsequent transferee means any person that 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 from a transaction described in
paragraph (c) or (d) of this section.
(11) Six-year lookback period means the seventy-two months
immediately preceding the first month of the taxpayer's most recent
taxable year that began before January 14, 2025.
(12) Tax-indifferent party means a person that is either not liable
for Federal income tax by reason of the person's tax-exempt or, in
certain cases, foreign status, or to which any gain, or portion of any
gain, that would have resulted from a transaction described in
paragraph (d)(1) of this section if the property subject to a basis
decrease in such transaction were sold immediately after such
transaction would not result in Federal income tax liability for the
person's taxable year within which such gain would have been
recognized, and whose status as a tax-indifferent party is known or
should be known to any other person that participates in a transaction
described in paragraph (d)(1) of this section or to a partner in a
partnership that participates in such a transaction. A tax-indifferent
party does not include a partnership or S corporation except in a case
in which a principal purpose of the use of the partnership or S
corporation is to avoid tax-indifferent party status.
(13) Transfer on the death of a partner means a transfer of a
partnership interest from a partner to the partner's estate or a deemed
transfer from a grantor trust owned by the partner to a trust that
becomes a separate entity for Federal income tax purposes by reason of
the partner's death.
(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 a partnership. A partnership with two or more
related partners engages in any of the transactions described in
paragraphs (c)(1)(i) through (iii) of this section as follows:
(i) The partnership distributes property to one of the related
partners 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 applicable threshold
described in paragraph (c)(3) of this section is met.
(ii) The partnership distributes property to one of the related
partners in liquidation of that person's partnership interest (or in
complete liquidation of the partnership), the basis of one or more of
those distributed properties is increased under section 732(b) and (c)
of the Code, and the applicable threshold described in paragraph (c)(3)
of this section is met.
(iii) The partnership distributes property to one of the related
partners, the basis of one or more of those distributed properties is
increased under section 732(d) of the Code, the distributee 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 applicable threshold described in paragraph
(c)(3) of this section is met.
(2) Transfers of a partnership interest--(i) In general. Except as
otherwise provided in paragraph (c)(2)(ii) or (c)(4) of this section, a
partner transfers all or a portion of a partnership interest 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 applicable threshold described in paragraph
(c)(3) of this section is met.
(ii) Subsequent nonrecognition transfers--(A) In general. If a
partner receives an interest in a partnership from a person in a
recognition transaction (first transfer) and the basis of one or more
partnership properties is increased under section 743(b)(1) and (c) of
the Code, and subsequently the partner (transferor) transfers the
partnership interest to a person related to the transferor (transferee)
in a transaction described in paragraph (c)(2)(i) of this section
(subsequent transfer), the subsequent transfer is a transaction
described in paragraph (c)(2)(i) of this section only to the extent, if
any, that the transferee's basis adjustment under section 743(b)(1) and
(c) resulting from the subsequent transfer exceeds the amount of the
transferor's remaining basis adjustment described in paragraph
(c)(2)(ii)(B) of this section that is attributable to the transferred
partnership interest (excess amount), and the applicable threshold
described in paragraph (c)(3) of this section is met. Only the excess
amount is counted towards the applicable threshold described in
paragraph (c)(3) of this section.
(B) Transferor's remaining basis adjustment. A transferor's
remaining basis adjustment is equal to the amount of the transferor's
basis adjustment under section 743(b)(1) and (c) resulting from the
first transfer as adjusted under section 1016(a)(2) of the Code to
reflect the recovery of the basis adjustment or as otherwise adjusted
prior to the subsequent transfer.
(3) Applicable threshold--(i) In general. Except as otherwise
provided in paragraph (c)(3)(ii) of this section, for determining
whether a transaction is described in paragraph (c)(1) or (2), (d)(1)
or (2) of this section, the applicable 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 that results in a basis
decrease in the same transaction or another transaction) exceeds by at
least $10 million the gain recognized from such transactions during the
same taxable year, 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 paragraph (d)(1) of
this section) who are a party to such transactions.
(ii) Six-year lookback period threshold. In the case of a
transaction described in (c) or (d) of this section that
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occurred within the six-year lookback period, paragraph (c)(3)(i)
applies by substituting ``$25 million'' for ``$10 million'' for
determining whether the applicable threshold is met for a taxable year.
(iii) Basis increase under section 734(b) and (c) only for shares
of basis increase to related partners. In the case of a transaction
described in paragraph (c)(1)(i) of this section for determining
whether the applicable threshold is met for a taxable year, a basis
increase is an increase to the adjusted basis of the partnership's
property under section 734(b)(1) and (c) only to the extent of a
related partner's share of the basis increase. For purposes of this
paragraph (c)(3)(iii), a partner's share of a basis increase is
determined immediately after the distribution under rules similar to
the rules of Sec. 1.197-2(h)(12)(iv)(D).
(iv) Basis increase under sections 732(b) or (c) only for shares of
corresponding basis decreases under section 734(b) to related partners
or tax-indifferent parties. In the case of a transaction described in
paragraph (c)(1)(ii) of this section for determining whether the
applicable threshold is met for a taxable year, a basis increase is an
increase to the basis of property distributed to one of the related
partners under section 732(b) or (c), but excluding the amount of any
basis increase that corresponds to a decrease to the basis of property
distributed to unrelated partners (other than tax-indifferent parties)
under section 732(b) and (c) or to unrelated partners' (other than tax-
indifferent parties') shares of a corresponding decrease to the basis
of the partnership's remaining property under section 734(b)(2) and
(c). For purposes of this paragraph (c)(3)(iv), a partner's share of a
basis decrease is determined immediately after the distribution under
rules similar to the rules of Sec. 1.197-2(h)(12)(iv)(D). In the case
of a transaction described in paragraph (d)(1) of this section, for
purposes of determining whether the applicable threshold is met for a
taxable year, a basis increase is an increase to the basis of property
distributed to one of the partners under section 732(b) or (c) only to
the extent of a corresponding decrease to the basis of property
distributed to a tax-indifferent party under section 732(b) and (c) or
to one or more tax-indifferent party's shares of a corresponding
decrease to the basis of the partnership's remaining property under
section 734(b)(2) and (c).
(4) Exclusion of a transfer on the death of a partner. A
transaction described in paragraph (c)(2) or (d)(2) of this section
does not include a transfer of a partnership interest that is a
transfer on the death of a partner within the meaning of paragraph
(b)(13) of this section.
(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)(1)(i) or (ii)
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 an increase in the basis of
partnership property or an increase in the basis of property held by
another partner in the partnership by receiving a distribution of
property from the partnership or having a share of a corresponding
decrease to the basis of partnership property, and the applicable
threshold described in paragraph (c)(3) of this section is met; and
(2) A transaction in which a transferor transfers an interest in a
partnership to a transferee that is related to the transferor in a
recognition transaction, and the applicable 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 or a substantially similar transaction described in
paragraph (d) 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)(1) of this section
or a substantially similar transaction described in paragraph (d)(1) of
this section in any taxable year in which the partner directly receives
a distribution of property, or directly transfers or receives an
interest in a participating partnership, in a transaction described in
paragraph (c)(2) of this section or a substantially similar transaction
described in paragraph (d)(2) of this section.
(3) Participating partnerships. A participating partnership
participates in a transaction of interest described in paragraph (c) or
a substantially similar transaction described in paragraph (d) 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) or (d)(1) of this section, or a
participating partnership interest is transferred in a transaction
described in paragraph (c)(2) or (d)(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 or a substantially similar transaction described in
paragraph (d) 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) or (d) of this section that was required to be
disclosed under paragraph (f) 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) or a substantially similar transaction described in paragraph (d)
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) or (d) of this section, taking
into account the limitations provided in paragraphs (c)(3)(iii) and
(iv) 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 taxable year in which the transaction
of interest occurred, the participating partner participates in a
transaction of interest described in paragraph (c) of this section in
the taxable year of the basis increase and in the taxable year of the
sale.
(f) Disclosure requirements--(1) In general. Except as otherwise
provided in this paragraph (f)(1), 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), and in the manner described in Sec. 1.6011-4(e), for each
taxable year in which the participant participated in a transaction
described in paragraph (c) or (d) 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) or (d) of this section. In the
case of a participant that is a tax-indifferent party, the disclosure
requirements of this paragraph (f) apply only if the tax-indifferent
party is otherwise required to file a tax return (or an information
return) for the taxable year of the
[[Page 2975]]
transaction described in paragraph (d)(1) of this section.
(i) The names and identifying numbers of all participants,
including the participating partnership, participating partners and any
related subsequent transferees.
(ii) All basis adjustments resulting from a transaction described
in paragraph (c) or (d) of this section, including--
(A) Basis information, including the participating partnership's
adjusted basis in the distributed property immediately before the
distribution,
(B) Any adjustments to basis under section 732(a)(2), (b), (d) or
section 734(b),
(C) Any adjustments to basis under section 743(b) with respect to a
participating partner that is transferred an interest in a
participating partnership, and
(D) 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) or
(d) of this section, including any cost recovery allowances
attributable to any increase in basis as a result of a transaction
described in paragraph (c) of this section, and any gain or 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) or (d) of this section. The Federal income tax consequences
attributable to an increase in basis resulting from a transaction
described in paragraph (c) or (d) of this section are limited to those
attributable to the increase in basis, taking into account the
limitations of paragraph (c)(3)(iii) or (iv) of this section. For
example, in the case of a distribution of depreciable property that was
subject to an increase in basis because of a transaction described in
paragraph (c) or (d) of this section, the Federal 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) Six-year lookback period for taxable years described in special
rule of Sec. 1.6011-4(e)(2)(i). For purposes of the special rule of
Sec. 1.6011-4(e)(2)(i) (describing the disclosure requirement with
respect to a transaction that is identified as a transaction of
interest after the filing of the taxpayer's tax return (including an
amended return) reflecting the taxpayer's participation in the
transaction of interest but before the end of the period of limitations
for assessment of tax for such taxable year), a participant must
provide the information described in paragraph (f)(1) of this section
for such open years only if the transaction described in paragraph (c)
or (d) of this section occurred within the six-year lookback period
described in paragraph (b)(11) of this section.
(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 2025, 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 $10 million in Partner A's hands. On its
tax return for taxable year 2025, Partner A reports deductions for
depreciation expense attributable to the $10 million increase in the
basis of Property X resulting from the transaction under paragraph
(c)(1)(ii) of this section. In addition, ABC Partnership must reduce
the basis of its remaining property under section 734(b)(2) as a result
of the distribution of Property X to Partner A by $10 million. ABC
Partnership and Partner A use the calendar year as their taxable year.
(ii) Analysis. Partner A is a participant during taxable year 2025
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 2025 in a transaction described in paragraph (c) of this
section. ABC Partnership is a participant during taxable year 2025
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 2025 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 2025. Partner A must
include the information described in paragraph (f) of this section,
including the amount of the deductions attributable to the $10 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 2025,
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 the Office of Tax Shelter
Analysis (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 2026 through 2030,
Partner A reports deductions for depreciation expense attributable to
the $10 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 2025.
(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 2026 through 2030 as the Federal income tax consequences
of the transaction described in paragraph (c)(1)(ii) of this section.
As a result, for each of taxable years 2026 through 2030, 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 for the taxable year attributable to the $10
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 2025, instead of distributing a depreciable asset, ABC
Partnership distributes a nondepreciable asset, Land with an adjusted
basis of $5
[[Page 2976]]
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 $15 million in Partner A's hands. Subsequently
in the same taxable year 2025, 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 use the calendar
year as their taxable year.
(ii) Analysis. Partner A is a participant during taxable year 2025
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 Partner A directly received a distribution of property
during taxable year 2025 in a transaction described in paragraph (c) of
this section. ABC Partnership is a participant during taxable year 2025
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 2025 in a transaction
described in paragraph (c) of this section. AX Partnership is a
participant during taxable year 2025 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 2025 that was subject to an increase in
basis because 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 2025. 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 2025, 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 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 2025. In
addition, Partner A, ABC Partnership and AX Partnership must send a
copy of their respective Form 8886 (or successor form) to the 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 2026,
AX Partnership disposes of Land in a taxable sale for its fair market
value of $15 million and recognizes no gain or loss.
(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 2026 as the
Federal income tax consequences of the transaction described in
paragraph (c)(1)(ii) of this section. AX Partnership must file the form
with its tax return for taxable year 2026. Partner A does not have a
disclosure requirement with respect to AX Partnership's disposition of
Land because the disposition is a subsequent realization of a tax
benefit within the meaning of paragraph (e)(5) of this section with
respect to AX Partnership.
(5) Example 5. Reporting of a transaction of interest that occurred
within the six-year lookback period--(i) Facts. The facts are the same
as in paragraph (g)(1)(i) of this section (Example 1), except that
instead of ABC Partnership distributing Property X in taxable year
2025, the distribution is made in May of taxable year 2022, which is
within the six-year lookback period described in paragraph (b)(11) of
this section. That is, the distribution occurred within the seventy-two
months immediately preceding January 2025, the first month of the
taxpayer's most recent taxable year that began before January 14, 2025.
Further, taxable year 2022 is an open taxable year subject to the
special rule of Sec. 1.6011-4(e)(2)(i). Additionally, neither Partner
A nor ABC Partnership engages in any other transaction described in
paragraph (c) or (d) of this section for taxable year 2022.
(ii) Analysis. Because the transaction occurred within the six-year
lookback period described in paragraph (b)(11) of this section, the
applicable threshold described in paragraph (c)(3)(i) of this section
is $25 million as provided in paragraph (c)(3)(ii) of this section. The
distribution of Property X to Partner A is not a transaction described
in paragraph (c)(1)(ii) of this section with respect to either Partner
A or ABC Partnership because the applicable threshold is not met for
taxable year 2022. Had the applicable threshold for taxable year 2022
been met, all the information required by paragraph (f)(1) of this
section must be reported in its disclosure for taxable year 2022 and
for any subsequent taxable year for which the taxpayer's return
reflected the tax consequences of the transaction.
(6) Example 6. No reporting of a transaction of interest for
transaction that occurred prior to the six-year lookback period--(i)
Facts. The facts are the same as in paragraph (g)(1)(i) of this section
(Example 1), except that as a result of the distribution of Property X
to Partner A, the basis of Property X is increased by $30 million, and
the distribution occurred in December of taxable year 2018, which is
prior to the six-year lookback period described in paragraph (b)(11) of
this section. That is, the transaction occurred prior to January 2019,
which is the beginning of the seventy-two-month period that ends in
December 2024. In addition, taxable year 2018 is an open taxable year
subject to the special rule of Sec. 1.6011-4(e)(2)(i). Further,
Partner A realized Federal income tax consequences (depreciation
expense) in taxable year 2019 attributable to the $30 million increase
to the basis of Property X and taxable year 2019 is an open taxable
year subject to the special rule of Sec. 1.6011-4(e)(2)(i).
(ii) Analysis. Because taxable year 2018 is not within the six-year
lookback period, under paragraph (f)(2) of this section, neither the
distribution of Property X to Partner A, nor any of the Federal income
tax consequences arising in that taxable year or later taxable years
(such as depreciation expense in taxable year 2019 or any later taxable
year) from such distribution, is required to be disclosed under
paragraph (f) of this section and Sec. Sec. 1.6011-4(d) and (e).
(7) Example 7. Corresponding basis decrease under section
734(b)(2)(B) shared by an unrelated partner--(i) Facts. The facts are
the same as in paragraph (g)(1)(i) of this section (Example 1), except
Partner C is unrelated to Partners A and B and is not a tax-indifferent
party. As a result of the
[[Page 2977]]
distribution of Property X to Partner A, and the increase to the basis
of Property X by $10 million in Partner A's hands, ABC Partnership is
required to reduce the adjusted basis of its remaining properties under
section 734(b)(2)(B) by $10 million. Partner B's and Partner C's share
of ABC Partnership's basis decrease to its remaining properties is $5
million each. Neither Partner A nor ABC Partnership engages in any
other transaction described in paragraph (c) of this section for
taxable year 2025.
(ii) Analysis. For purposes of paragraphs (c)(1)(ii) and (c)(3)(i)
of this section, under paragraph (c)(3)(iv) of this section, only $5
million of the $10 million basis increase to Property X counts toward
the applicable threshold because $5 million of the basis increase
corresponds to unrelated Partner C's share of the decrease to the basis
of ABC Partnership's remaining properties under section 734(b)(2)(B)
and thus, is excluded from the calculation of the applicable threshold.
Thus, the distribution of Property X to Partner A is not a transaction
described in paragraph (c)(1)(ii) of this section with respect to
either Partner A or ABC Partnership because the applicable threshold is
not met for taxable year 2025.
(h) Extension of time--(1) Taxpayer disclosures. Taxpayers will be
treated as having met their requirements to disclose timely under Sec.
1.6011-4(e)(2)(i) if they file their disclosure with the OTSA by July
14, 2025.
(2) Material advisor disclosures. Material advisors who have made a
tax statement before January 14, 2025 will be treated as having met
their requirements to disclose timely under Sec. 301.6111-3(e) of this
chapter if they file their disclosure with the OTSA by the date that is
an additional 90 days beyond the last day for filing specified in Sec.
301.6111-3(e) of this chapter.
(i) Applicability date--(1) In general. 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 January 14, 2025.
(2) Material advisors. Notwithstanding Sec. 301.6111-3(b)(4)(i)
and (iii) of this chapter, material advisors are required to disclose
only if they have made a tax statement on or after January 14, 2019.
Douglas W. O'Donnell,
Deputy Commissioner.
Approved: January 3, 2025.
Aviva R. Aron-Dine,
Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2025-00324 Filed 1-10-25; 8:45 am]
BILLING CODE 4830-01-P
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</html>Indexed from Federal Register on January 14, 2025.
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