Certain Partnership Related-Party Basis Adjustment Transactions as Transactions of Interest

<RULE> DEPARTMENT OF THE TREASURY <SUBAGY>Internal Revenue Service</SUBAGY> <CFR>26 CFR Part 1</CFR> <DEPDOC>[TD 10028]</DEPDOC> <RIN>RIN 1545-BR07</RIN> <SUBJECT>Certain Partnership Related-Party Basis Adjustment Transactions as Transactions of Interest</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Internal Revenue Service (IRS), Treasury. <HD SOURCE="HED">ACTION:</HD> Final rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> This document contains final regulations that identify certain partnership related-party basis adjustment transactions and substantially similar transactions as transactions of interest, a type of reportable transaction. Material advisors and certain participants in these transactions are required to file disclosures with the IRS and are subject to penalties for failure to disclose. The final regulations affect participants in these transactions as well as material advisors. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> <E T="03">Effective date:</E> These regulations are effective on January 14, 2025. <E T="03">Applicability date:</E> For the date of applicability, <E T="03">see</E> § 1.6011-18(h) and (i). </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Concerning these final regulations, contact Elizabeth Zanet of the Office of Associate Chief Counsel (Passthroughs and Special Industries), (202) 317-6007 (not a toll-free number). </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Authority</HD> This document amends the Income Tax Regulations (26 CFR part 1) by adding final regulations under section 6011 of the Internal Revenue Code (Code). The document adds § 1.6011-18 to identify certain partnership related-party basis adjustment transactions and substantially similar transactions as transactions of interest, a type of reportable transaction (final regulations). These regulations are issued pursuant to the authority conferred on the Secretary of the Treasury or her delegate (Secretary) under the following provisions of the Code. Section 6001 of the Code provides an express delegation of authority to the Secretary of the Treasury or her delegate (Secretary), requiring every taxpayer to keep the records, render the statements, make the returns, and comply with the rules and regulations that the Secretary deems necessary to demonstrate tax liability, as prescribed, either by notice served or by regulations. Section 6011(a) provides an express grant of regulatory authority for the Secretary to prescribe regulations requiring any person who is liable for any tax imposed by the Code, or with respect to the collection thereof, to make a return or statement according to the forms and regulations prescribed by the Secretary. Section 6011(a) adds that every person who is required to make a return or statement must include the information required by forms or regulations. In addition, section 6707A(c)(1) of the Code defines the term “reportable transaction” for purposes of imposing penalties under section 6707A(a) relating to persons who fail to include on any return or statement any information with respect to a reportable transaction that is required under section 6011 to be included with such return or statement. In doing so, it provides an express delegation of authority to the Secretary, stating that, “[t]he term 'reportable transaction' means any transaction with respect to which information is required to be included with a return or statement because, as determined under regulations prescribed under section 6011, such transaction is of a type which the Secretary determines as having a potential for tax avoidance or evasion.” Section 6111(a) provides an express grant of regulatory authority for the Secretary to require that each material advisor with respect to any reportable transaction make a return setting forth any information as the Secretary may prescribe. Such return must be filed not later than the date specified by the Secretary. Finally, section 7805(a) of the Code authorizes the Secretary to “prescribe all needful rules and regulations for the enforcement of [the Code], including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.” <HD SOURCE="HD1">Background</HD> <HD SOURCE="HD2">I. Basis Adjustments Under Subchapter K</HD> <HD SOURCE="HD3">A. In General</HD> Under subchapter K of chapter 1 of the Code (subchapter K), a distribution by a partnership of the partnership's property (partnership property) or a transfer of an interest in a partnership (partnership interest) may result in an adjustment to the basis of the distributed property, partnership property, or both. A key factor is whether an election made by the partnership in accordance with regulations prescribed by the Secretary under section 754 of the Code (section 754 election) is in effect. Section 754 provides that if a section 754 election is in effect for a partnership, the basis of its partnership property will be adjusted, in the case of a distribution of property, in the manner provided by section 734 of the Code, and in the case of a transfer of a partnership interest, in the manner provided in section 743 of the Code. Unless a section 754 election is revoked in accordance with the regulations under section 754, the section 754 election applies to all distributions of property by the partnership and to all transfers of interests in the partnership in the taxable year for which the section 754 election was properly made and all subsequent taxable years. In the case of a distribution of partnership property to a partner by a partnership for which a section 754 election is in effect, or with respect to which there is a substantial basis reduction as described in section 734(d), the distribution may result in an adjustment to the basis of the partnership's remaining property (remaining partnership property) under section 734(b). A distribution of partnership property may also result in an adjustment to the basis of the distributed property under section 732(a), (b), or (d) of the Code. If a partnership interest is transferred by sale or exchange or on the death of a partner, and the partnership either has a section 754 election in effect or has a substantial built-in loss with respect to the transfer of the partnership interest as described in section 743(d), the transfer may result in an adjustment to the basis of partnership property under section 743(b) with respect to the transferee partner. <HD SOURCE="HD3">B. Basis Adjustments Under Section 732</HD> Section 732 applies to determine a distributee partner's basis in distributed property other than money. In the case of a distribution of partnership property other than in liquidation of the distributee partner's partnership interest (current distribution), and except as provided under section 732(a)(2), section 732(a)(1) provides that the distributee partner's basis in distributed property (other than money) is equal to the partnership's adjusted basis in the distributed property immediately before the distribution. Under section 732(a)(2), however, a distributee partner's basis in distributed property is limited to the adjusted basis of the distributee partner's partnership interest reduced by any money distributed to such partner in the same transaction. In the case of a distribution of partnership property in liquidation of the distributee partner's partnership interest (liquidating distribution), section 732(b) provides that the distributee partner's basis in distributed property (other than money) is equal to the adjusted basis of the distributee partner's partnership interest reduced by any money distributed to such partner in the same transaction. In the case of a distribution of more than one property from a partnership, the basis of the distributed properties to which section 732(a)(2) and (b) apply must be allocated among the distributed properties under the rules of section 732(c). Section 732(d) through (f) provide additional rules applicable to certain distributed property. <E T="03">See also</E> §§ 1.732-1 through 1.732-3. <HD SOURCE="HD3">C. Basis Adjustments Under Section 734</HD> In the case of a distribution of property by a partnership for which a section 754 election is in effect, and for which either the distributee partner recognizes gain or loss on the distribution, or for which the basis of the distributed property in the distributee partner's hands, as determined under section 732, differs from the partnership's adjusted basis in the distributed property immediately before the distribution, section 734(b) requires the partnership to increase or decrease (as applicable) the basis of its remaining partnership property. Also, in the case of a distribution of property by a partnership that results in a substantial basis reduction under section 734(d), the basis of remaining partnership property must be adjusted under section 734(b), even if no section 754 election is in effect for the partnership. Section 734(b)(1) requires a partnership to increase the basis of its remaining partnership property if a distribution of partnership property by the partnership results in the distributee partner recognizing gain under section 731(a)(1) of the Code, or if property (other than money) to which section 732(a)(2) or (b) applies is distributed to the distributee partner and the property's adjusted basis to the partnership immediately before the distribution is greater than the distributee partner's basis in the distributed property as determined under section 732. Section 731(a)(1) requires a distributee partner to recognize gain in a current or liquidating distribution to the extent that any money distributed to that partner in the distribution exceeds the adjusted basis of that partner's partnership interest immediately before the di ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 143k characters. 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