Treasury Department and IRS Target Partnership Basis-Shifting Transactions

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TL Fahring focuses on helping individuals and businesses with a wide variety of matters involving state, federal, and international taxation. He has represented clients in all stages of federal and state tax disputes, including audits, administrative appeals, litigation, and collection matters. Mr. Fahring also has used his tax knowledge to assist clients in planning complex domestic and international transactions, including advising as to potential reporting and withholding requirements.

Mr. Fahring received his J.D. from the University of Texas School of Law, where he graduated with high honors and was inducted into the Order of the Coif and Chancellors honors societies. After clerking for a year at the Texas Eleventh Court of Appeals, he attended New York University School of Law, where he received an LL.M. (Master of Laws) in Taxation and served as a student editor on the Tax Law Review.

On June 17, 2024, the Treasury Department launched “a new regulatory initiative to close a major tax loophole exploited by large, complex partnerships.”[1] The loophole: partnership basis-shifting transactions.

In these transactions, a single business that operates through many different legal entities . . . enters into a set of transactions that manipulate partnership tax rules to maximize tax deductions and minimize tax liability. . . . For example, a partnership might shift tax basis from property that does not generate tax deductions (such as stock or land) to property that does (such as equipment). Taxpayers may also use these techniques to depreciate the same asset over and over.[2]

Treasury claims that such “transactions defy congressional intent to avoid tax liability with little to no other economic consequences for the participating businesses.”[3]

To try to fight this problem, the Treasury is issuing Notice 2024-54, announcing its intent to publish proposed regulations to eliminate the tax benefit from these transactions, Proposed Regulation 1.6011-18, which would require taxpayers and their material advisers to report their participation in partnership basis-shifting transactions, and Revenue Ruling 2024-14, which finds that certain partnership basis-shifting transactions lack economic substance and will not be respected.

Treasury believes that this initiative could raise more than $50 billion in tax revenue the next 10 years.[4] These moves come as the Internal Revenue Service has been increasing audit activity involving partnerships after years of such efforts being “severely underfunded.”[5]

[1] U.S. Department of the Treasury, IRS Announce New Initiative to Close Loopholes, Ensure Wealthiest Taxpayers Pay What They Owe, (June 17, 2024).

[2] Id.

[3] Id.

[4] Id.

[5] See id.; Internal Revenue Service, IRS Announces New Steps to Combat Abusive Use of Partnerships; Agency’s Focus Intensifies as New Guidance Closes Loopholes Worth Tens of Billions, (June 17, 2024).