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The IRS and Treasury have issued proposed regulations (REG-108921-25 (PDF - 284.06KB)) to remove Treas. Reg. Section 1.6011-18, which designated certain partnership related-party basis adjustment transactions (also referred to as “basis-shifting transactions”) as transactions of interest (TOIs) under the reportable transaction rules.
This proposal follows Notice 2025-23, issued in April 2025, which announced the government’s intent to withdraw the final regulations and provided immediate penalty relief for taxpayers and material advisors.
The final regulations, effective Jan. 14, 2025, required disclosure of certain basis-shifting transactions involving related parties, regardless of whether they were entered into for tax avoidance purposes.
The rules received significant criticism for being overly broad, retroactive and administratively burdensome. In response, the IRS and Treasury determined that the compliance costs outweighed the benefits and decided to withdraw the rule. Notice 2025-23 allowed taxpayers and material advisors to treat the removal of the basis-shifting TOI regulations as occurring on Jan. 14, 2025, and, as a result, as if these regulations never took effect.
Taxpayers and advisors may continue to rely on Notice 2025-23 until the proposed removal of the basis-shifting TOI regulations is finalized. For more detail, see our Tax Flash on the 2025 notice.
Importantly, Rev. Rul. 2024-14 remains in effect. The ruling outlines three factual situations involving basis-shifting transactions where the IRS may disregard favorable basis adjustments under the economic substance doctrine, meaning that basis-shifting transactions may still be challenged even without the TOI designation.
Grant Thornton insight:
Taxpayers and their tax advisers should continue to monitor transactions that may fall within the scope of Rev. Rul. 2024-14 or otherwise be subject to increased scrutiny under the economic substance doctrine. Documentation and analysis of the substance of these types of transactions (e.g., involving transfers of partnership interests or distributions among related or affiliated parties) and the underlying cause of the disparities between inside and outside basis should be carefully considered.
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