IRS Reverses Course on Regulations Concerning Partnerships’ Related-Party Basis-Shifting Transactions by Alex Keneiby, CPA
Posted on May 26, 2025
by
Alex Keneiby
The IRS has announced its intention to withdraw final regulations issued just three months prior that would have imposed new reporting requirements on partnerships engaged in certain related-party basis-shifting transactions. By rescinding these regulations and the related penalties for noncompliance, the IRS aims to eliminate what it calls “complex” and “costly” compliance burdens on partnerships.
Background
The IRS issued Notice 2024-54 in June 2024 announcing plans to crack down on the “abusive” use of partnership rules to inflate the basis of partners’ property without causing any meaningful change to the economics of their business. The specific transactions covered in the notice and finalized in early January 2025 under then-President Biden involve tax-free transfers, distributions and liquidations of partnership interests to partners and other related parties or transferees, in which a basis increase provides related parties with an opportunity to decrease their taxable income through increased cost recovery deductions, including as property depreciation deductions, and decreased taxable gains (or increased taxable losses).
However, with the inauguration of President Trump on Jan. 20, 2025, and the new administration’s “deregulation initiatives,” the Department of the Treasury removed the retroactive reporting requirements for partnerships’ basis-shifting transactions that generate tax benefits for partnerships, their partners and other related taxpayers.
Repeal of Basis-Shifting Transactions of Interest Requirements
An executive order issued on February 19, 2025, called for all government agencies to identify and remove regulations deemed “unlawful and undermining the national interest,” including those that impose “undue burdens on small businesses and impede private enterprise and entrepreneurship.” Consistent with this order, the Department of the Treasury and the IRS issued Notice 2025-23 in April 2025 to begin the process of withdrawing the basis shifting transactions of interest regulations effective January 14, 2025. This essentially provides taxpayers and their material advisors with immediate relief from retroactive reporting requirements and any related penalties for noncompliance. The IRS is expected to issue a notice of proposed rulemaking in the coming months to finalize the details of repealing the basis shifting regulations.
About the Author: Alex Keneiby, CPA, is a senior manager of tax services with Berkowitz Pollack Brant, where he provides tax consulting services that guide entrepreneurial clients through complex partnership structures, real estate transactions and issues relating to federal and state taxes. He can be reached at the CPA firm’s Miami office at info@bpbcpa.com or (305) 379-7000.
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