On June 17, 2024, the IRS announced the formation of a dedicated group in the Office of Chief Counsel specifically focused on developing guidance on partnerships, which is expected to work with a new “passthrough working group” being established in the Large Business and International Division of the IRS. At the same time, Treasury and the IRS launched an attack on a specific partnership strategy involving so-called “basis bump” or “basis shifting” transactions involving related parties through a combination of guidance challenging the substance of such arrangements and declaring such arrangements to be “transactions of interest” that are subject to the strict disclosure requirements of the “reportable transaction” rules.1


A “basis bump” or “basis shifting” transaction, as described in the guidance, generally involves using sophisticated related party partnership structures to exploit various basis adjustment rules in the partnership provisions of the Internal Revenue Code, with the intended result of shifting the tax basis in partnership assets – either from non-depreciable property to depreciable property (increasing the tax depreciation or amortization deductions that may be claimed by the partners), or from assets the partners intend to keep to assets they intend to sell (thereby reducing taxable gain or increasing taxable loss, depending on the facts, on the properties the partners intend to dispose). The present attack on such transactions is limited to transactions involving “related” parties, which include generally corporations or other entities with more than 50% overlapping ownership, as well as certain family relationships (such as parents and their children).


Generally, the partnership basis adjustment statute and related Treasury regulations were crafted to match a partner’s tax basis in its interest in the partnership (“outside basis”) with that partner’s share of the partnership’s basis in its assets ( “inside basis”). Under these rules, a partnership generally will increase or decrease the basis of its assets when certain distributions of cash or property are made to a partner or when a partner transfers its interest in the partnership. For example, when a partnership distributes property with a low inside basis to a partner with a high outside basis, the rules allow the recipient partner to have a high basis in the distributed asset but require the partnership to reduce its basis in other assets.


These rules are intended to work in situations in which the partners are unrelated parties dealing with each other at arms-length. In those circumstances, a partnership and its various partners can be expected to bargain over the tax consequences of the distribution and the tax benefits – or burdens – resulting from the basis adjustment. Such bargaining is arguably much less likely when the parties are related.


The announced effort to combat these related party basis adjustment transactions has three parts. The first prong consists of proposed regulations identifying certain types of basis adjustment transactions as “transactions of interest.” This means that the transactions will need to be specifically disclosed to IRS under the reportable transaction rules. These disclosure obligations apply to the partnership and the related party partners involved in the transactions, as well as to material advisors, including any person who promoted the transaction and the accounting and law firms who provided tax advice in connection with the transaction. This will be a controversial part of the new rules because disclosure would be retroactive and apply to any transaction in which a taxpayer is still receiving a benefit.


The second prong of the attack is a revenue ruling in which the IRS states that the “economic substance” doctrine applies to disallow the benefit of the partnership basis adjustments otherwise allowable under the tax law where the transaction among related parties was devoid of economic purpose or substance. The revenue ruling, which is effectively the position the IRS intends to assert in any litigation over these transactions, described three situations in which purported partnership basis adjustments will be disregarded and notes, in all three situations, that enhanced 20%-40% penalties for undisclosed noneconomic substance transactions would apply.


The third prong is a notice announcing Treasury and the IRS’s intent to issue proposed regulations governing related party partnership basis adjustments. In general, these rules to be proposed will not permit either the partnership or a related party partner to receive the benefit of an increase in basis. The notice announces that, broadly, the proposed regulations are expected to address the required method of accounting for basis in related party partnership transactions and rules for determining taxable gain or loss on the disposition of basis adjusted property. The proposed regulations will also expand the scope of transactions to include those involving tax-indifferent parties (including tax-exempt organizations and parties with tax attributes that make them tax-indifferent). This last aspect of the proposed regulations suggests that potentially affected taxpayers who may not necessarily be subject to the immediate effects of the new guidance may nevertheless wish to consider whether they have entered into other arrangements that might be brought into scope by future proposed regulations. Additionally, other proposed regulations will address the treatment of partnerships that are owned by members of a consolidated group of corporations. Those regulations are intended to adopt a “single entity” approach that could extend beyond basis adjustment transactions.

  1. The guidance was issued in various official publications: see Notice 2024-54 (June 17, 2024), announcing the intention to publish propose regulations, available at https://www.irs.gov/pub/irs-drop/n-24-54.pdf; REG 124593-23 (June 17, 2024), proposing regulations to treat the transactions discussed here as “transactions of interest,” available at https://www.govinfo.gov/content/pkg/FR-2024-06-18/pdf/2024-13282.pdf; Rev. Rul. 2024-14 (June 17, 2024), ruling on the application of the economic substance doctrine to three scenarios relating to the transactions discussed here, available at https://www.irs.gov/pub/irs-drop/rr-24-14.pdf; and IR 2024-21 (June 17, 2024), and IR-2024-166 (June 17, 2024), announcing all of the above and the formation of new IRS teams, available at https://www.irs.gov/newsroom/irs-announces-new-steps-to-combat-abusive-use-of-partnerships-agencys-focus-intensifies-as-new-guidance-closes-loopholes-worth-tens-of-billions. ↩︎
Print:
Email this postTweet this postLike this postShare this post on LinkedIn
Photo of Stuart Rosow Stuart Rosow

Stuart Rosow is a partner in the Tax Department and a leader of the transactional tax team. He concentrates on the taxation of complex business and investment transactions. His practice includes representation of publicly traded and privately held corporations, financial institutions, operating international…

Stuart Rosow is a partner in the Tax Department and a leader of the transactional tax team. He concentrates on the taxation of complex business and investment transactions. His practice includes representation of publicly traded and privately held corporations, financial institutions, operating international and domestic joint ventures, and investment partnerships, health care providers, charities and other tax-exempt entities and individuals.

For corporations, Stuart has been involved in both taxable and tax-free mergers and acquisitions. His contributions to the projects include not only structuring the overall transaction to ensure the parties’ desired tax results, but also planning for the operation of the business before and after the transaction to maximize the tax savings available. For financial institutions, Stuart has participated in structuring and negotiating loans and equity investments in a wide variety of domestic and international businesses. Often organized as joint ventures, these transactions offer tax opportunities and present pitfalls involving issues related to the nature of the financing, the use of derivations and cross-border complications. In addition, he has advised clients on real estate financing vehicles, including REITs and REMICs, and other structured finance products, including conduits and securitizations.

Stuart’s work on joint ventures and partnerships has involved the structuring and negotiating of a wide range of transactions, including deals in the health care field involving both taxable and tax-exempt entities and business combinations between U.S. and foreign companies. He has also advised financial institutions and buyout funds on a variety of investments in partnerships, including operating businesses, as well as office buildings and other real estate. In addition, Stuart has represented large partnerships, including publicly traded entities, on a variety of income tax matters, including insuring retention of tax status as a partnership; structuring public offerings; and the tax aspects of mergers and acquisitions among partnership entities.

Also actively involved in the health care field, Stuart has structured mergers, acquisitions and joint ventures for business corporations, including publicly traded hospital corporations, as well as tax-exempt entities. This work has led to further involvement with tax-exempt entities, both publicly supported entities and private foundations. A significant portion of the representation of these entities has involved representation before the Internal Revenue Service on tax audits and requests for private letter rulings and technical advice.

Stuart also provides regular advice to corporations, a number of families and individuals. This advice consists of helping to structure private tax-advantaged investments; tax planning; and representation before the Internal Revenue Service and local tax authorities on tax examinations.

A frequent lecturer at CLE programs, Stuart is also an adjunct faculty member of the Columbia Law School where he currently teaches Partnership Taxation.

Photo of Martin T. Hamilton Martin T. Hamilton

Martin T. Hamilton is a partner in the Tax Department. He primarily handles U.S. corporate, partnership and international tax matters.

Martin’s practice focuses on mergers and acquisitions, cross-border investments and structured financing arrangements, as well as tax-efficient corporate financing techniques and the tax…

Martin T. Hamilton is a partner in the Tax Department. He primarily handles U.S. corporate, partnership and international tax matters.

Martin’s practice focuses on mergers and acquisitions, cross-border investments and structured financing arrangements, as well as tax-efficient corporate financing techniques and the tax treatment of complex financial products. He has experience with public and private cross-border mergers, acquisitions, offerings and financings, and has advised both U.S. and international clients, including private equity funds, commercial and investment banks, insurance companies and multinational industrials, on the U.S. tax impact of these global transactions.

In addition, Martin has worked on transactions in the financial services, technology, insurance, real estate, health care, energy, natural resources and industrial sectors, and these transactions have involved inbound and outbound investment throughout Europe and North America, as well as major markets in East and South Asia, South America and Australia.

Photo of Richard M. Corn Richard M. Corn

Richard M. Corn is a partner in the Tax Department. He focuses his practice on corporate tax structuring and planning for a wide variety of transactions, including:

  • mergers and acquisitions
  • cross-border transactions
  • joint ventures
  • structured financings
  • debt and equity issuances
  • restructurings
  • bankruptcy-related transactions

Richard M. Corn is a partner in the Tax Department. He focuses his practice on corporate tax structuring and planning for a wide variety of transactions, including:

  • mergers and acquisitions
  • cross-border transactions
  • joint ventures
  • structured financings
  • debt and equity issuances
  • restructurings
  • bankruptcy-related transactions

Richard advises both U.S. and international clients, including multinational financial institutions, private equity funds, hedge funds, asset managers and joint ventures. He has particular experience in the financial services and sports sectors. He also works with individuals and tax-exempt and not-for-profit organizations on their tax matters.

Richard began his career as a clerk for the U.S. Court of Appeals for the Fourth Circuit Judge J. Michael Luttig and then went on to clerk at the U.S. Supreme Court for Associate Justice Clarence Thomas. Prior to joining Proskauer, he most recently practiced at Sullivan & Cromwell as well as Wachtell, Lipton, Rosen and Katz.

Photo of Amanda H. Nussbaum Amanda H. Nussbaum

Amanda H. Nussbaum is the chair of the Firm’s Tax Department as well as a member of the Private Funds Group. Her practice concentrates on planning for and the structuring of domestic and international private investment funds, including venture capital, buyout, real estate…

Amanda H. Nussbaum is the chair of the Firm’s Tax Department as well as a member of the Private Funds Group. Her practice concentrates on planning for and the structuring of domestic and international private investment funds, including venture capital, buyout, real estate and hedge funds, as well as advising those funds on investment activities and operational issues. She also represents many types of investors, including tax-exempt and non-U.S. investors, with their investments in private investment funds. Business partners through our clients’ biggest challenges, Amanda is a part of the Firm’s cross-disciplinary, cross-jurisdictional Coronavirus Response Team helping to shape the guidance and next steps for clients impacted by the pandemic.

Amanda has significant experience structuring taxable and tax-free mergers and acquisitions, real estate transactions and stock and debt offerings. She also counsels both sports teams and sports leagues with a broad range of tax issues.

In addition, Amanda advises not-for-profit clients on matters such as applying for and maintaining exemption from federal income tax, minimizing unrelated business taxable income, structuring joint ventures and partnerships with taxable entities and using exempt and for-profit subsidiaries.

Amanda has co-authored with Howard Lefkowitz and Steven Devaney the New York Limited Liability Company Forms and Practice Manual, which is published by Data Trace Publishing Co.