On April 17, 2025, the IRS issued Notice 2025-23, which announced its intent to publish a notice of proposed rulemaking to remove Treasury Regulations Section 1.6011-18 that identifies certain partnership basis adjustment transactions as “transactions of interest.” Furthermore, Notice 2025-34 revoked Notice 2024-54 and Revenue Ruling 2024-14 and provided immediate relief from penalties for participants in, and material advisors to, the basis shifting transactions identified in Treasury Regulations Section 1.6011-18. Consequently, the Final Regulations discussed below will ultimately be withdrawn and in the intermediate period will not be enforced.
I. Introduction
On January 10, 2025, the United States Internal Revenue Service (the "IRS") released final regulations (the "Final Regulations") under section 6011 of the Internal Revenue Code of 1986, as amended (the "Code"), that identify certain partnership basis adjustment transactions as “transactions of interest.” Specifically, the Final Regulations identify four transactions of interest under Code sections 732, 734, and 743 between related persons or tax-indifferent persons that result in basis increases that for federal income tax purposes give rise to additional depreciation and amortization deductions or reduced gain on the sale of property. The IRS previously noted in Revenue Ruling 2024-14 that it intended to challenge many of these types of transactions as lacking economic substance under Code section 7701(o). “Transactions of interest” are one of the categories of “reportable transactions” under Treasury Regulations Section 1.6011-4. A taxpayer participating in a reportable transaction must disclose details about the transaction to the IRS in the taxpayer’s return, which disclosure is sent to the Office of Tax Shelter Analysis. Accordingly, taxpayers participating in reportable transactions face a significant risk of audit.
II. Background
Normally, the federal income tax basis of property is unaffected by distributions of property from the partnership to its partners. The Code, however, contains several provisions that provide for adjusting the federal income tax basis of retained or distributed property following certain transactions. The purpose of these provisions is to minimize the difference between the partners’ federal income tax bases in their partnership interests (outside basis) and the partnership’s federal income tax basis in its property (inside basis) or to preserve the unrecognized gain or loss when a partnership distributes property to a partner.
For example, Code section 732(a)(1) provides that a partner’s tax basis in property distributed from a partnership is the partnership’s inside basis immediately before the distribution. However, there are two exceptions. First, if the partner’s outside basis is less than the inside basis of the distributed property, then the partner’s tax basis in the distributed property is limited to the partner’s outside basis. Second, a partner’s tax basis in partnership property distributed in complete liquidation of the partner’s partnership interest (or in complete liquidation of the entire partnership) equals the partner’s outside basis immediately before the distribution reduced by any money received in the same distribution. Therefore, if the partnership’s inside basis in property distributed to a partner is less than the distributee partner’s outside basis, then the distributee partner increases the tax basis of the distributed property. If more than one item of property is distributed in liquidation of a partnership interest, Code section 732(c) provides rules for allocating the basis increase among the distributed properties.
Under Code section 734(a), if a partnership distributes property to a partner, the partnership will not normally increase or decrease the inside basis of its remaining property. However, a partnership that has an election in effect under Code section 754 (the "754 Election") will adjust the inside basis of its property if either (1) the distributee partner recognizes gain because the sum of the money and the adjusted tax basis of the property distributed to the partner exceeds the partner’s outside basis or (2) an adjustment to the basis of the distributed property occurs under Code section 732 upon a complete liquidation of a distributee partner’s partnership interest. The amount of the increase in the partnership’s inside basis in its property equals either the amount of gain recognized by the distributee partner or the amount of any downward basis adjustment taken into account by the distributee partner under Code section 732. Code section 755 provides rules for allocating the basis increase among the partnership’s remaining properties.
Code section 743(a) normally precludes an adjustment to the inside basis of partnership property following a transfer of a partnership interest. If, however, the partnership as a 754 Election in effect, then Code section 743(b) directs the partnership to increase the inside basis of its property in an amount equal to the difference between the transferee partner’s outside basis and the transferee partner’s share of the inside basis of the partnership’s property. A Code section 743(b) adjustment can occur, for example, if a partner sells a partnership interest for an amount greater than the partner’s share of the partnership’s inside basis or if a partner dies and the partner’s estate increases the outside basis of the partnership interest under Code section 1014. Unlike basis increases under Code sections 732 and 734(b), the basis increase under Code section 743(b) is unique to the transferee partner only and does not impact the common inside basis of partnership property.
