New IRS regs put some partnership transactions under spotlight

Final regulations now identify certain partnership related-party “basis shifting” transactions as “transactions of interest” subject to the rules for reportable transactions.

The final regs apply to related partners and partnerships that participated in the identified transactions through distributions of partnership property or the transfer of an interest in the partnership by a related partner to a related transferee. Affected taxpayers and their material advisors are subject to the disclosure requirements for reportable transactions. 

During the proposal process, the Treasury and the Internal Revenue Service received comments that the final regulations should avoid unnecessary burdens for small, family-run businesses, limit retroactive reporting, provide more time for reporting and differentiate publicly traded partnerships, among other suggested changes now reflected in the regs.

• Increased dollar threshold for basis increase in a TOI. The threshold amount for a basis increase in a TOI has increased from $5 million to $25 million for tax years before 2025 and $10 million for tax years after 2025. 
• Limited retroactive reporting for open tax years. Reporting has been limited for open tax years to those falling within a six-year lookback window. The six-year lookback is the 72-month period before the first month of a taxpayer’s most recent tax year that began before the publication of the final regulations (slated for Jan. 14 in the Federal Register). Also, the threshold amount for a basis increase in a TOI during the six-year lookback is $25 million. 
• Additional time for reporting. Taxpayers have an additional 90 days from the final regulation’s publication to file disclosure statements for TOIs in open tax years for which a return has already been filed and that fall within the six-year lookback. Material advisors have an additional 90 days to file their disclosure statements for tax statements made before the final regulations. 
• Publicly traded partnerships. Because PTPs are typically owned by a large number of unrelated owners, the final regulations exclude many owners of PTPs from the disclosure rules. 

The identified transactions generally result from either a tax-free distribution of partnership property to a partner that is related to one or more partners of the partnership, or the tax-free transfer of a partnership interest by a related partner to a related transferee.

The tax-free distribution or transfer generates an increase to the basis of the distributed property or partnership property of $10 million or more ($25 million or more in the case of a TOI undertaken in a tax year before 2025) under the rules of IRC Sections 732(b) or (d), 734(b) or 743(b), but for which no corresponding tax is paid. 

The basis increase to the distributed or partnership property allows the related parties to decrease taxable income through increased cost recovery allowances or decrease taxable gain (or increase taxable loss) on the disposition of the property.