Treasury and IRS Finalize Disclosure Requirements for So-Called Related-Party “Basis-Shifting” Transactions

The Department of the Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) have released final regulations designating so-called “basis-shifting” transactions among related parties as “transactions of interest.” (Our prior coverage of the IRS’s guidance package aimed at related-party basis adjustment transactions can be found here and our prior coverage of the IRS’s large partnership compliance initiative can be found here.) Last month, Treasury claimed to be examining basis-shifting transactions that would yield more than $100 billion of additional taxes if the IRS is successful — double the amount the IRS estimated in June 2024. Under the final regulations, which are scheduled to be published January 14, 2025, material advisors and participants alike must disclose these and “substantially similar” transactions to the IRS, with penalties for non-compliance. As described below, the final regulations largely adopt the sweeping approach of the proposed regulations as provided in the guidance package released on June 18, 2024. The most significant change is a six-year lookback, which reduces, but does not eliminate, retroactivity concerns. In addition, while reporting deadlines are extended a modest 90 days, the minimum dollar threshold is increased, and some relief is given to publicly traded partnerships, the reporting burden will still be substantial. There is, however, a possibility that the next Congress will take action that effectively voids the regulations under the “lookback” period of the Congressional Review Act (“CRA”), as well as the potential for a pre-enforcement challenge under the Administrative Procedure Act (“APA”).

Summary of Reporting Requirements

The final regulations identify specific partnership related-party basis adjustment transactions as transactions of interest and require disclosure of participation in such transactions and “substantially similar” transactions. The final regulations apply prospectively as well as to transactions of calendar-year taxpayers that took place on or after January 1, 2019.

Partnerships and partners that participate in a related-party basis adjustment transaction must file IRS Form 8886, Reportable Transaction Disclosure Statement, with the Office of Tax Shelter Analysis (“OTSA”) for each taxable year of participation. In general, participation includes receipt of a basis adjustment as the result of a related-party basis adjustment transaction, and any realization of a tax benefit from such basis adjustment. Disclosure must include detailed information about the transaction, including the names and identifying numbers of all participants, basis adjustments, and any Federal income tax consequences realized during the taxable year. Calendar-year partnerships and partners that participated in a related-party basis adjustment transaction on or after January 1, 2019 and before January 14, 2025 must disclose such transactions by July 13, 2025. For transactions on or after January 14, 2025, disclosure must be made on a timely-filed tax return for every year of participation.

Material advisors with respect to related-party basis adjustment transactions must generally make disclosures by filing IRS Form 8918, Material Advisor Disclosure Statement, with OTSA by the last day of the month following the end of the calendar quarter in which they become material advisors with respect to a transaction of interest. For transactions entered into on or after January 1, 2019 and before January 14, 2025, material advisors must make such disclosures by April 30, 2025 plus 90 days (July 29, 2025). Notably, the regulations do not provide any special rules that would limit the disclosure obligations of material advisors to only those transactions of which they are aware.

Notable Changes from the Proposed Regulations

The proposed regulations were widely criticized as unnecessary, overbroad, and impermissibly retroactive. (See our prior coverage here.) In the preamble to the final regulations, the Treasury repeatedly doubles-down on its position that the regulations are necessary for information-gathering to be able to identify abusive related-party basis adjustments. There are, however, changes to the regulations that are intended to address taxpayer concerns:

• Six-year lookback period. While the final regulations persist in requiring taxpayer and material advisor disclosure of participation in or advice with respect to related-party basis adjustment transactions which took place prior to the issuance of the final regulations — a controversial requirement that has been dubbed as retroactive by many taxpayers — they generally limit the reporting requirement to basis adjustments occurring after January 1, 2019.
• Increased reporting threshold. The final regulations raise the reporting threshold from $5 million to $10 million for transactions occurring on or after January 14, 2025, and $25 million for transactions occurring on or after January 1, 2019 and before January 14, 2025.
• Exclusions for certain transactions. Basis adjustments involving transfers of or distributions with respect to partnership interests in a publicly traded partnership are generally excluded from treatment as related-party basis adjustment transactions in the final regulations, except for certain material transactions involving related partners. Transfers of partnership interests on the death of a partner are also excluded.
• Additional guidance for transactions involving unrelated partners. Example 7 of the final regulations clarifies the impact of basis decreases shared with unrelated partners on reporting threshold calculations.

Potential to be Overturned

The final regulations could be overturned under the CRA. Under the CRA, members of Congress may introduce a resolution of disapproval for regulations that were issued within the CRA lookback period, which generally begins on or after 60 working days before the end of a session of Congress and extends through the beginning of the subsequent session of Congress. If a resolution of disapproval is signed into law, the regulation is overturned. The applicable agency is then barred from issuing a rule “substantially in the same form.” Because the final regulations were promulgated during the CRA lookback period, they may be eligible for a resolution of disapproval and could be overturned.

Additionally, affected taxpayers and material advisors may be able to preemptively challenge the final regulations through an APA action in accordance with the Supreme Court’s ruling in CIC Services, LLC v. IRS, 593 U.S. 209 (2021), that regulations prescribing reporting requirements can be challenged pre-enforcement without violating the Tax Anti-Injunction Act and the Declaratory Judgment Act.

Conclusion

The final regulations on partnership related-party basis adjustment transactions impose significant disclosure requirements on both participants and material advisors. While it is possible that the regulations will be challenged — and ultimately overturned — under the CRA, it is crucial for affected parties to understand these requirements and ensure timely compliance to avoid penalties. For further guidance or assistance with specific transactions, please contact our tax team.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.