At our 2023 Tax Planning Forum, we discussed Rev. Rul. 2023-2, 2023-16 IRB 658, in which the IRS indicated that assets of an irrevocable grantor trust are not eligible for a basis step-up on the death of the grantor. The ruling is an interpretive ruling of §1014 and, as such, has retroactive impact.

Whether the IRS is correct in its conclusion is now subject to challenge in Belmont Investments, LLC, v. Commissioner, Dkt. #14039-25 (Oct. 3, 2025), a pending case in the Tax Court. In the case, a grantor trust held an interest in a partnership, and, on the death of the grantor, the partnership made a §754 election and reported a §743(b) basis adjustment for the benefit of the trust. The IRS denied the basis step-up asserting that a basis step-up is not available for a partnership interest held by an irrevocable grantor trust, which would then negate any eligibility for the partnership to make a §754 election with respect to such partnership interest. (The IRS filed its answer on December 5, 2025; however, the answer contains perfunctory admissions and denials and does not shed any light on any substantive tax issues.) The claimed §743(b) basis adjustment was approximately $37,300,000, and a significant portion of the basis adjustment was used to reduce gain on a property disposition. Note that the partnership filed a Form 8275 in connection with the §754 election made in the year of death, which should take any penalties off the table in the event the taxpayer’s position is successfully challenged.

The tax years at issue in Belmont are 2018-2020, which long pre-date Rev. Rul. 2023-2, and Belmont is the first reported case in which the IRS has challenged the basis step-up of property held by a grantor trust. At this point, all that the taxpayer has filed is a petition indicating that the IRS position is in error, so that little can be gleaned as to the taxpayer’s arguments. However, some of the arguments set forth, for example, in the following rhetoric likely will be made: Gassman, “Revenue Ruling 2023-2 Got it Wrong? The Case For A Stepped-Up Basis When The Grantor Dies,” Forbes (Apr. 7, 2023); Gans and Blattmachr, “Grantor Trust Assets and Section 1014: New IRS Ruling Doesn’t Solve the Problem,” Journal of Taxation (Sept. 2023); Akers, “Belmont Investments, LLC v. Commissioner, Tax Court Docket No. 14039-25 (Petition filed October 3, 2025), found at Bessemer.com (December 2025) See also, e.g., Blattmachr, Gans and Jacobson, “Income Tax Effects of Termination of Grantor Trust Status by Reason of the Grantor’s Death,” Journal of Taxation (Sept. 2002) (which contains many of the arguments against the conclusion ultimately reached by the IRS in Rev. Rul. 2023-2, long before the ruling was issued).

We will be taking a deep dive into Belmont at this year’s fall/winter Tax Planning Forum® programs. Registration is open for such programs, as well as for our Fundamentals of Flow-Through® programs, including our spring Fundamentals programs on May 19-21 and June 23-25. Register early to reserve your spot, including for our fall in-person programs in Las Vegas and Orlando for which space is limited.