In brief

What happened? 

The Treasury Department and the IRS issued today three guidance items addressing basis-shifting transactions involving partnerships and related parties that could significantly limit the flexibility afforded to related-party partnerships.  

Proposed regulations (the Reportable Transaction Proposed Regulations) would, if finalized, treat certain partnership related-party basis adjustment transactions (Covered Transactions or Related-Party Basis Adjustment Transactions) as transactions of interest that would be required to be disclosed to the IRS by participants and material advisors. 

Notice 2024-54 (the Notice) announces that Treasury and the IRS plan to publish proposed regulations with respect to Related-Party Basis Adjustment Transactions (the Proposed Related-Party Basis Adjustment Regulations) as well as proposed regulations with respect to the taxable income and tax liability of a consolidated group whose members own interests in a partnership (the Proposed Consolidated Return Regulations). Significantly, the Notice indicates that the Proposed Related-Party Basis Adjustment Regulations would deny cost recovery deductions (or reductions in disposition gains) in future periods, even if the transfer giving rise to the basis adjustment occurred prior to 2024.  

Finally, Rev. Rul. 2024-14 holds that the economic substance doctrine would apply to disallow tax benefits in three scenarios involving a related-party partnership. 

Comments on Notice 2024-54 are due July 17, 2024. Comments on the proposed regulations will be due 60 days after the proposed regulations are published in the Federal Register (expected to be June 18, 2024). 

Why is it relevant? 

The guidance describes Related-Party Basis Adjustment Transactions as those designed to manipulate mechanical basis-adjustment provisions in a manner that would allow additional cost-recovery deductions, decreased taxable gain, or increased taxable gain without corresponding economic impact. Generally, these transactions involve a series of transactions among related persons including contributions or distributions of property to a partnership with related-party or tax-indifferent partners in a manner that results in an increase in basis under the partnership tax basis adjustment provisions and also creates or increases disparities between the outside basis of one or more partners and their respective shares of the inside basis of the partnership’s property. 

The Reportable Transaction Proposed Regulations would require Related-Party Basis Adjustment Transactions to be disclosed both when concluded and as benefits are realized. The inclusion of these transactions as transactions of interest is proposed to be effective on the date that final regulations are published in the Federal Register. 

The Notice sets forth Treasury’s intent to issue future regulations that would preclude taxpayers from realizing tax benefits from cost recovery deductions or on sales of partnership property for years ending on or after June 17, 2024, regardless of when the transaction that gave rise to the Related-Party Basis Adjustment Transaction occurred. 

Rev. Rul. 2024-14 sets forth standards Treasury and the IRS consider relevant in addressing whether related-party transactions that give rise to basis adjustments satisfy the requirements for economic substance. In the scenarios set forth in the revenue ruling, the IRS concludes that the cost savings and reduced complexity associated with the transactions are insubstantial when compared to the intended US federal income tax benefits. 

Action to consider 

Taxpayers should consult with their tax advisors regarding the implications of this new guidance on future and completed transactions that are described as Related-Party Basis Adjustment Transactions in the Notice or Reportable Transaction Proposed Regulations. In addition, affected taxpayers should consider whether to provide comments to Treasury and the IRS on areas of particular concern. 

We are continuing to analyze each of these guidance items, including the proposed retroactive effective dates, and will provide additional insight shortly.