Basis Shifting TOI Regulations Finalized: Timely Reporting Deadline Now in Effect
On January 10, 2025, Treasury issued final regulations under Reg. §1.6011-18 classifying related-party basis adjustments as reportable transactions of interest (“TOIs”). The final regulations adopted, with modifications, the proposed regulations that were issued on June 18, 2024. The issues and rules specific to Notice 2024-54 (which accompanied the proposed regulations) are not addressed in the final regulations, but still are under consideration by Treasury and the IRS. See our June 20, 2024, email blast for more information regarding the proposed regulations, Notice 2024-54, and Rev. Rul. 2024-24.
The final regulations treat the same four transactions, as were contained in the proposed regulations (and transactions that are “substantially similar,” as defined in Reg. §1.6011-4(c)(4)), as reportable 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 or the property distributed to the related partner, and the “applicable threshold” is met. Very generally, the final regulations, in addition to other modifications, increase the “applicable threshold,” which is the minimum aggregate basis increase to require reporting a basis-shifting transaction as a TOI, from $5 million to $10 million for transactions occurring after the effective date of the final regulations. In addition, the final regulations increase the “applicable threshold” from $5 million to $25 million for transactions that occurred during the new six-year lookback period (72-months immediately preceding the first month of the taxpayer’s most recent taxable year) that began before the effective date of the final regulations. Worth noting, the final regulations do not provide carve-outs for everyday business transactions, succession planning transactions, or transactions with significant business purpose, but, as noted above, the regulations generally do not apply to transactions involving unrelated parties. Transfers resulting from death are specifically excluded from the definition of 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”). Importantly, a 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 under the regulations, 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. Steve, Jill (Steve’s sister), Dan (Steve’s father) are members of an LLC. Dan owns 50% while Steve and Jill each own 25% of the LLC that has the following simplified balance sheet:
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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 $11 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 $11 million. Because the distribution results in a basis shift from non-depreciable to depreciable property that exceeds the $10 million threshold, and the parties are related, the transaction is a TOI requiring proper registration and disclosures under the proposed regulations.
The final regulations are complicated and include other modifications not discussed in this email.