IRS Issues Final Rule on Partnership Related-Party “Basis Shifting” Transactions

On January 10, 2025, the Internal Revenue Service (IRS) announced that it has issued final regulations identifying certain partnership related-party “basis shifting” transactions as “transactions of interest.” This has significant implications for partnerships and partners that engage in these transactions, and it is a development that will require careful consideration going forward. Learn more from Boston tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group.

The IRS’ New Final Rule on “Basis Shifting” Transactions

The IRS’ announcement comes after the agency issued proposed regulations in the middle of last year. As the IRS explains, it “received comments on the proposed regulations stating 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,” and “[t]he final regulations . . . include certain changes reflecting the comments.” As a result, if any partnerships made changes or preparations in anticipation of the proposed regulations becoming final, they will want to work with their tax counsel to review the final regulations and determine what alternate or additional changes or preparations are necessary.

The IRS’ new final rule on partnership related-party “basis shifting” transactions applies to certain specific types of transactions—not all transactions that could potentially fall under this broad umbrella. Covered transactions include:

• “[T]ax-free distribution of partnership property to a partner that is related to one or more partners of the partnership;” and,
• “[T]ax-free transfer of a partnership interest by a related partner to a related transferee.”

With respect to both types of transactions, the final rule focuses specifically on transactions involving a basis increase of $10 million or more going forward and $25 million or more for transactions closed prior to the 2025 tax year. Regarding transactions closed prior to the 2025 tax year, the final rule requires disclosure of transactions that fall within a “six-year lookback window,” as more specifically described in the regulations.  

What It Means for a Transaction to Be Labeled a “Transaction of Interest”

What does it mean for a transaction to be labeled a “transaction of interest”? The IRS uses this designation to identify transactions that “the IRS and the Treasury Department believe is a transaction that has the potential for tax avoidance or evasion, but lack sufficient information to determine whether the transaction should be identified specifically as a tax avoidance transaction.”

Transactions of interest (or “TOIs”) are subject to disclosure requirements, and failure to disclose a TOI can trigger penalties even if the transaction is otherwise compliant with federal law. Regardless of disclosure, engaging in TOIs can trigger scrutiny from the IRS, and IRS audits targeting TOIs can create substantial exposure for all parties involved.

Schedule a Call with Boston Tax Attorney Kevin E. Thorn

Do you need to know more about the IRS’ new final rule regarding partnership related-party “basis shifting” transactions? If so, we invite you to get in touch. Please call 617-692-2989 or contact us confidentially online to schedule an appointment with Boston tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group.