U.S. Treasury Building in Washington D.C. in winter

Treasury Finalizes Regulations Regarding Basis Shifting Transactions

Article

February 10, 2025

The U.S. Department of the Treasury (the Treasury) and Internal Revenue Service (IRS) have observed that related parties have been improperly leveraging partnerships to manipulate basis adjustment provisions under Subchapter K, which pertain to property distributions or transfers of partnership interests.

These basis adjustments have, in some cases, been used to generate or regenerate federal income tax benefits artificially, resulting in substantial tax savings without corresponding economic investments.

Issuance of Final Regulations

On January 10, 2025, the Treasury issued final regulations in T.D. 10028 to curb such transactions. These regulations classify certain partnership-related basis adjustment transactions among related parties as transactions of interest, a specific category of reportable transactions.

The final regulations largely adopt the proposed regulations from June 2024, but with key modifications. Notably, they raise the threshold for a basis increase from $5 million to $25 million and limit the lookback period for transactions to six years. Additionally, taxpayers have 180 days from the regulations' effective date of January 14, 2025, to report any identified transactions of interest from previous years.

Background on Basis Adjustments

Typically, when a partnership distributes property or transfers an interest, it may adjust the basis of the distributed property, the partnership property or both, provided there is an election under internal revenue code (IRC) Section 754 in place.

With a Section 754 election, the basis of partnership property is adjusted according to Section 734(b) for property distributions or Section 743(b) for interest transfers. Once enacted, this election applies to all property distributions and interest transfers within the partnership for the tax year of the election and all subsequent years.

Details of the Final Regulations

The final regulations target partnership-related basis adjustment transactions that allocate basis increases to assets eligible for cost recovery allowances or shorter recovery periods, or to assets that the partnership or distributee partner plans to sell or exchange soon in a taxable transaction. In essence, these adjustments increase the basis of property where deductions are imminently realizable.

If a transaction falls under the criteria specified in the final regulations, participants and material advisors are required to disclose these transactions to the IRS, with penalties imposed for nondisclosure.

Let Us Be Your Guide

Navigating the complexities of these new regulations can be challenging. Cherry Bekaert’s Tax Services team is here to provide knowledgeable guidance and support. Our experienced professionals can help you understand and comply with these regulations, ensuring your partnership transactions are structured correctly and reported accurately. Let us assist you in safeguarding your financial interests while maintaining compliance with the latest tax laws. Reach out to Cherry Bekaert today for tailored solutions and insightful advice.

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