The Internal Revenue Service (IRS) and the Treasury Department have issued final regulations (T.D. 10028) under section 6011 of the Internal Revenue Code (Code), aimed at curbing tax avoidance through certain partnership related-party basis adjustment transactions. These regulations, which add § 1.6011-18 to the Income Tax Regulations, identify these transactions as “transactions of interest,” a type of reportable transaction. This article provides a comprehensive overview of these final regulations, including their effective date, the specific sections of the Code they interpret or impact, and the relevant authorities cited.

Potential Issue Due to Change in Administration

As these regulations are scheduled to be published six days before the inauguration of a new President, it is very possible that action may be taken to delay or reverse some or all of these provisions. Such actions often occur regarding regulations published shortly before a change in power, so advisers should be sure to confirm the status of these regulations even though they will become initially final on January 14, 2025.

Effective and Applicability Dates

These final regulations are effective on the date of their publication in the Federal Register, which is January 14, 2025. For the specific applicability date, see § 1.6011-18(h) and (i). A special rule applies for taxpayers who entered into a transaction before the date of the regulations being published. These taxpayers have an additional 90 calendar days to disclose the transaction to the Office of Tax Shelter Analysis (OTSA), as required by § 1.6011-4(e)(2)(i). Therefore, taxpayers must disclose such transactions by July 13, 2025. Material advisors who made a tax statement prior to January 14, 2025, also have an extension for disclosure. They have an additional 90 days beyond the last day for filing specified in § 301.6111-3(e). Material advisors are required to disclose only if they have made a tax statement on or after January 14, 2019, which is six years prior to January 14, 2025.

Authority

These final regulations are issued under the authority granted to the Secretary of the Treasury or her delegate by various sections of the Code. Specifically:

Section 6001: This section provides the Secretary with the authority to require taxpayers to keep records, render statements, and make returns to demonstrate tax liability.
Section 6011(a): This section grants the Secretary the authority to prescribe regulations that require individuals liable for any tax to make a return or statement according to the forms and regulations prescribed by the Secretary.
Section 6707A(c)(1): This section defines “reportable transaction” for the purpose of imposing penalties on those who fail to include required information on returns, stating that a reportable transaction is "any transaction with respect to which information is required to be included with a return or statement because, as determined under regulations prescribed under section 6011, such transaction is of a type which the Secretary determines as having a potential for tax avoidance or evasion".
Section 6111(a): This section authorizes the Secretary to require material advisors for any reportable transaction to make a return setting forth prescribed information.
Section 7805(a): This section grants the Secretary the general authority to prescribe all needful rules and regulations for the enforcement of the Code.

Background: Subchapter K and Basis Adjustments

The regulations focus on transactions involving basis adjustments under Subchapter K of the Code. These adjustments occur when:

Distributions of Partnership Property: When a partnership distributes property, basis adjustments may be required under section 734 of the Code. These adjustments increase or decrease the basis of the partnership’s remaining property, depending on whether the distributee partner recognizes a gain or loss or the basis of the distributed property in the partner’s hands differs from the partnership’s adjusted basis in the property.
Transfers of Partnership Interests: When a partnership interest is transferred, a basis adjustment may be required under section 743 of the Code. The transferee partner’s basis in the partnership interest is determined under sections 1011 and following, generally as their cost basis under section 1012. A section 754 election allows for an adjustment to the basis of the partnership’s assets upon a transfer of a partnership interest.
Section 732: This section outlines the rules for determining a partner’s basis in distributed property. In general, if a distribution is not in liquidation of the partner’s interest, the partner’s basis in the property is the same as the partnership’s adjusted basis immediately before the distribution, but it can’t exceed the partner’s basis in their partnership interest. If a distribution is in liquidation of a partner’s interest, the basis of the distributed property is equal to the partner’s basis in the partnership interest.

Specific Transactions of Interest

The final regulations identify several types of partnership related-party basis adjustment transactions as transactions of interest:

Distributions by a Partnership with Related Partners (§ 1.6011-18(c)(1)): These include scenarios where:
- The partnership distributes property to a related partner in a current or liquidating distribution, and the partnership increases the basis of its remaining properties under section 734(b) and (c). This is referred to as a “section 734(b) TOI” in the document.
- The partnership distributes property to a related partner in liquidation of that partner’s interest, and the basis of one or more of those distributed properties is increased under section 732(b) or (c), and the applicable threshold amount is met. This is referred to as a “section 732(b) TOI”.
- The applicable threshold amount is met, as described below.
Transfers of a Partnership Interest to a Related Partner (§ 1.6011-18(c)(2)): This occurs when a partner transfers all or a portion of a partnership interest to a related partner in a nonrecognition transaction, and the basis of one or more partnership properties is increased under section 743(b)(1) and (c), and the applicable threshold amount is met. This is referred to as a “section 743(b) TOI” in the document.
- A special rule applies if a partner receives an interest in a partnership in a recognition transaction, and the basis of the partnership’s assets is increased under section 743(b), and then that partner transfers their partnership interest to a related partner in a nonrecognition transaction. In such cases, only the excess amount of any additional positive basis adjustment resulting from the subsequent nonrecognition transfer, as well as the applicable threshold, is considered for determining if a disclosure is required.
- The term “transfer on the death of a partner” is excluded from these rules. The term means a transfer of a partnership interest from a partner to the partner’s estate, or a deemed transfer from a grantor trust to a trust that becomes a separate entity for federal tax purposes because of the partner’s death.

Substantially Similar Transactions

The final regulations also identify certain transactions as “substantially similar” to those described above. According to section 1.6011-4(c)(4), transactions are substantially similar if they are expected to obtain the same or similar types of tax consequences and are either factually similar or based on the same or similar tax strategy. These include:

Transactions Involving Tax-Indifferent Parties (§ 1.6011-18(d)(1)):
- A transaction that is described above in the “Distributions by a Partnership with Related Partners” section, except that the partners are not related and one or more partners is a tax-indifferent party that facilitates an increase in the basis of partnership property or an increase in the basis of property held by another partner in the partnership, and the applicable threshold amount is met.
- A tax-indifferent party is defined as a person not liable for federal income tax due to their tax-exempt status or who has a gain from the transaction that would not be subject to Federal Income Tax and whose status is known or should be known to other participants or partners.
- The rules regarding tax-indifferent parties now include a knowledge element, where a tax-indifferent party’s status must be known or should be known to other participants in the transaction. Partnerships and S corporations are generally not considered tax-indifferent parties unless they are used to avoid tax-indifferent party status.
- The final regulations limit the calculation of the applicable threshold amount to basis increases that correspond to a basis decrease to the tax-indifferent party for sections 732 and 734 TOIs. See Part IV.B. of the Summary of Comments and Explanation of Revisions.
Recognition Transfers of a Partnership Interest to a Related Party (§ 1.6011-18(d)(2)): A transaction where a partner transfers their partnership interest to a related transferee in a recognition transaction, and the applicable threshold amount is met. The final regulations clarify that the transferor and transferee must be related to each other for this rule to apply.

Applicable Threshold Amount (§ 1.6011-18(c)(3))

A transaction is identified as a transaction of interest only if the sum of basis increases exceeds the applicable threshold amount. The threshold is calculated by summing all basis increases from the identified transactions, without netting for any basis decreases, then subtracting the gain recognized that is subject to Federal Income Tax by the related parties. The applicable threshold amount is:

$10 million: For transactions that occur after the six-year lookback period.
$25 million: For transactions that occur within the six-year lookback period. The six-year lookback period is defined as the 72 months immediately preceding the first month of the taxpayer’s most recent tax year that began before January 14, 2025.
Special Rules:
- For section 734(b) TOIs, only the related partners’ share of the basis increase is included when calculating whether the threshold is met.
- For section 732(b) TOIs, the threshold calculation excludes basis increases that correspond to basis decreases borne by unrelated partners, unless they are tax-indifferent parties.
- In the case of substantially similar transactions, the basis increase is only counted to the extent of a corresponding basis decrease to the tax-indifferent party.

Participation in a Transaction of Interest (§ 1.6011-18(e))

The final regulations define who participates in a transaction of interest. This includes:

Participating Partners: A partner who directly receives a distribution of property or transfers or receives a partnership interest.
Participating Partnerships: A partnership that makes a distribution of property or where a partnership interest is transferred.
Related Subsequent Transferees: Any person who is related to a participating partner and who receives property that was subject to a basis increase in a nonrecognition transaction.
Subsequent Realization of Tax Benefit: A participant who benefits from the tax consequences of a basis increase from a transaction of interest (such as through cost recovery deductions) also participates in the transaction.

Disclosure Requirements (§ 1.6011-18(f))

Participants must provide the information required under § 1.6011-4(d) and the instructions for Form 8886 for each year in which they participate in a transaction of interest. Disclosure includes:

The names and identifying numbers of all participants.
All basis adjustments resulting from the transaction.
Any Federal income tax consequences realized during the taxable year as a result of the transaction.
- The Federal income tax consequences attributable to an increase in basis are limited to those attributable to the increase in basis.
Six-Year Lookback Rule: For transactions occurring before the regulations are published, the disclosure requirement applies only if the transaction occurred within the six-year lookback period.

Special Considerations

Publicly Traded Partnerships (PTPs): The regulations exclude basis adjustments from the transfer of or distribution of partnership interests in a PTP, except when the transaction involves related partners through a private transfer, redemption, or private placement.
Cash Distributions: Cash distributions can be considered "property" for the purposes of section 734(b), but distributions where gain is recognized and tax is paid do not count toward the threshold.
Transfers Between Unrelated Partners: The final regulations clarify that, in the case of a section 743(b) TOI, a related partner is a transferor and transferee of a partnership interest that are related to each other immediately before or after a section 743(b) TOI. The definition does not include a transferee who is unrelated to a transferor but related to one or more partners in the partnership.
Section 754 Elections: The regulations do not provide an exception to the reporting requirements if a section 754 election was not made for a transaction that would have provided a basis adjustment. Taxpayers who fail to make a timely election can seek relief under §§ 301.9100-1 through 301.9100-3.

Prepared with assistance from NotebookLM

A copy of the final regulations can be downloaded from https://public-inspection.federalregister.gov/2025-00324.pdf