Treasury/IRS Hammer Basis-Shifting Transactions

  • 06/20/2024
        On Monday, Treasury and the IRS issued Notice 2024-54, Rev. Rul. 2024-24, and Prop. Reg. 1.6011-18 concerning basis adjustments under §732, §734(b), and §743(b) perceived by Treasury and the IRS to be abusive where related parties are involved. Rev. Rul. 2024-24 discusses, in three scenarios, the reach of the economic substance doctrine of §7701(o) to disregard these basis adjustments in related-party transactions that lack sufficient business purpose.

        Prop. Reg. §1.6011-18 identifies four transactions (and transactions that are “substantially similar,” as defined in Reg. §1.6011-4(c)(4)) as reportable “transactions of interest” or “TOIs,” where partnership property is distributed to a partner who is related to one or more other partners or where a partnership interest is transferred between related persons and the result of the transaction is an increase in basis to the remaining property of the partnership. The proposed regulations also require, very generally, a minimum basis increase of $5 million for the transaction to be a TOI.

        Transactions classified as TOIs are subject to specific income tax return reporting requirements by taxpayers who participate in the TOI, as well as reporting requirements with the Office of Tax Shelter Analysis (“OTSA”). Any person who is a “material advisor,” as defined in §6111, must register the transaction with OTSA and maintain a list under §6112 identifying every person with whom the material advisor acted as such and provide to OTSA any other information required under the regulations. Penalties for failure to comply are substantial.

        By way of example, the following scenario runs afoul of the proposed regulations. Dan is Steve’s father and Jill is Steve’s wife. Dan owns 50% while Steve and Jill each own 25% of an LLC that has the following simplified balance sheet:


        The land is distributed to Dan in complete liquidation of his LLC interest. Under §732(b), Dan will take a basis in the land of $6 million (i.e., the basis of his LLC interest). As a result of the decrease in basis of the land, assuming the LLC makes a §754 election (or has a §754 election already in effect), pursuant to §734(b)(1) the basis of the depreciable property remaining in the LLC will increase from zero to $6 million. Because the distribution results in a basis shift from non-depreciable to depreciable property that exceeds the $5 million threshold, and the parties are related, the transaction is a TOI requiring proper registrations and disclosures under the proposed regulations.

        Note that Notice 2024-54 indicates that Treasury plans on issuing another set of proposed regulations incorporating the above concepts (in that the currently proposed regulations only relate to TOI reporting and the economic substance doctrine) into the fabric of §732, §734(b), §743(b) and §755. Whether these proposed regulations will incorporate a $5,000,000 de minimis exception is unclear. In any event, we are hopeful that any changes to the above Code sections will not apply, if there is a "sufficient" business purpose for any related-party transaction in which a basis shift occurs, such as an “ordinary” business divorce of a family business because of disharmony. Stay tuned!

Register for a Tax Forum program by July 31, 2024 and enjoy the Early Bird discount

        Basis shifting transactions under the proposed regulations and many other flow-through planning transactions will be discussed in detail at our 2024 Tax Forum programs that begin this fall, and we expect spirited discussion during our live Q&A sessions. As a reminder, the early-bird discount for registration ends on July 31, 2024, so register now.

        See a summary of the anticipated topics to be covered at the 2024 Tax Planning Forum and at the 2024 Fundamentals of Flow-Through Seminar.

        Self-Study Courses – New in 2024 are two Tax Forum self-study programs. The §465 At-Risk Rules: Important Concepts and Planning and More Under the S Corporation §1374 Built-In Gain Rules are just a few clicks away.

        Your Flow-through Questions – We are always happy to spend a few minutes addressing any questions related to flow-through or closely held business matters that come up in your practice – even if they are outside the parameters of the programs you have attended or plan to attend. Please do not hesitate to call us at 800-286-4760 or email any of the Tax Forum faculty members.
None of the authors is rendering legal, accounting or other professional advice. If such advice is required, it is strongly recommended that a professional advisor be engaged.