IRS issues partnership basis shifting guidance

On June 17, 2024, the IRS and Department of Treasury (Treasury) issued guidance on certain partnership transactions the agencies consider potentially abusive. The transactions of interest involve distributions of certain assets by partnerships with related partners and transfers of partnership interests between related parties that result in “basis shifting," which in turn leads to tax savings in the way of depreciation deductions or reduced gains on subsequent asset sales. Per an accompanying news release, the guidance was born out of the work by IRS exam teams which have audited several such transactions, and estimates that curtailing them will raise over $50 billion in revenue over 10 years.

The guidance includes an IRS notice which announces two sets of forthcoming proposed regulations that would address the transactions: a set of proposed regulations that identify the transactions as “transactions of interest” and require disclosures by taxpayers and “material advisers," and a revenue ruling that holds the economic substance doctrine can be leveraged by the IRS to disallow the aforementioned tax savings.

We continue to analyze the guidance and a more detailed alert about its contents is forthcoming. However, it is important to note in the interim that the transactions the IRS is targeting are those with no economic substance but only serve to reduce partners’ tax liabilities. Partnerships engaging in bona fide business transactions should not be concerned that they could be characterized as abusive. Further, the issued and forthcoming regulations are only proposed, and will not be effective until final, though possibly with retroactive effect to tax years ending on or after June 17, 2024.

Please reach out to your Baker Tilly advisor with any questions about how the above may impact your tax situation.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments. Baker Tilly US, LLP does not practice law, nor does it give legal advice, and makes no representations regarding questions of legal interpretation.