IRS Proposes to Remove Partnership Related Party Basis Shifting Transaction Regs

(Parker Tax Publishing March 2026)

The IRS issued proposed regulations that would remove the regulations in Reg. Sec. 1.6011-18 that identify certain partnership related-party basis adjustment transactions and substantially similar transactions as transactions of interest, a type of reportable transaction (Basis Shifting TOI Regulations). The proposed regulations are consistent with the guidance issued in Notice 2025-23, in which the IRS announced that it intended to remove the Basis Shifting TOI Regulations and granted penalty relief for participants in and material advisors to such transactions. REG-108921-25.

Background

Under Code Sec. 732, a distribution by a partnership of the partnership's property (partnership property) or a transfer of an interest in a partnership (partnership interest) may result in an adjustment to the basis of the distributed property, partnership property, or both. In the case of a distribution of partnership property to a partner by a partnership with an election under Code Sec. 754 (Section 754 election), or with respect to which there is a substantial basis reduction as described in Code Sec. 734(d), the distribution may also result in an adjustment to the basis of the partnership's remaining property under Code Sec. 734(b).

If a partnership interest is transferred by sale or exchange or on the death of a partner, and the partnership either has a Section 754 election in effect or has a substantial built-in loss with respect to the transfer of the partnership interest as described in Code Sec. 743(d), the transfer may result in an adjustment to the basis of partnership property under Code Sec. 743(b) with respect to the transferee partner.

On June 18, 2024, the IRS published proposed regulations (REG-124593-23) identifying certain partnership related-party basis adjustment transactions and substantially similar transactions as transactions of interest, a type of reportable transaction (Basis Shifting TOI Proposed Regulations). On January 14, 2025, the IRS finalized the Basis Shifting TOI Proposed Regulations with modifications in response to comments with the publication of final regulations in T.D. 10028 (Basis Shifting TOI Regulations). The purpose of the Basis Shifting TOI Regulations was to provide information to the IRS that could help identify abusive basis shifting transactions. However, taxpayers and their material advisors criticized the Basis Shifting TOI Regulations as imposing complex, burdensome, and retroactive disclosure obligations on many ordinary-course and tax-compliant business activities, creating costly compliance obligations and uncertainty for businesses. The IRS agreed that the compliance burden of the Basis Shifting TOI Regulations was substantial and likely exceeded the benefits of the Basis Shifting TOI Regulations.

In Notice 2025-23, the IRS announced that it intended to publish a notice of proposed rulemaking proposing the removal of the Basis Shifting TOI Regulations. Notice 2025-23 further stated that taxpayers and their material advisors could rely on the notice until the IRS removed the Basis Shifting TOI Regulations. Notice 2025-23 additionally stated that the IRS will (1) waive penalties under Code Sec. 6707A(a) for participants in transactions identified in the Basis Shifting TOI Regulations, and (2) waive penalties under Code Secs. 6707(a) and 6708 for material advisors to transactions identified in the Basis Shifting TOI Regulations.

REG-108921-25

On March 5, the IRS issued proposed regulations (Removal NPRM) that, consistent with Notice 2025-23, propose to remove the Basis Shifting TOI Regulations. The proposed removal of the Basis Shifting TOI Regulations would be effective on the date that the IRS publishes final regulations (Forthcoming Final Regulations). The IRS intends that the Treasury decision adopting the Forthcoming Final Regulations will provide that participants and material advisors may treat the removal of the Basis Shifting TOI Regulations as occurring on January 14, 2025, which is the applicability date of the Basis Shifting TOI Regulations. Thus, participants and material advisors will be able to treat the Basis Shifting TOI Regulations as never having taken effect.

Consistent with Notice 2025-23, participants and material advisors may continue relying on that notice until the IRS finalizes the Removal NPRM with the publication of the Forthcoming Final Regulations.

For a discussion of the withdrawal of the Basis Shifting TOI Regulations, see Parker Tax ¶24,670.

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