In Summary:
On January 14, 2025, the Treasury and the Internal Revenue Service (IRS)
published final regulations requiring taxpayers and their material advisors to disclose certain Transactions of Interest (TOIs), which are subject to the rules for reportable transactions.
The regulations apply to partnerships that participated in related party transactions involving distributions of property or transfers of a partnership interest.
Disclosure applies to transactions where the basis increase (step-up) is greater than: $10 million for current and future transactions; $25 million for retroactive transactions.
Substantial penalties apply for failure to comply.
What are “transactions of interests” and “reportable transactions?”
TOIs are transactions that the IRS believes could be used to evade tax but that haven’t yet been classified as a tax shelter. They are a type of reportable transaction. Treasury requires taxpayers who participate in reportable transactions to disclose their involvement in those transactions by filing Form 8886, Reportable Transaction Disclosure Statement with their tax returns. Entities or individuals that are material advisers on these types of transactions (by organizing, managing, promoting, selling, implementing, insuring, or carrying out a reportable transaction) must file their own disclosure forms on Form 8918, Material Advisor Disclosure Statement.
What are related-party basis shifting transactions?
The transactions that the IRS now classifies as TOIs can be seen as tax avoidance schemes because taxpayers not only make a tax-free asset transfers, but they also increase the basis in those assets, which may result in significant tax benefits. Two examples of related-party basis shifting transactions:
1. Transfer of partnership property
A tax-free distribution of partnership property to a partner that is related to one or more partners of the partnership.
Upon liquidation of a partner’s interest the partner’s basis in that asset distributed is stepped-up rather than the asset maintaining carryover basis ( This can occur if the distributee partner’s tax basis in its partnership interest exceeds the partnership’s tax basis in the asset distributed.)
2. Transfer of partnership interest:
A tax-free transfer of partnership interest from one partner to a related party.
A transfers of a partnership interest by one partner to a related partner where the transferee obtains a tax basis step-up with respect to the partnership property.
In both cases, those transactions would be considered TOIs in 2025 if the step-up in basis exceeded $10 million ($25 million if they were a retroactive transaction). These types of transactions are not appealing to the IRS because they significantly decrease taxable income. Not only is the transfer itself tax-free, but the related party will benefit from the stepped-up basis through (1) larger cost recovery allowances (via depreciation deductions) and/or (2) a smaller gain when taxpayer eventually sell the assets.
How to prepare?
1. Determine if disclosure is required for current transactions.
The Final Regulations require reporting where a basis shifting transaction occurred resulting in increase in tax basis of $10 million.
2. Determine if disclosure is required for transactions occurring in prior years.
The regulations require taxpayers to disclose transactions with basis shifting in excess of $25 million in any open tax year (for which a tax return had already been filed as of January 14, 2025) if a basis shifting transaction occurred within a six-year lookback period. The due date to disclose these retroactive transactions is July 14, 2025.
3. Avoid penalties.
Failure to comply with the reporting requirements may result in the imposition of penalties of up to $50,000 per transaction per participant.
Taxpayers and advisors will need to identify both current and retroactive transactions for the six year look back period to determine if disclosure is required. Navigating these new regulations can be complex.
If you have questions, contact us today.
