In January 2025, the IRS finalized regulations that identify partnership basis adjustment transactions as “transactions of interest” (TOIs). This was done to avoid an abuse of partnership structures.
The regulations stipulated that partnerships should disclose any basis shifting transactions to the taxman. However, the IRS acknowledged that the disclosure obligations are complex. So in April this year, they waived penalties for related failures and released a notice withdrawing the partnership disclosure rules.
But what does all this mean for your partnership? Essentially, you’ll need to ensure that any transactions have valid economic purposes, or risk falling under the IRS spotlight. In this blog, we’ll guide you through how to do just that.
What Were The Original Disclosure Rules?
Before we dive into the history of the partnership disclosure rules, it’s important to define basis shifting. This refers to any tax strategies in which partnerships and their related parties manipulate the tax basis of their assets. That way, they can generate tax benefits without corresponding economic activity. Normally, this involves moving the basis from assets that don’t yield tax deductions to those that do, to artificially create deductions or reduce taxable gains.
The IRS outlined three main categories for basis shifting. These were:
- Transferring partnership interest to a related party. Here, a partner with a high outside basis and low inside basis transfers their partnership interest to a related entity in a non-taxable transaction.
- Distributing property to a related party. In this instance, a partnership distributes a high-basis asset to a related partner with a low outside basis. This reduces the basis of the received asset, and the partnership increases the basis of its remaining assets, leading to unjustified tax benefits.
- Liquidating a related partnership or partner. In a liquidation, assets are distributed in a manner that shifts basis to those with shorter depreciation lives, leading to accelerated deductions or reduced taxable gains.
Because these kinds of transactions do not have economic substance, and are generally undertaken to avoid taxes, they’re considered highly abusive. As a result, the Treasury Department and the IRS came up with the January 2025 partnership disclosure rules that marked the above transactions as TOIs. At the time, that meant that any such basis shifting practices had to be fully disclosed, within 90 days of the publication. These included any transaction that resulted in a basis increase of $10 million or more from the previous six years.
But then came Notice 2025-23, which proposed a withdrawal of the disclosure rules.
What Are the Key Takeaways of Notice 2025-23?
On April 17, 2025, the IRS issued this notice, announcing its intent to withdraw the final regulations that identified certain basis adjustment transactions as TOIs, effective from January 14, 2025. The reason for this was because the partnership disclosure rules had complex obligations, particularly for ordinary-course and tax-compliant business activities. If followed, disclosure could have been expensive, and led to uncertainty for many businesses.
Instead, the IRS plans to publish final regulations to formally remove the TOI designation for these basis-shifting transactions.
But in the meantime, the existing partnership disclosure rules requirements remain in effect, with a deadline of July 14, 2025. However, the IRS will not enforce penalties for failures to disclose these transactions during this interim period.
Implications for partnerships and other taxpayers
One of the most significant aspects of Notice 2025-23 is relief from very complicated compliance requirements. Now, you no longer need to conduct time-consuming historical transaction reviews, which means you’ll save a significant amount of time and money.
But this doesn’t mean that you can let your guard down. Note that the IRS has not withdrawn Revenue Ruling 2024-14, which applies the economic substance aspect to basis-shifting transactions. In other words, any transactions without economic purpose or substance may still be flagged by the IRS. As such, it is crucial to document the intent behind transactions and maintain comprehensive internal records to substantiate their economic substance.
How to be Prepared For Changes
Even though the IRS has provided relief from penalties associated with the failure to file disclosure statements, the formal withdrawal of these regulations hasn’t happened yet. This means it’s still important to consider preparing disclosures as a precaution. You’ll have to keep comprehensive records that demonstrate efforts to comply with the regulations, such as documentation of transactions.
Staying up to date with IRS changes is essential. After all, as we’ve seen with the TOIs, regulations can be changed or withdrawn as easily as they are made. It’s also possible that the regulations surrounding basis shifting transactions could change again in the future. Of course, a tax professional can help you stay on top of any possible changes, and assist you to develop contingency plans in the event of any changes to tax laws and partnership disclosure rules.
If you need help ensuring your taxes are compliant, no matter your business entity, or if you have any concerns about regulations, schedule a free Discovery Call with one of our tax pros today!
The information presented in this blog article is provided for informational purposes only. The information does not constitute legal, accounting, tax advice, or other professional services. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability of the information contained herein. Use the information at your own risk. We disclaim all liability for any actions taken or not taken based on the contents of this blog. The use or interpretation of this information is solely at your discretion. For full guidance, consult with qualified professionals in the relevant fields.