Global Daily Tax News, US Authorities Launch Partnership Tax Avoidance Crackdown, (Jun 20, 2024)

On June 17, the US Treasury Department and the IRS announced a new regulatory initiative to close a major tax loophole being exploited by some large, complex partnerships.

New guidance released by the two agencies sets out measures to prevent large, complex partnerships from using opaque business structures to inflate tax deductions and avoid taxes.

Releasing the new guidance, the Treasury said, "Among the techniques these taxpayers rely on to make billions of dollars in taxable income disappear are what are known as partnership basis shifting transactions. In these transactions, a single business that operates through many different legal entities ("related parties") enters into a set of transactions that manipulate partnership tax rules to maximize tax deductions and minimize tax liability. These transactions defy congressional intent to avoid tax liability with little to no other economic consequences for the participating businesses. 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."

The Treasury estimates the initiative could raise more than USD50bn in revenue over 10 years.

The two agencies are to propose regulations under existing regulatory authority to stop related parties in complex partnership structures from shifting the tax basis of their assets among each other to take abusive deductions or reduce gains when the asset is sold.

In addition, Treasury and IRS are proposing to increase the reporting of these transactions to the IRS and are providing a ruling to inform taxpayers that certain transactions will be challenged for lack of economic substance.

Several pieces of guidance are to be released:

First, Treasury and IRS have released a notice of intent to issue proposed regulations that previews two future proposed rules. The first Notice of Proposed Rulemaking (NPRM) would provide mechanical rules under the partnership tax provisions regarding the effects of basis adjustments resulting from related party partnership basis shifting transactions. The proposed regulations, once finalized, would effectively eliminate the inappropriate tax benefits created from these abusive transactions between related parties.

The other NPRM would apply a single-entity approach with respect to interests in a partnership held by members of a consolidated group, which are groups of corporations that share an 80 percent vote and value stock ownership and file a consolidated tax return. The regulations, once final, would prevent partnership basis shifting amongst members of a consolidated group.

Second, Treasury and the IRS have released an NPRM that would require taxpayers and their material advisers to report if they and their clients are participating in these partnership basis shifting transactions. The goal of the NPRM is to provide the IRS with additional information to better assess the scale and characteristics of the abuse and help direct IRS enforcement resources. The threshold for reporting would be set at USD5m or more of positive basis adjustments generated through covered transactions in a single tax year and for which no tax was paid.

Finally, Treasury and IRS have released a Revenue Ruling that provides that certain related-party partnership transactions involving basis shifting lack economic substance. The agencies said: "The ruling will support the IRS' position in current and future audits and litigation that many of these transactions violate the codified economic substance doctrine because the transaction creates no meaningful change to the economics of the parties as compared to the tax benefit or has no substantial business purpose."