New IRS Regulation Establishes Disclosure Requirements for Certain Partnership “Basis Shifting” Transactions

The Internal Revenue Service (IRS) has adopted new regulations that establish disclosure requirements for certain partnership “basis shifting” transactions. These new disclosure requirements apply to both future transactions and transactions closed within a six-year lookback period, and failure to comply can expose partnerships, individual partners and their advisors to substantial liability. Learn more from Washington D.C. tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group.

New Disclosure Rules Target Partnership Related-Party “Basis Shifting” Transactions

The IRS’ new regulations specifically target two types of partnership related-party “basis shifting” transactions. Under the new regulations, which became final on January 10, 2025, the following transactions are now classified as “transactions of interest”:

• “[T]ax-free distribution of partnership property to a partner that is related to one or more partners of the partnership;” and,
• “[T]ax-free transfer of a partnership interest by a related partner to a related transferee.”

This classification is significant. As the IRS explains, a transaction of interest (or “TOI”) is a transaction that the agency “believe[s] is a transaction that has the potential for tax avoidance or evasion.” All TOIs are subject to disclosure, and taxpayers and material advisors who fail to meet applicable TOI disclosure requirements can face penalties even if the transaction at issue is fully compliant with the Internal Revenue Code.

Importantly, while the transactions listed above are generally classified as TOIs under the IRS’ new regulations, there are exceptions. For example, the new regulations only apply to transactions resulting in a basis increase of $10 million or more if closed in the 2025 tax year or later and to transactions resulting in a basis increase of $25 million or more if closed in prior years. Additionally, as the IRS also explains, “[b]ecause [publicly traded partnerships (PTPs)] are typically owned by a large number of unrelated owners, the final regulations exclude many owners of PTPs from the disclosure rules.”

Managing Compliance in 2025 (and Beyond)

To ensure compliance while also avoiding unnecessary disclosures, partnerships and their advisors will want to consult with an experienced Washington D.C. tax attorney who can help them assess the new regulations’ applicability. Even when properly disclosed, TOIs will often trigger scrutiny from the IRS.

Given that partnership related-party “basis shifting” transactions are a clear enforcement priority for the IRS in 2025, a proactive approach to compliance—and clearly documenting compliance—will be essential. Along with mitigating the risk of facing scrutiny, this approach will also help mitigate both the costs and the risks involved in defending against an IRS audit if necessary.

Request a Consultation with Washington D.C. Tax Attorney Kevin E. Thorn

If you need to know more about the IRS’ new final regulations regarding partnership related-party “basis shifting” transactions, we invite you to get in touch. To request a consultation with Washington D.C. tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, give us a call at 202-349-4033 or tell us how we can get in touch online today.