IRS Closes Partnership Basis-Shifting Tax Loopholes

The IRS has announced that it intends to propose regulations designed to close certain tax loopholes used by partnerships to minimize their tax liability through transactions that have no real economic substance. The guidance focuses on complicated basis-shifting transactions through which taxpayers shift the basis of assets between closely related partners or entities to reduce taxable gain or increase depreciation deductions. According to the IRS, these types of transactions create no real economic value apart from tax reduction. The IRS announced its intent to provide rules regarding the impact of basis adjustments in certain types of transactions—and also identifies related-party transactions resulting in basis adjustments as reportable transactions of interest. The IRS intends to use its additional funding under the Inflation Reduction Act to significantly increase audits and challenge these related-party transactions going forward.

IRS Identifies Three Specific Types of Transactions

The IRS has identified three specific types of transactions used by partnerships to minimize taxation through basis adjustments: (1) transfer of partnership interests to related parties, (2) distribution of property to a related party, and (3) liquidation of related partnership or partner.