In June of 2024, the Internal Revenue Service (IRS) issued guidance attempting to address the perceived inappropriate use of existing partnership rules related to certain related-party basis-shifting transactions. These basis-shifting transactions are intended to generate tax benefits without any meaningful economic substance.
IRS exam teams have reported repeated instances of inappropriate basis-shifting practices by related-party partnerships. The IRS hopes this effort will bring more fairness to the tax system and demonstrate its commitment to address noncompliance by partnerships and other high-income taxpayers.
The guidance was released in three packages: Notice 2024-54, Tres. Reg. 124593-23, and Rev. Rul. 2024-14. Specifically, Notice 2024-54 announced two sets of proposed regulations addressing certain basis adjustments and taking a single-entity approach to ensure a clear reflection of taxable income; proposed Tres. Reg. 124593-23 identified specific transactions as reportable transactions, and; Rev. Rul. 2024-14 clarified when the Economic Substance Doctrine may be applied to disallow tax benefits that are associated with the specific basis-shifting transactions involving partnerships and related parties, as described in Tres. Reg. 124593-23.
Given the recent demise of the Chevron deference doctrine (See Loper Bright Enters. v. Raimondo, No. 22-4751, 2024 WL 3208360 (U.S. June 28, 2024)), these regulations are sure to be challenged. This is already regarded as an extraordinarily complex and sophisticated area of law and finalizing the IRS’s proposed guidance as currently drafted would undoubtedly bring more ambiguity and litigation