Certain Partnership Related-Party Basis Adjustment Transactions as Transactions of Interest, 51476-51491 [2024-13282]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 89, Number 118 (Tuesday, June 18, 2024)]
[Proposed Rules]
[Pages 51476-51491]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-13282]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-124593-23]
RIN 1545-BR07


Certain Partnership Related-Party Basis Adjustment Transactions 
as Transactions of Interest

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and public hearing.

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SUMMARY: This document contains proposed regulations that would 
identify certain partnership related-party basis adjustment 
transactions and substantially similar transactions as transactions of 
interest, a type of

[[Page 51477]]

reportable transaction. Material advisors and certain participants in 
these transactions would be required to file disclosures with the IRS 
and would be subject to penalties for failure to disclose. The proposed 
regulations would affect participants in these transactions as well as 
material advisors. This document also provides a notice of a public 
hearing on the proposed regulations.

DATES: 
    Comments due: Written or electronic comments must be received by 
August 19, 2024.
    Public hearing: A public hearing on this proposed regulation has 
been scheduled for Tuesday, September 17, 2024, at 10 a.m. ET. Requests 
to speak and outlines of topics to be discussed at the public hearing 
must be received by August 19, 2024. If no outlines are received by 
August 19, 2024, the public hearing will be cancelled. Requests to 
attend the public hearing must be received by 5 p.m. ET on September 
13, 2024. The public hearing will be made accessible to people with 
disabilities. Requests for special assistance during the public hearing 
must be received by 5 p.m. ET on September 12, 2024.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically via the Federal eRulemaking Portal at https://www.regulations.gov (indicate IRS and REG-124593-23) by following the 
online instructions for submitting comments. Requests for a public 
hearing must be submitted as prescribed in the ``Comments and Requests 
for a Public Hearing'' section. Once submitted to the Federal 
eRulemaking Portal, comments cannot be edited or withdrawn. The 
Department of the Treasury (Treasury Department) and the IRS will 
publish for public availability any comments submitted to the IRS's 
public docket. Send paper submissions to: CC:PA:01:PR (REG-124593-23), 
Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin 
Station, Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Elizabeth Zanet of the Office of Associate Chief Counsel (Passthroughs 
and Special Industries), (202) 317-6007; concerning the submission of 
comments or the hearing, Vivian Hayes at (202) 6901 (not toll-free 
numbers) or by email at [email protected] (preferred).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed additions to the Income Tax 
Regulations (26 CFR part 1) under section 6011 of the Internal Revenue 
Code (Code). The proposed additions would add Sec.  1.6011-18 to 
identify certain partnership related-party basis adjustment 
transactions as transactions of interest for purposes of section 6011 
(proposed regulations).

I. Disclosure of Reportable Transactions by Participants and Penalties 
for Failure To Disclose

    Section 6011(a) generally provides that, if required by regulations 
prescribed by the Secretary of the Treasury or her delegate 
(Secretary), any person made liable for any tax imposed by the Code, or 
with respect to the collection thereof, must make a return or statement 
according to the forms and regulations prescribed by the Secretary. 
Every person required to make a return or statement must include 
therein the information required by such forms or regulations.
    Section 1.6011-4(a) provides that every taxpayer that has 
participated in a reportable transaction within the meaning of Sec.  
1.6011-4(b) and who is required to file a tax return must file a 
disclosure statement within the time prescribed in Sec.  1.6011-4(e). 
Reportable transactions are identified in Sec.  1.6011-4 and include 
listed transactions, confidential transactions, transactions with 
contractual protection, loss transactions, and transactions of 
interest. See Sec.  1.6011-4(b)(2) through (6). Section 1.6011-4(b)(6) 
defines a ``transaction of interest'' as a transaction that is the same 
as or substantially similar to one of the types of transactions that 
the IRS has identified by notice, regulation, or other form of 
published guidance as a transaction of interest.
    Section 1.6011-4(c)(4) provides that a transaction is 
``substantially similar'' if it is expected to obtain the same or 
similar types of tax consequences and is either factually similar or 
based on the same or similar tax strategy. Receipt of an opinion 
regarding the tax consequences of the transaction is not relevant to 
the determination of whether the transaction is the same as or 
substantially similar to another transaction. Further, the term 
substantially similar must be broadly construed in favor of disclosure. 
For example, a transaction may be substantially similar to a 
transaction of interest even though it may involve different entities 
or use different Code provisions.
    Section 1.6011-4(c)(3)(i)(E) provides that a taxpayer has 
participated in a transaction of interest if the taxpayer is one of the 
types or classes of persons identified as participants in the 
transaction in the published guidance describing the transaction of 
interest.
    Section 1.6011-4(d) and (e) provide that the disclosure statement, 
Form 8886, Reportable Transaction Disclosure Statement (or successor 
form), must be attached to the taxpayer's tax return for each taxable 
year in which a taxpayer participates in a reportable transaction. A 
copy of the disclosure statement must be sent to the IRS's Office of 
Tax Shelter Analysis (OTSA) at the same time that any disclosure 
statement is first filed by the taxpayer pertaining to a particular 
reportable transaction.
    Section 1.6011-4(e)(2)(i) provides that if a transaction becomes a 
transaction of interest after the filing of a taxpayer's tax return 
(including an amended return) reflecting the taxpayer's participation 
in the transaction of interest and before the end of the period of 
limitations for assessment for any taxable year in which the taxpayer 
participated in the transaction of interest, then a disclosure 
statement must be filed with OTSA within 90 calendar days after the 
date on which the transaction becomes a transaction of interest. This 
requirement extends to an amended return and exists regardless of 
whether the taxpayer participated in the transaction in the year the 
transaction became a transaction of interest. The Commissioner of 
Internal Revenue (Commissioner) may also determine the time for 
disclosure of transactions of interest in the published guidance 
identifying the transaction.
    Participants required to disclose these transactions under Sec.  
1.6011-4 who fail to do so are subject to penalties under section 6707A 
of the Code. Section 6707A(b) provides that the amount of the penalty 
is 75 percent of the decrease in tax shown on the return as a result of 
the reportable transaction (or which would have resulted from such 
transaction if such transaction were respected for Federal tax 
purposes), subject to minimum and maximum penalty amounts. The minimum 
penalty amount is $5,000 in the case of a natural person and $10,000 in 
any other case. For a transaction of interest, the maximum penalty 
amount is $10,000 in the case of a natural person and $50,000 in any 
other case.
    Additional penalties may also apply. In general, section 6662A of 
the Code imposes a 20 percent accuracy-related penalty on any 
understatement (as defined in section 6662A(b)(1)) attributable to an 
adequately disclosed reportable transaction. If the taxpayer had a 
requirement to disclose participation in the reportable transaction but 
did not adequately disclose the transaction in accordance

[[Page 51478]]

with the regulations under section 6011, the taxpayer is subject to an 
increased penalty rate equal to 30 percent of the understatement. See 
section 6662A(c). Section 6662A(b)(2) provides that section 6662A 
applies to any item which is attributable to any listed transaction and 
any reportable transaction (other than a listed transaction) if a 
significant purpose of such transaction is the avoidance or evasion of 
Federal income tax.

II. Disclosure of Reportable Transactions by Material Advisors and 
Penalties for Failure To Disclose

    Section 6111(a) provides that each material advisor with respect to 
any reportable transaction must make a return setting forth: (1) 
information identifying and describing the transaction, (2) information 
describing any potential tax benefits expected to result from the 
transaction, and (3) such other information as the Secretary may 
prescribe. Such return must be filed not later than the date specified 
by the Secretary.
    Section 301.6111-3(a) of the Procedure and Administration 
Regulations (26 CFR part 301) provides that each material advisor with 
respect to any reportable transaction, as defined in Sec.  1.6011-4(b), 
must file a return as described in Sec.  301.6111-3(d) by the date 
described in Sec.  301.6111-3(e).
    Section 301.6111-3(b)(1) provides that a person is a material 
advisor with respect to a transaction if the person provides any 
material aid, assistance, or advice with respect to organizing, 
managing, promoting, selling, implementing, insuring, or carrying out 
any reportable transaction, and directly or indirectly derives gross 
income in excess of the threshold amount as defined in Sec.  301.6111-
3(b)(3) for the material aid, assistance, or advice. Under Sec.  
301.6111-3(b)(2)(i) and (ii), a person provides material aid, 
assistance, or advice if the person provides a tax statement, which is 
any statement (including another person's statement), oral or written, 
that relates to a tax aspect of a transaction that causes the 
transaction to be a reportable transaction as defined in Sec.  1.6011-
4(b)(2) through (7).
    Material advisors must disclose transactions on Form 8918, Material 
Advisor Disclosure Statement (or successor form), as provided in Sec.  
301.6111-3(d) and (e). Section 301.6111-3(e) provides that the material 
advisor's disclosure statement for a reportable transaction must be 
filed with the OTSA by the last day of the month that follows the end 
of the calendar quarter in which the advisor becomes a material advisor 
with respect to a reportable transaction or in which the circumstances 
necessitating an amended disclosure statement occur. A person may 
become a material advisor with respect to a transaction that is later 
identified as a transaction of interest. See Sec.  301.6111-3(b)(4). 
The disclosure statement must be sent to the OTSA at the address 
provided in the instructions for Form 8918 (or successor form).
    Section 301.6111-3(d)(2) provides that the IRS will issue to a 
material advisor a reportable transaction number with respect to the 
disclosed reportable transaction. Receipt of a reportable transaction 
number does not indicate that the disclosure statement is complete, nor 
does it indicate that the transaction has been reviewed, examined, or 
approved by the IRS. Material advisors must provide the reportable 
transaction number to all taxpayers for whom the material advisor acts 
as a material advisor as defined in Sec.  301.6111-3(b). The reportable 
transaction number must be provided at the time the transaction is 
entered into, or if the transaction is entered into prior to the 
material advisor receiving the reportable transaction number, within 60 
calendar days from the date the reportable transaction number is mailed 
to the material advisor.
    Section 6707(a) of the Code provides that a material advisor who 
fails to file a timely disclosure, or files an incomplete or false 
disclosure statement, is subject to a penalty. Pursuant to section 
6707(b)(1), the penalty for reportable transactions other than listed 
transactions, including transactions of interest, is $50,000.
    Additionally, section 6112(a) of the Code provides that each 
material advisor with respect to any reportable transaction, whether or 
not required to file a return under section 6111 with respect to such 
transaction, must maintain a list (1) identifying each person with 
respect to whom such advisor acted as a material advisor with respect 
to such transaction and (2) containing such other information as the 
Secretary may by regulations require. Material advisors must furnish 
such lists to the IRS in accordance with Sec.  301.6112-1(e).
    A material advisor may be subject to a penalty under section 6708 
of the Code for failing to maintain a list under section 6112(a) and 
failing to make the list available upon written request to the 
Secretary in accordance with section 6112(b) within 20 business days 
after the date of request. Section 6708(a) provides that the penalty is 
$10,000 per day for each day of the failure after the 20th day. 
However, no penalty will be imposed with respect to the failure on any 
day if such failure is due to reasonable cause.

III. Basis Adjustments Under Subchapter K

A. In General

    Under subchapter K of chapter 1 of the Code (subchapter K), 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.
    A distribution of partnership property may result in an adjustment 
to the basis of the distributed property under section 732(a), (b), or 
(d) of the Code. In the case of a distribution of partnership property 
to a partner by a partnership with an election under section 754 of the 
Code (section 754 election) in effect, or with respect to which there 
is a substantial basis reduction as described in section 734(d) of the 
Code, the distribution may also result in an adjustment to the basis of 
the partnership's remaining property (remaining partnership property) 
under section 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 section 743(d) 
of the Code, the transfer may result in an adjustment to the basis of 
partnership property under section 743(b) with respect to the 
transferee partner.
    Section 754 provides that if a partnership makes an election in 
accordance with regulations prescribed by the Secretary, the basis of 
partnership property shall be adjusted, in the case of a distribution 
of property, in the manner provided by section 734, and in the case of 
a transfer of a partnership interest, in the manner provided in section 
743. Unless the election is revoked in accordance with the regulations 
under section 754, the section 754 election applies with respect to all 
distributions of property by the partnership and to all transfers of 
interests in the partnership during the taxable year with respect to 
which the election was filed and all subsequent taxable years.

B. Basis Adjustments Under Section 732

    Section 732 governs a distributee partner's basis in distributed 
property other than money. In the case of a current distribution, and 
except as

[[Page 51479]]

provided under section 732(a)(1) and (2) provides that the distributee 
partner's basis in distributed property (other than money) is equal to 
the partnership's adjusted basis in the distributed property 
immediately before the distribution. Under section 732(a)(2), however, 
a distributee partner's basis in distributed property is limited to the 
adjusted basis of the distributee partner's partnership interest 
reduced by any money distributed to such partner in the same 
transaction.
    In the case of a liquidating distribution, section 732(b) provides 
that the distributee partner's basis in distributed property (other 
than money) is equal to the adjusted basis of the distributee partner's 
partnership interest reduced by any money distributed to such partner 
in the same transaction.
    In the case of a distribution of more than one property from a 
partnership, the basis of the distributed properties to which section 
732(a)(2) and (b) apply must be allocated among the distributed 
properties under the rules of section 732(c) and the regulations 
thereunder.

C. Basis Adjustments Under Section 734

    In the case of a distribution of property by a partnership with a 
section 754 election in effect, and for which either the distributee 
partner recognizes gain or loss on the distribution, or for which the 
basis of the distributed property in the distributee partner's hands, 
as determined under section 732, differs from the partnership's 
adjusted basis in the distributed property immediately before the 
distribution, section 734(b) requires the partnership to increase or 
decrease (as applicable) the basis of its remaining partnership 
property. Also, in the case of a distribution of property by a 
partnership that results in a substantial basis reduction under section 
734(d), the basis of remaining partnership property must be adjusted 
under section 734(b), even if the partnership does not have a section 
754 election in effect.
    Section 734(b)(1) requires a partnership to increase the basis of 
its remaining partnership property if a distribution of partnership 
property by the partnership results in the distributee partner 
recognizing gain under section 731(a)(1) of the Code, or if property 
(other than money) to which section 732(a)(2) or (b) applies is 
distributed to the distributee partner and the property's adjusted 
basis to the partnership immediately before the distribution is greater 
than the distributee partner's basis in the distributed property as 
determined under section 732. Section 731(a)(1) requires a distributee 
partner to recognize gain in a current or liquidating distribution to 
the extent that any money distributed to that partner in the 
distribution exceeds the adjusted basis of that partner's partnership 
interest immediately before the distribution. The amount of the basis 
increase to the partnership's remaining property under section 
734(b)(1) following a distribution of partnership property to a partner 
is equal to the amount of gain recognized by the distributee partner in 
the distribution under section 731(a)(1) and the excess of the 
partnership's adjusted basis in the distributed property immediately 
before the distribution over the distributee partner's basis in the 
distributed property as determined under section 732.
    Section 734(b)(2) requires a partnership to decrease the basis of 
its remaining property if a distribution of property by the partnership 
results in the distributee partner recognizing loss under section 
731(a)(2), or if property (other than money) is distributed to the 
distributee partner in a distribution to which section 732(b) applies 
and the property's adjusted basis to the partnership immediately before 
the distribution is less than the distributee partner's basis in the 
distributed property as determined under section 732. Under section 
731(a)(2), a distributee partner may recognize a loss in a liquidating 
distribution of that partner's interest in the partnership to the 
extent that such partner received only money, unrealized receivables 
described in section 751(c), or inventory items described in section 
751(d) of the Code in the distribution. In such a case, the distributee 
partner is required to recognize a loss to the extent that such 
partner's adjusted basis in the partnership interest exceeds the sum of 
any money distributed to that partner in the distribution and the basis 
to the distributee partner (determined under section 732) of any 
unrealized receivables or inventory received by that partner in the 
distribution. The amount of the basis decrease to the partnership's 
remaining property under section 734(b)(2) following a distribution of 
partnership property to a partner is equal to the amount of loss 
recognized by the distributee partner in the distribution under section 
731(a)(2) and the excess of the distributee partner's basis in the 
distributed property as determined under section 732 over the 
partnership's adjusted basis in the distributed property immediately 
before the distribution.
    A partnership without a section 754 election in effect is subject 
to a mandatory basis adjustment under section 734(b)(2) if there is a 
substantial basis reduction with respect to a distribution of 
partnership property. Under section 734(d), a substantial basis 
reduction with respect to a distribution of partnership property occurs 
if the sum of the amount of loss recognized to the distributee partner 
on the distribution, plus any increase in basis in the distributed 
property to the distributee partner under section 732(b), exceeds 
$250,000.

D. Basis Adjustments Under Section 743(b)

    Generally, if a partnership interest is transferred in a sale or 
exchange or on the death of a partner, the transferee partner's basis 
in the transferred partnership interest is determined under section 742 
of the Code and the basis of partnership property is determined under 
section 743(a). Section 742 provides that the transferee partner's 
basis in a partnership interest acquired other than by contribution is 
determined under part II of subchapter O of chapter 1 of the Code, 
beginning at section 1011 of the Code and following. Thus, for example, 
a transferee partner's basis in a partnership interest acquired by 
purchase generally is cost basis under section 1012 of the Code. 
Section 743(a) provides that, in the case of a transfer of a 
partnership interest by sale or exchange or on the death of a partner, 
the basis of partnership property is not adjusted unless either the 
partnership has a section 754 election in effect or the partnership has 
a substantial built-in loss with respect to the transfer of the 
partnership interest.
    Under section 743(b), in the case of a transfer of a partnership 
interest by sale or exchange or on the death of a partner, a 
partnership with a section 754 election in effect or that has a 
substantial built-in loss with respect to the transfer of the 
partnership interest must increase or decrease (as applicable) the 
adjusted basis of partnership property with respect to the transferee 
partner.
    Section 743(b)(1) provides that the adjusted basis of partnership 
property is increased by the excess of the transferee partner's basis 
in the transferred partnership interest over the transferee partner's 
proportionate share of the adjusted basis of partnership property.
    Section 743(b)(2) provides that the adjusted basis of partnership 
property is decreased by the excess of the transferee partner's 
proportionate share of the adjusted basis of partnership property over 
the transferee partner's basis in the transferred partnership interest.
    A partnership without a section 754 election is subject to a 
mandatory basis

[[Page 51480]]

adjustment under section 743(b) with respect to a transfer of a 
partnership interest if the partnership has a substantial built-in loss 
with respect to the transfer of the partnership interest. Under section 
743(d)(1), a partnership has a substantial built-in loss with respect 
to a transfer of an interest in the partnership if either the 
partnership's adjusted basis in its property exceeds the fair market 
value of such property by more than $250,000, or the transferee partner 
would be allocated a loss of more than $250,000 if the partnership 
assets were sold for cash equal to their fair market value immediately 
after the transfer.
    Under regulations prescribed by the Secretary, a basis adjustment 
under section 743(b) is an adjustment to the basis of partnership 
property with respect to the transferee partner only. The transferee 
partner's proportionate share of the partnership's adjusted basis in 
its property generally is determined in accordance with the transferee 
partner's interest in the partnership's previously taxed capital 
(including the transferee partner's share of partnership liabilities) 
under regulations prescribed by the Secretary.
    In the case of a transferee partner who acquired all or part of its 
partnership interest by a transfer to which no section 754 election was 
in effect, and to whom a distribution of property (other than money) is 
made with respect to the transferred interest within two years, section 
732(d) and the regulations thereunder allow the partner to make an 
election to treat as the adjusted basis of the distributed property the 
adjusted basis such property would have if the adjustment under section 
743(b) were in effect with respect to the partnership property.
    Under Sec.  1.732-1(d)(4), the special basis adjustment under 
section 732(d) is required to apply to a distribution of property to a 
partner who acquired all or part of its interest by a transfer from a 
partnership without a section 754 election in effect for the taxable 
year of such transfer, whether or not the distribution is made within 
two years of such transfer, if at the time the partnership interest was 
transferred, (i) the fair market value of all partnership property 
(other than money) exceeded 110 percent of its adjusted basis to the 
partnership, (ii) an allocation of basis under section 732(c) upon a 
liquidation of the transferee partner's interest in the partnership 
immediately after the transfer of such interest would have resulted in 
a shift of basis from property not subject to an allowance for 
depreciation, depletion, or amortization to property subject to such an 
allowance, and (iii) a basis adjustment under section 743(b) would 
change the basis to the transferee partner of the property actually 
distributed.

E. Allocation of Basis Adjustments Under Sections 734 and 743

    Section 734(c) states that a basis adjustment under section 734(b) 
is allocated among partnership properties under the rules of section 
755 of the Code. Section 743(c) states that a basis adjustment under 
section 743(b) is allocated among partnership properties under the 
rules of section 755.
    Section 755(a) generally requires basis adjustments under section 
734(b) or section 743(b) to be allocated in a manner that has the 
effect of reducing the difference between the fair market value and the 
adjusted basis of partnership properties or in any other manner 
permitted by regulations. In addition, section 755(b) requires these 
basis adjustments to be allocated to partnership property of a like 
character or to subsequently acquired partnership property of a like 
character if such property is not available or has insufficient basis 
at the time of the basis adjustment (because a decrease in the adjusted 
basis of the property would reduce the basis of such property below 
zero). Section 755(c) provides a special rule that prohibits allocating 
a basis decrease under section 734(b) to the stock of a corporation 
that is a partner of the partnership (or to any related partner in the 
partnership within the meaning of section 267(b) of the Code or section 
707(b)(1) of the Code).

F. Common Terminology for Bases With Respect to a Partnership Interest

    A partner's adjusted basis in its partnership interest commonly is 
referred to as the partner's ``outside basis'' in its partnership 
interest. A partnership's adjusted basis in its property commonly is 
referred to as the ``inside basis'' of the partnership's property. Each 
partner has a share of inside basis. For ease of explanation, this 
terminology is used in part IV of this Background section.

IV. Partnership Related-Party Basis Adjustment Transactions

A. Overview

    The Treasury Department and the IRS are aware of related persons 
using partnerships to engage in transactions that inappropriately 
exploit the basis adjustment provisions of subchapter K applicable to 
distributions of partnership property or transfers of partnership 
interests discussed in part III of this Background section. This 
awareness results from the IRS's review of various partnership 
transactions involving related parties in which basis adjustments were 
created to artificially generate or regenerate Federal income tax 
benefits that resulted in significant tax savings without a 
corresponding economic outlay. These transactions were carefully 
structured to exploit the mechanical basis adjustment provisions of 
subchapter K to produce significant tax benefits with little or no 
economic impact on the related parties, and in a manner that would not 
be a likely arrangement between partners negotiating at arm's-length.
    Four variations of the transactions are referred to in this 
preamble as ``Partnership Related-Party Basis Adjustment 
Transactions.'' The manner in which the transactions exploit the basis 
adjustment provisions of sections 732(b) and (d), 734(b), and 743(b), 
and the potential for tax abuse presented by the transactions are 
described in this part IV and part VI of this Background section.
    Generally, in a Partnership Related-Party Basis Adjustment 
Transaction, partnership property is distributed to a partner who is 
related to one or more other partners, and that distribution results in 
a person related to the distributee partner, the distributee partner, 
or both, receiving all or a share of a basis increase in the 
distributed property or remaining partnership property under section 
732 or 734(b) (as applicable); alternatively, a partnership interest is 
transferred between related persons or to a transferee partner who is 
related to an existing partner in the partnership, and that transfer 
results in an increase to the inside basis in partnership property with 
respect to the transferee partner under section 743(b).
    Partnership Related-Party Basis Adjustment Transactions generally 
are structured so that, under the applicable allocation rules (sections 
732(c), 734(c), 743(c), and 755), the basis increase is allocated to 
property that is eligible for cost recovery allowances (or eligible for 
a shorter cost recovery period) or that the partnership or the 
distributee partner disposes of in a taxable sale or exchange. 
Accordingly, the basis increase results in related partners decreasing 
their overall taxable income through additional or accelerated cost 
recovery allowances or decreasing their taxable gain or increasing 
their taxable loss on the subsequent taxable disposition of the 
property subject to the basis increase.
    The related partners receive these tax benefits directly in the 
case of a distribution of property in which the basis of the 
distributed property is

[[Page 51481]]

increased in the distributee partner's hands under section 732(b) or 
(d). They receive these benefits indirectly in the case of a transfer 
of a partnership interest in which the inside basis of partnership 
property is increased for the transferee partner under section 743(b) 
or in the case of a distribution of property that results in an 
increase to the common basis of partnership property under section 
734(b). Whether the tax benefits are received directly or indirectly, 
the resulting decrease in taxable income or gain (or increase in 
taxable loss) benefits the related-party group as a whole. Further, 
because the partners are related, the distributions or transfers may 
have little or no effect on the overall economic ownership of the 
property yet produce significant tax benefits shared by the related 
partners.
    A related partner's partnership interest must have certain 
characteristics to create the opportunity for a Partnership Related-
Party Basis Adjustment Transaction. In general, these characteristics 
are (1) a partner's outside basis in its partnership interest that is 
low compared to the partnership's basis in property it distributes to 
such partner, (2) a partner's outside basis in its partnership interest 
that is high compared to such partner's share of the partnership's 
basis in the partnership property (that is, the partner's share of 
inside basis), or (3) a partner's outside basis in its partnership 
interest that is high compared to the partnership's basis in property 
it distributes to such partner in liquidation of the partner's 
interest. Partnerships with related parties can create these 
characteristics through orchestrated contributions and distributions, 
as well as allocations under section 704(b) and (c). In most commercial 
transactions involving unrelated parties, the opportunity for abuse is 
limited because each party has separate, and often competing, economic 
and tax interests and the parties transact at arm's length. In 
contrast, for related parties, basis can be manipulated to provide a 
material net tax benefit to the related parties, as illustrated in part 
IV.B, C, D and E of this Background section.

B. Partnership Related-Party Basis Adjustment Transactions Under 
Section 734(b)

    In a Partnership Related-Party Basis Adjustment Transaction under 
section 734(b), a partnership with a section 754 election in effect and 
two or more direct or indirect partners that are related to each other 
makes a current or liquidating distribution of partnership property to 
one or more of the related partners. Immediately before the 
distribution, the partnership's basis in the distributed partnership 
property exceeds the distributee partner's basis in its partnership 
interest (that is, the partnership distributes property with a 
relatively high inside basis to a distributee partner with a relatively 
low outside basis). Under section 732(a)(2) or (b), the low-outside 
basis partner takes a basis in the distributed property that is lower 
than the inside basis of the property immediately before the 
distribution.
    As a result of the basis decrease to the distributed property in 
the hands of the distributee partner under section 732(a)(2) or (b), 
the partnership increases the basis of its remaining partnership 
properties under section 734(b) by an amount equal to the excess of the 
partnership's basis in the distributed property immediately before the 
distribution over the basis of the distributed property in the hands of 
the distributee partner immediately after the distribution.
    As a result of the distribution, under sections 734(c) and 755, the 
partnership allocates the basis increase to its remaining partnership 
properties; these remaining partnership properties are eligible for 
cost recovery allowances or are disposed of by the partnership in a 
taxable sale or exchange. The partnership then claims increased cost 
recovery allowances or decreased taxable gain (or increased taxable 
loss) on the disposition of the partnership property with the increased 
basis.
    Because the transaction occurs among related persons, any economic 
consequences inherent in distributing partnership property to a partner 
that will have to reduce the basis of the distributed property under 
section 732(a)(2) or (b) can be minimized. For example, the distributed 
property might be property that the distributee partner intends to hold 
indefinitely and that is not eligible for cost recovery allowances. 
Further, because the transaction occurs among related persons, the 
overall economic ownership of the property remains substantially the 
same as before the transaction.
    Related parties may choose to structure a distribution of 
partnership property to a related partner so that gain is recognized, 
for example, by distributing cash or marketable securities. If the 
recognized gain is insignificant compared with the increase in basis 
obtained under section 734(b) or is offset because of a tax attribute 
of the distributee partner (such as net operating losses), then the 
transfer may be considered a Partnership Related-Party Basis Adjustment 
Transaction under section 734(b).

C. Partnership Related-Party Basis Adjustment Transactions Under 
Section 743(b)

    In a Partnership Related-Party Basis Adjustment Transaction under 
section 743(b), a partner transfers an interest in a partnership with a 
section 754 election in effect to a related transferee or a transferee 
that is related to one or more of the partners in a nonrecognition 
transaction within the meaning of section 7701(a)(45) of the Code, such 
as a transfer under section 351(a) or 721(a) of the Code. Because the 
transfer is accomplished through a nonrecognition transaction, the 
transferee's basis in the transferred partnership interest generally 
will be equal to the transferor partner's basis in the transferred 
partnership interest (that is, the transferred partnership interest 
will be substituted basis property within the meaning of section 
7701(a)(42) of the Code, such as that provided under section 362(a) of 
the Code in the case of a transfer of property to a corporation in 
exchange for stock under section 351(a), or under section 722 of the 
Code in the case of a transfer of property to a partnership in exchange 
for a partnership interest under section 721(a)).
    In order for the transfer to give rise to a basis increase under 
section 743(b)(1), the transferor partner must have an inside-outside 
basis disparity with respect to its partnership interest so that the 
transferor partner's basis in the partnership interest (that is, the 
transferor partner's outside basis that carries over to the transferee 
partner) is greater than the transferor partner's share of the 
partnership's basis in its properties (that is, the transferor 
partner's share of inside basis immediately prior to the transfer). 
Because a section 754 election is in effect for the taxable year of the 
transfer, section 743(b) requires a basis increase to eliminate the 
inside-outside basis disparity of the transferee partner. The basis 
increase under section 743(b)(1) is equal to the excess of the 
transferee partner's outside basis over its proportionate share of the 
inside basis.
    As a result of the transfer, under sections 743(c) and 755, the 
partnership allocates the basis increase with respect to the transferee 
partner to its partnership properties; these properties are eligible 
for cost recovery allowances or are disposed of by the partnership in a 
taxable sale or exchange. The transferee partner then receives 
increased allocations of cost recovery

[[Page 51482]]

allowances or lower allocations of taxable gain (or higher allocations 
of taxable loss) on the sale or exchange of the property by the 
partnership. Further, because the transaction occurs among related 
persons, the overall economic ownership of the partnership among the 
related partners remains the same as before the transaction.
    Related parties may choose to structure a transfer of a partnership 
interest between a related transferor partner and related transferee so 
that gain is recognized. If the recognized gain is insignificant 
compared with the increase in basis obtained under section 743(b)(1) or 
is offset because of a tax attribute of the transferor (such as net 
operating losses), then the transfer may be considered a Partnership 
Related-Party Basis Adjustment Transaction under section 743(b).

D. Partnership Related-Party Basis Adjustment Transactions Under 
Section 732(b)

    In a Partnership Related-Party Basis Adjustment Transaction under 
section 732(b), a partnership with two or more direct or indirect 
partners that are related makes a liquidating distribution of property 
to a related partner. Immediately before the distribution, the 
partnership's basis in the distributed property was relatively low and 
the distributee partner had a relatively high outside basis. Under 
section 732(b), the distributee partner's basis in the distributed 
property is equal to the partner's outside basis. As a result, the 
distributed property's basis is increased by an amount equal to the 
excess of the distributee partner's outside basis over the 
partnership's basis in the distributed property. As part of the 
transaction, under section 732(b) and (c), the distributee partner 
allocates the basis increase to its distributed property; this property 
is eligible for cost recovery allowances or is property that the 
distributee partner disposes of in a taxable sale or exchange. 
Accordingly, the distributee partner receives increased cost recovery 
allowances or decreases its taxable gain (or increases taxable loss) on 
the disposition of the distributed property.
    Because the transaction occurs among related parties, any economic 
consequences inherent in distributing partnership property that may 
result in tax benefits to the distributee, potentially at the expense 
of the remaining partners, is minimized. Further, because the 
transaction occurs among related persons, the overall economic 
ownership of the property among the related partners remains the same 
as before the transaction.
    As a result of the basis increase to the distributed property, the 
partnership may be required to decrease the basis of one or more of its 
remaining properties under the elective or mandatory basis adjustment 
provisions of section 734(b)(2) or (d). The parties may plan the 
transaction so that this reduction in basis will not have an adverse 
tax effect on the related parties because the partnership can allocate 
the basis reduction to property the partnership intends to hold 
indefinitely and that is not eligible for cost recovery allowances.
    The related parties may achieve similar results through a 
transaction in which the partnership is liquidated. In a Partnership 
Related-Party Basis Adjustment Transaction in which a partnership makes 
liquidating distributions to all partners, a partner with a high 
outside basis (distributee partner) receives a liquidating distribution 
of low-inside basis property that is eligible for cost recovery 
allowances or that the distributee partner disposes of in a taxable 
sale or exchange. The partnership also distributes property to one or 
more parties related to the distributee partner (related distributee 
partner(s)), and such distribution may require a reduction to the basis 
of property under section 732(b) because the related distributee 
partner's basis in the partnership interest at the time of liquidation 
may be low compared to the partnership's basis in the distributed 
property. Similar to the version of the transaction in which only the 
distributee partner's partnership interest is liquidated, the property 
that is subject to reduction in basis as a result of the liquidation 
may be property that the related distributee partner(s) intend to hold 
indefinitely and that is not eligible for cost recovery allowances.

E. Partnership Related-Party Basis Adjustment Transactions Under 
Section 732(d)

    In a Partnership Related-Party Basis Adjustment Transaction under 
section 732(d), a partnership with two or more direct or indirect 
partners that are related makes a current or liquidating distribution 
of property to a related partner. Prior to the distribution, the 
related partner acquired all or part of its partnership interest in a 
transaction that would have been a Partnership Related Party Basis 
Adjustment Transaction under section 743(b) if the partnership had a 
section 754 election in effect.
    The subsequent property distribution to the related transferee 
partner is made within two years of the transfer (in the case of an 
elective basis adjustment under section 732(d)) or at any time after 
the transfer if at the time of the transfer the fair market value of 
the partnership's property (other than money) exceeded 110 percent of 
the property's adjusted basis to the partnership (in the case of a 
mandatory basis under section 732(d)). In either case, under section 
732(d), for purposes of section 732(a), (b), and (c), the adjusted 
partnership basis of the distributed property is treated as equal to 
the adjusted basis the property would have had if the basis adjustment 
under section 743(b) were in effect at the time of the transfer.
    As part of the transaction, the related distributee partner 
receives property with a higher basis than the property had before the 
transaction and either the property is eligible for cost recovery 
allowances or the distributee partner recovers the property's basis by 
disposing of it in a taxable sale or exchange.
    Similar to a Partnership Related-Party Basis Adjustment Transaction 
under section 732(b), because the transaction occurs among related 
parties, any economic consequences inherent in distributing partnership 
property to a partner that, as a result of the distribution, will 
receive tax benefits is lessened or eliminated. Further, because the 
transaction occurs among related persons, the economic ownership of the 
property remains essentially the same as before the transaction.

V. Tax-Indifferent Parties Involved in Partnership Basis Adjustment 
Transactions

    The Treasury Department and the IRS are aware that persons using 
partnerships that include tax-indifferent parties as partners may 
undertake transactions that accomplish the same results as the 
Partnership Related-Party Basis Adjustment Transactions. These 
transactions may take the form of any of the variations of the 
transactions described in part IV of this Background section and 
produce the same tax benefits for the taxable partners, except that the 
partners may not be related and negative tax consequences resulting 
from the transactions are borne by the tax-indifferent party. For 
example, a partnership with a section 754 election in effect and 
unrelated partners, one of which is a tax-indifferent party with a low 
outside basis, may distribute high-basis nondepreciable property to the 
tax-indifferent party. Under section 732(a)(2) or (b), the distribution 
results in the tax-indifferent party taking a basis in the distributed 
property that is lower than the partnership's basis in the property 
immediately before the

[[Page 51483]]

distribution. Under section 734(b), the partnership must adjust the 
basis of its remaining property and, as part of the transaction under 
sections 734(c) and 755, it increases the basis of depreciable 
property. Since the distributee partner is a tax-indifferent party, it 
does not experience any negative tax consequences from receiving 
property subject to a basis decrease as a result of the distribution. 
At the same time, the partners that are not tax-indifferent receive the 
tax benefit of increased cost recovery allowances through the 
partnership.

VI. Potential Tax Avoidance Using Partnership Related-Party Basis 
Adjustment Transactions

    In Partnership Related-Party Basis Adjustment Transactions, related 
persons use partnerships to engage in transactions that inappropriately 
apply the basis adjustments under section 732, 734(b), or 743(b). These 
provisions can be exploited to create inappropriate basis increases to 
the partnership's properties, including any distributed property, but 
without meaningful change in the economic ownership of the properties 
or partnership interests because the parties involved in the 
transactions are related. The basis increases may be used to increase 
cost recovery allowances or decrease taxable gain or increase taxable 
loss on the subsequent taxable disposition of the property by the 
partnership or distributee partner.
    The Treasury Department and the IRS propose to identify the 
Partnership Related-Party Basis Adjustment Transactions and 
substantially similar transactions as transactions of interest under 
proposed regulations described in the Explanation of Provisions section 
of this preamble. Identifying the transactions as transactions of 
interest would substantially improve the IRS's ability to detect 
abusive transactions and gather information about their prevalence and 
the contexts in which they arise.

Explanation of Provisions

I. Partnership Related-Party Basis Adjustment Transactions of Interest

    Proposed Sec.  1.6011-18(a) would identify transactions that are 
the same as or substantially similar (within the meaning of Sec.  
1.6011-4(c)(4)) to transactions described in proposed Sec.  1.6011-
18(c) as transactions of interest for the purposes of Sec.  1.6011-
4(b)(6). Proposed Sec.  1.6011-18(c) would include a relatedness 
requirement and a $5 million minimum threshold requirement. Further, 
proposed Sec.  1.6011-18(a) would identify transactions that are 
substantially similar (within the meaning of Sec.  1.6011-4(c)(4)) to 
the transactions described in proposed Sec.  1.6011-18(c) as including 
the transactions described in proposed Sec.  1.6011-18(d).
    The relatedness requirement would be set forth in proposed Sec.  
1.6011-18(b)(8) and (9). Proposed Sec.  1.6011-18(b)(8) would define 
``related'' as having a relationship described in section 267(b) 
(without regard to section 267(c)(3)) or 707(b)(1). Proposed Sec.  
1.6011-18(b)(9) would define ``related partners'' as partners of a 
partnership that are related in the following manner--(i) in a 
transaction described in proposed Sec.  1.6011-18(c)(1), the 
partnership has two or more direct or indirect partners that are 
related to each other within the meaning of proposed Sec.  1.6011-
18(b)(8), or (ii) in a transaction described in proposed Sec.  1.6011-
18(c)(2), the transferor of a partnership interest is related to the 
transferee, or the transferee is related to one or more of the partners 
in the partnership, within the meaning of proposed Sec.  1.6011-
18(b)(8). The relatedness requirement may be met either immediately 
before or immediately after a basis adjustment transaction described in 
proposed Sec.  1.6011-18(c)(1) or (2).
    Proposed Sec.  1.6011-18(c) would provide that a transaction of 
interest is a transaction the factual elements of which are described 
in proposed Sec.  1.6011-18(c)(1)(i) through (iii) or (c)(2). A basis 
adjustment transaction under proposed Sec.  1.6011-18(c)(1)(i) would 
occur when a partnership makes a current or liquidating distribution of 
property to a partner who is related to one or more partners, the 
partnership increases the basis of one or more of its remaining 
properties under section 734(b) and (c), and the $5 million threshold 
under proposed Sec.  1.6011-18(c)(3) is met.
    A basis adjustment transaction under proposed Sec.  1.6011-
18(c)(1)(ii) would occur when a partnership distributes property to a 
partner who is related to one or more partners in liquidation of a 
partnership interest (or in complete liquidation of the partnership), 
the basis of one or more distributed properties is increased under 
section 732(b) and (c), and the $5 million threshold under proposed 
Sec.  1.6011-18(c)(3) is met.
    A basis adjustment transaction under proposed Sec.  1.6011-
18(c)(1)(iii) would occur when a partnership distributes property to a 
partner who is related to one or more partners, the basis of one or 
more distributed properties is increased under section 732(d), the 
related partner acquired all or a part of its interest in the 
partnership in a transaction that would have been a transaction 
described in proposed Sec.  1.6011-18(c)(2) if the partnership had a 
section 754 election in effect for the year of transfer, and the $5 
million threshold under proposed Sec.  1.6011-18(c)(3) is met.
    A basis adjustment transaction under proposed Sec.  1.6011-18(c)(2) 
would occur when a partner transfers an interest in the partnership to 
a related transferee or to a person who is related to one or more 
existing partners in a nonrecognition transaction, the basis of one or 
more partnership properties is increased under section 743(b)(1) and 
(c), and the $5 million threshold under proposed Sec.  1.6011-18(c)(3) 
is met. Proposed Sec.  1.6011-18(b)(2) would define nonrecognition 
transaction as defined in section 7701(a)(45) (other than a transfer on 
the death of a partner).
    Proposed Sec.  1.6011-18(c)(3) would provide rules for determining 
the $5 million threshold. Under proposed Sec.  1.6011-18(c)(3), a basis 
adjustment would include basis increases from multiple transactions 
described in proposed Sec.  1.6011-18(c)(1) or (2) by the same partner 
or partnership during the taxable year that in the aggregate (without 
netting for any basis adjustments in the same transaction or another 
transaction that reduces basis) and after reducing the resulting 
aggregate amount by the gain recognized, if any, on which tax imposed 
under subtitle A of the Code (subtitle A) is required to be paid by any 
of the related parties to the transaction equal or exceed $5 million. 
Accordingly, a transaction of a partner or partnership described in 
proposed Sec.  1.6011-18(c)(1) or (2) that results in a basis increase 
of less than $5 million during the taxable year would be a transaction 
of interest under proposed Sec.  1.6011-18(a) if, in the same taxable 
year, the partner or partnership participated in another transaction or 
transactions described in proposed Sec.  1.6011-18(c)(1) or (2), and in 
the aggregate, the transactions resulted in a basis increase that 
equals or exceeds $5 million, without regard to any basis decrease 
resulting from the transactions and after reducing the resulting 
aggregate amount by the gain recognized, if any, on which tax imposed 
under subtitle A is required to be paid by any of the related parties 
to the transactions. A threshold of $5 million of basis increases in a 
taxable year to which no corresponding tax is paid should be 
sufficiently large to capture situations that use the provisions of 
subchapter K to produce

[[Page 51484]]

significant tax benefits with little or no economic impact.
    If a basis adjustment transaction is described in proposed Sec.  
1.6011-18(c)(1)(i) through (iii) or (c)(2), any basis adjustments to 
recoverable property must be reported in the taxable year of the basis 
adjustment transaction, in each taxable year there is a cost recovery 
allowance, and in the taxable year the recoverable property is disposed 
of in a transaction in which gain or loss is recognized in whole or in 
part. Any basis adjustments to other property must be reported in the 
taxable year of the basis adjustment transaction and the taxable year 
in which the other property is disposed of in a transaction in which 
gain or loss is recognized in whole or in part. See proposed Sec.  
1.6011-18(e) and (f).
    Proposed Sec.  1.6011-18(b)(7) would define recoverable property as 
property of a character subject to an allowance for depreciation, 
amortization, or depletion under subtitle A of the Code.

II. Examples of Partnership Related-Party Basis Adjustment Transactions 
of Interest

    The following examples illustrate the transactions of interest 
described in proposed Sec.  1.6011-18(c).

A. Example 1. A Partnership Related-Party Basis Adjustment Transaction 
Under Proposed Sec.  1.6011-18(c)(1)(i)

    XY Partnership is owned by partners X and Y. The partners are 
related to each other within the meaning of proposed Sec.  1.6011-
18(b)(8) and (b)(9)(i). Each partner directly owns 50 percent of the 
capital and profits interests in XY Partnership and shares losses 
equally. X has an outside basis of $10 million, and Y has an outside 
basis of $1 million. XY Partnership owns property it uses in its trade 
or business, including Property 1 and Property 2. For Federal income 
tax purposes, Property 1 is depreciable property and Property 2 is 
nondepreciable property. XY Partnership has an adjusted basis in 
Property 1 of zero, and an adjusted basis in Property 2 of $10 million.
    XY Partnership has a section 754 election in effect for the taxable 
year and makes a current distribution of Property 2 to Y. Under section 
732(a)(2), Y's basis in distributed Property 2 is limited to Y's 
adjusted basis in its partnership interest of $1 million. As a result 
of the distribution to Y, Property 2's adjusted basis is decreased from 
$10 million immediately before the distribution to $1 million in Y's 
hands. Under section 734(b), XY Partnership must increase the basis of 
its remaining property. The amount of the basis increase is equal to 
the excess of XY Partnership's basis in Property 2 immediately before 
the distribution of $10 million over Y's adjusted basis in Property 2 
after the distribution of $1 million, which results in an increase to 
the basis of XY Partnership's remaining property of $9 million.
    Under sections 734(c) and 755 and the regulations thereunder, XY 
Partnership allocates the basis increase of $9 million to Property 1. 
As a result, XY Partnership claims depreciation deductions based on an 
increased basis in Property 1.

B. Example 2. A Partnership Related-Party Basis Adjustment Transaction 
Under Proposed Sec.  1.6011-18(c)(1)(ii)

    DEF Partnership is owned by partners D, E and F. The partners are 
related to each other within the meaning of proposed Sec.  1.6011-
18(b)(8) and (b)(9)(i). D's outside basis is $7 million. E and F each 
have an outside basis of $1 million. DEF Partnership owns only two 
properties, Property 1 and Property 2, both of which it uses in its 
trade or business. For Federal income tax purposes, Property 1 is 
depreciable property and Property 2 is nondepreciable property. DEF 
Partnership has an adjusted basis in Property 1 of zero, and an 
adjusted basis in Property 2 is $9 million.
    DEF Partnership distributes Property 1 to D in liquidation of D's 
partnership interest. Under section 732(b), D's basis in distributed 
Property 1 is equal to $7 million. As a result, D claims depreciation 
deductions based on a $7 million basis in Property 1.

C. Example 3. A Partnership Related-Party Basis Adjustment Transaction 
Under Proposed Sec.  1.6011-18(c)(1)(iii)

    XYZ Partnership is owned by partners X, Y and Z. The partners are 
related to each other within the meaning of proposed Sec.  1.6011-
18(b)(8) and (b)(9)(i). Each partner directly owns one-third of the 
capital and profits interests in XYZ Partnership and shares losses 
equally.
    XYZ Partnership owns Property 1, Property 2, and Property 3. 
Property 1 is depreciable property, and XYZ Partnership's adjusted 
basis in Property 1 is zero. Property 2 and Property 3 are 
nondepreciable property.
    X acquired its interest in XYZ Partnership in a nonrecognition 
transaction from a person related to X within the meaning of proposed 
Sec.  1.6011-18(b)(8). At the time of the transfer, XYZ Partnership did 
not have a section 754 election in effect. Immediately after the 
transfer, X's outside basis was $12 million and share of inside basis 
was $2 million. If XYZ Partnership had a section 754 election in effect 
at the time of the transfer, XYZ Partnership would have adjusted X's 
share of inside basis under section 743(b). Assume that the adjustment 
under section 743(b) would have resulted in a basis increase to 
Property 1 of $10 million.
    In a taxable year that is within two years of the transfer of the 
partnership interest to X, XYZ Partnership makes a current distribution 
of Property 1 to X. Under section 732(a)(1), X's adjusted basis in 
Property 1 is zero. However, X makes an election under section 732(d) 
to adjust the basis of Property 1 to the adjusted basis it would have 
if the adjustment under section 743(b) were in effect with respect to 
the partnership property at the time X acquired its interest. As a 
result of the election under 732(d), because the adjusted basis of 
Property 1 under section 743(b) with respect to X would have been 
increased by $10 million, X takes a basis in Property 1 equal to $10 
million and claims depreciation deductions based on a $10 million basis 
in Property 1.

D. Example 4. A Partnership Related-Party Basis Adjustment Transaction 
Under Proposed Sec.  1.6011-18(c)(2)

    AB Partnership is owned by partners A and B. A owns 95 percent of 
the capital and profits interests in AB Partnership and is allocated 95 
percent of all losses. B owns 5 percent of the capital and profits 
interests in AB Partnership and is allocated 5 percent of all losses. 
A's outside basis is $6 million and share of inside basis is $1 
million. AB Partnership owns depreciable property it uses in a trade or 
business.
    In a taxable year in which AB Partnership has a section 754 
election in effect, A transfers its entire partnership interest to C, a 
person related to A within the meaning of proposed Sec.  1.6011-
18(b)(8) and (b)(9)(ii), in a nonrecognition transaction in which no 
gain was recognized. Because AB Partnership has a section 754 election 
in effect for the taxable year of the transfer, under section 
743(b)(1), AB Partnership increases the basis of the partnership 
property with respect to C by $5 million.
    Assume that under sections 743(c) and 755 and the regulations 
thereunder, the basis increase with respect to C of $5 million is 
allocated to partnership property that is depreciable. As a result, C 
may be allocated depreciation deductions over the recovery periods of 
the partnership properties equal to the amount of the basis increase 
under section 743(b)(1).

[[Page 51485]]

III. Substantially Similar Transactions

    Proposed Sec.  1.6011-18(a) would provide that substantially 
similar transactions include, but are not limited to, the transactions 
described in proposed Sec.  1.6011-18(d). For purposes of proposed 
Sec.  1.6011-18, transactions would be ``substantially similar'' 
transactions if the transactions are substantially similar within the 
meaning of Sec.  1.6011-4(c)(4).
    Under proposed Sec.  1.6011-18(d)(1), a transaction would be 
substantially similar to a transaction described in proposed Sec.  
1.6011-18(c) if the transaction is a basis adjustment transaction 
described in proposed Sec.  1.6011-18(c)(1) or (2), except that it does 
not involve related partners and one or more partners of the 
partnership is a tax-indifferent party. Under proposed Sec.  1.6011-
18(b)(11), a tax-indifferent party would mean a person that is either 
not liable for Federal income tax because of its tax-exempt or, in 
certain cases, foreign status or to which gain from a transaction 
described in proposed Sec.  1.6011-18(c) would not result in Federal 
income tax liability for the person's taxable year within which such 
gain is recognized (for example, because the taxpayer has a net 
operating loss carryforward or capital loss carryforward).
    Under proposed Sec.  1.6011-18(d)(2), a transaction would be 
substantially similar to a transaction described in proposed Sec.  
1.6011-18(c) in situations in which a partner transfers its partnership 
interest in a recognition transaction to a related transferee or to a 
person related to one or more existing partners, and the $5 million 
threshold under proposed Sec.  1.6011-18(c)(3) is met. Proposed Sec.  
1.6011-18(b)(6) would define a recognition transaction as a transaction 
other than a nonrecognition transaction as defined in proposed Sec.  
1.6011-18(b)(2).

IV. Persons Treated as Participants

    Whether a taxpayer has participated in a transaction of interest 
described in proposed Sec.  1.6011-18(c) during a taxable year is 
determined under proposed Sec.  1.6011-18(e). Participants would 
include a participating partner within the meaning of proposed Sec.  
1.6011-18(b)(3), a participating partnership within the meaning of 
proposed Sec.  1.6011-18(b)(4), and a related subsequent transferee 
within the meaning of proposed Sec.  1.6011-18(b)(10). A participant 
would also include a tax-indifferent party within the meaning of 
proposed Sec.  1.6011-18(b)(11).
    Proposed Sec.  1.6011-18(b)(3) would define ``participating 
partner'' as any partner that directly receives a distribution of 
property or an interest in a participating partnership, or directly 
transfers an interest in a participating partnership, in a transaction 
described in proposed Sec.  1.6011-18(c), including a person that 
becomes or ceases to be a partner as a result of such transaction. 
Accordingly, except for in the case of a related subsequent transferee, 
the proposed regulations would impose the disclosure requirement only 
on the direct distributee, transferor, or transferee in the transaction 
of interest identified under proposed Sec.  1.6011-18(a). The person 
identified as the participating partner must be the owner for Federal 
income tax purposes of the partnership interest. As a result, in the 
case of a partnership interest held by a disregarded entity, the 
participating partner would be the owner of the disregarded entity for 
Federal income tax purposes. In the case of a partnership interest held 
by a grantor trust, the participating partner would be the grantor or 
owner of the grantor trust. Similar principles would be applied in 
determining the participating partner in circumstances similar to the 
disregarded entity or grantor trust situations. Under proposed Sec.  
1.6011-18(e)(2), a participating partner would participate in a 
transaction of interest in any taxable year in which the partner 
directly receives a distribution of property or an interest in a 
participating partnership, or directly transfers an interest in a 
participating partnership, in a transaction described in proposed Sec.  
1.6011-18(c).
    Proposed Sec.  1.6011-18(b)(4) would define ``participating 
partnership'' as any partnership that makes a distribution of property 
to a participating partner in a transaction described in proposed Sec.  
1.6011-18(c)(1), or a partnership interest of which was transferred in 
a transaction described in proposed Sec.  1.6011-18(c)(2). Under 
proposed Sec.  1.6011-18(e)(3), a participating partnership would 
participate in a transaction of interest in any taxable year in which 
(i) the partnership makes a distribution of property to a participating 
partner in a transaction described proposed Sec.  1.6011-18(c)(1) or 
(ii) a participating partnership interest is transferred in a 
transaction described proposed Sec.  1.6011-18(c)(2).
    Proposed Sec.  1.6011-18(b)(10) would define ``related subsequent 
transferee'' as any person related within the meaning of proposed Sec.  
1.6011-18(b)(8) to a participating partner that directly received in a 
nonrecognition transaction a transfer (including a distribution) of 
property that was subject to an increase in basis as a result of a 
transaction described in proposed Sec.  1.6011-18(c). Under proposed 
Sec.  1.6011-18(e)(4), any direct transfer, in a nonrecognition 
transaction, to a related person of property subject to a basis 
increase resulting from a transaction described in proposed Sec.  
1.6011-18(c) would result in the related subsequent transferee becoming 
a participant in the transaction of interest identified under proposed 
Sec.  1.6011-18(a). However, any subsequent transfer (including a 
distribution) by the related subsequent transferee to a transferee 
would not cause that transferee to become a participant.
    Proposed Sec.  1.6011-18(e)(5) would provide that a participating 
partnership, participating partner, or related subsequent transferee 
also participates in a transaction described in proposed Sec.  1.6011-
18(c) in any taxable year in which its tax return reflects the Federal 
income tax consequences of the basis increase from such transaction.

V. Information Disclosure Requirements

    Proposed Sec.  1.6011-18(f) would require participants to provide 
the information required under Sec.  1.6011-4(d) and the Instructions 
to Form 8886 (or successor form). For all participants, describing the 
transaction in sufficient detail would include (but would not be 
limited to) describing on Form 8886 (or successor form) an increase in 
basis resulting from a transaction described in proposed Sec.  1.6011-
18(c) by providing the information required in proposed Sec.  1.6011-
18(f)(1)(i), through (iii).
    Proposed Sec.  1.6011-18(f)(1)(i) would require reporting of the 
names and identifying numbers (for example, social security number, 
employer identification number) of all participants.
    Proposed Sec.  1.6011-18(f)(1)(ii) would require participants to 
provide all basis adjustments resulting from a transaction described in 
Sec.  1.6011-18(c), and basis information, including the participating 
partnership's adjusted basis in the distributed property immediately 
before the distribution, any adjustments to basis under sections 
732(a)(2), (b), (d) or 734(b), any adjustments to basis under section 
743(b) with respect to a participating partner that is transferred an 
interest in a participating partnership, and with respect to a 
participating partner that transfers an interest in a participating 
partnership, that participating partner's adjusted basis in the 
participating partnership interest and share of the participating 
partnership's adjusted basis in its

[[Page 51486]]

property immediately before the transfer.
    Proposed Sec.  1.6011-18(f)(1)(iii) would require participants to 
provide information on Form 8886 (or successor form) of any Federal 
income tax consequences realized during the taxable year as a result of 
a transaction described in proposed Sec.  1.6011-18(c), including cost 
recovery allowances attributable to an increase in basis described in 
proposed Sec.  1.6011-18(c) or taxable gain or loss attributable to the 
disposition of property that was subject to an increase in basis 
described in proposed Sec.  1.6011-18(c). In the case of Federal income 
tax consequences realized after the taxable year of a transaction 
described in proposed Sec.  1.6011-18(c), such as cost recovery 
allowances or taxable gain or loss on a disposition, a participant must 
provide information on the Federal income tax consequences on Form 8886 
(or successor form) for the taxable year of realization.
    Under proposed Sec.  1.6011-18(f)(2), if the property subject to an 
increase in basis as a result of a transaction described in proposed 
Sec.  1.6011-18(c) is disposed of in a subsequent taxable year in a 
transaction in which gain or loss is recognized in whole or in part, a 
participant must send a copy of Form 8886 to OTSA, for the taxable year 
of the disposition, in addition to sending a copy to OTSA in the 
taxable year of the basis adjustment transaction.
    Proposed Sec.  1.6011-18(g) would provide examples of the 
participants' disclosure requirements for the taxable year in which the 
transaction of interest occurred and the subsequent taxable years in 
which a participant continued to realize the Federal income tax 
consequences of the transaction of interest.

VI. Effect of Transaction Becoming a Transaction of Interest

    Participants required to disclose these transactions under Sec.  
1.6011-4 who fail to do so would be subject to penalties under section 
6707A. Material advisors required to disclose these transactions under 
section 6111 who fail to do so would be subject to penalties under 
section 6707. Material advisors required to maintain lists of investors 
under section 6112 who fail to do so (or who fail to provide such lists 
when requested by the IRS) would be subject to penalties under section 
6708(a). In addition, the IRS may impose other penalties on persons 
involved in these transactions or substantially similar transactions, 
including accuracy-related penalties under section 6662 or section 
6662A, the penalty under section 6700 of the Code for promoting abusive 
tax shelters, and the penalty under section 6701 of the Code for aiding 
and abetting understatement of a tax liability.
    In addition, material advisors have disclosure requirements with 
regard to transactions occurring in prior years. However, 
notwithstanding Sec.  301.6111-3(b)(4)(i) and (iii), material advisors 
would be required to disclose only if they have made a tax statement on 
or after six years before the date of the Treasury decision adopting 
these regulations as final regulations is published in the Federal 
Register.

Proposed Applicability Date

    Proposed Sec.  1.6011-18(a) would apply to identify certain 
partnership related-party basis adjustment transactions described in 
proposed Sec.  1.6011-18(c) and substantially similar transactions as 
transactions of interest effective as of the date of publication in the 
Federal Register of a Treasury decision adopting these regulations as 
final regulations.

Special Analyses

I. Regulatory Planning and Review--Economic Analysis

    Pursuant to the Memorandum of Agreement, Review of Treasury 
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory 
actions issued by the IRS are not subject to the requirements of 
section 6 of Executive Order 12866, as amended. Therefore, a regulatory 
impact assessment is not required.

II. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) generally 
requires that a federal agency obtain the approval of the Office of 
Management and Budget (OMB) before collecting information from the 
public regardless of whether such collection of information is 
mandatory, voluntary, or required to obtain or retain a benefit. An 
agency may not conduct or sponsor, and a person is not required to 
respond to, a collection of information unless the collection of 
information displays a valid control number assigned by OMB.
    The proposed regulations would contain reporting and recordkeeping 
requirements that are required to identify increases to the basis of 
partnership property in certain transactions involving adjustments to 
the basis of partnership property. These collections of information 
would generally be used by the IRS for tax compliance purposes and by 
taxpayers to facilitate proper reporting and recordkeeping.
    The proposed regulations would identify certain transactions as 
reportable transactions and require partners and partnerships that 
participate in the transactions, and material advisors that provide 
advice on the transactions, to meet the reporting requirements under 
Sections 6011 and 6111, and material advisors to meet the list 
maintenance requirements of Section 6112. The reporting requirements 
contained in the proposed regulations would be met by completing Forms 
8886 and 8918. These forms have been approved by OMB under control 
numbers 1545-1800 and 1545-0865, respectively. Accordingly, the 
proposed regulations would not be creating new collection of 
information requirements or changing the collection of information 
requirements already contained in the burden associated with the 
control numbers for Forms 8886 and 8918.

III. Regulatory Flexibility Act

    When an agency issues a proposed rulemaking, the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) (RFA) requires the agency to 
prepare and make available for public comment an initial regulatory 
flexibility analysis that describes the impact of the proposed rule on 
``small entities.'' 5 U.S.C. 603(a). The term ``small entities'' is 
defined in 5 U.S.C. 601 to mean ``small business,'' ``small 
organization,'' and ``small governmental jurisdiction,'' which are also 
defined in 5 U.S.C. 601. Small business size standards define whether a 
business is ``small'' and have been established for types of economic 
activities, or industry, generally under the North American Industry 
Classification System (NAICS). See 13 CFR part 121 (Small Business Size 
Regulations). The size standards look at various factors, including 
annual receipts, number of employees, and amount of assets, to 
determine whether the business is small. See 13 CFR part 121.201 for 
the Small Business Size Standards by NAICS Industry.
    Section 605 of the RFA provides an exception to the requirement to 
prepare an initial regulatory flexibility analysis if the agency 
certifies that the proposed rulemaking will not have a significant 
economic impact on a substantial number of small entities. The Treasury 
Department and the IRS hereby certify that these proposed regulations 
will not have a significant economic impact on a substantial number of 
small entities under the RFA.
    The IRS's Research, Applied Analytics, and Statistics division 
(RAAS) estimates that, in the case of a Partnership Related-Party Basis 
Adjustment Transaction identified as a transaction of interest 
involving a basis

[[Page 51487]]

adjustment under section 743(b), partnerships with gross receipts or 
sales of $25 million or less might comprise two-thirds and partnerships 
with gross receipts or sales of over $25 million might comprise one-
third of all partnerships engaging in the transaction. This data 
provides an estimate that cannot yet be tested or confirmed without 
actual reporting of these transactions. Further, although the estimate 
suggests that the majority (two-thirds) of partnerships subject to 
reporting might be partnerships with gross receipts or sales of $25 
million or less, the estimate does not indicate that the majority of 
partnerships subject to reporting will be small entities. The ``$25 
million or less'' parameter is used as a reference point that does not 
necessarily correlate with the meaning of small entities under the 
Small Business Size Regulations. Thus, some or many of the partnerships 
in the category having gross receipts or sales of $25 million or less 
might be too large to meet the size standards for small businesses 
under the Small Business Size Regulations. In addition, the data does 
not indicate whether the partnerships with gross receipts or sales of 
$25 million or less are part of larger enterprises.
    The proposed regulations will not have a significant economic 
impact on small entities because the proposed regulations would 
implement sections 6111 and 6112 and Sec.  1.6011-4 by specifying the 
manner in which and the time at which a Partnership Related-Party Basis 
Adjustment Transaction identified as a transaction of interest must be 
reported. Accordingly, because the proposed regulations would be 
limited in scope to time and manner of information reporting, their 
economic impact is expected to be minimal.
    The Treasury Department and the IRS expect that the reporting 
burden is low because the information sought is necessary for regular 
annual return preparation and ordinary recordkeeping. The estimated 
burden for any taxpayer required to file Form 8886 is approximately 10 
hours, 16 minutes for recordkeeping, 4 hours, 50 minutes for learning 
about the law or the form, and 6 hours, 25 minutes for preparing, 
copying, assembling, and sending the form to the IRS. RAAS estimates 
that the appropriate wage rate for complying with the proposed 
regulations is $102.00 (2022 dollars) per hour. Thus, it is estimated 
that persons required to comply with the proposed regulations would 
incur costs totaling approximately $2,194.70 per filing. This amount is 
small in comparison to the $5 million or more of basis increase in a 
Partnership Related-Party Basis Adjustment Transaction identified as a 
transaction of interest. As a result, the relatively small cost to 
comply with the proposed regulations will not pose any significant 
economic impact to any small entities that would be subject to the 
proposed regulations.
    For the reasons stated, a regulatory flexibility analysis under the 
RFA is not required. The Treasury Department and the IRS invite 
comments on the impact of the proposed regulations on small entities.
    Pursuant to section 7805(f) of the Code, this notice of proposed 
rulemaking has been submitted to the Chief Counsel for the Office of 
Advocacy of the Small Business Administration for comment on its impact 
on small business.

IV. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits and take 
certain other actions before issuing a final rule that includes any 
Federal mandate that may result in expenditures in any one year by a 
State, local, or Tribal government, in the aggregate, or by the private 
sector, of $100 million (updated annually for inflation). This proposed 
rule does not include any Federal mandate that may result in 
expenditures by State, local, or Tribal governments or by the private 
sector in excess of that threshold.

V. Executive Order 13132: Federalism

    Executive Order 13132 (Federalism) prohibits an agency from 
publishing any rule that has federalism implications if the rule either 
imposes substantial, direct compliance costs on State and local 
governments, and is not required by statute, or preempts State law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. This proposed rule does not have 
federalism implications and does not impose substantial direct 
compliance costs on State and local governments or preempt State law 
within the meaning of the Executive order.

Comments and Public Hearing

    Before these proposed amendments to the regulations are adopted as 
final regulations, consideration will be given to comments regarding 
the notice of proposed rulemaking that are submitted timely to the IRS 
as prescribed in the preamble under the ADDRESSES section. The Treasury 
Department and the IRS request comments on all aspects of the proposed 
regulations. All comments will be made available at https://www.regulations.gov. Once submitted to the Federal eRulemaking Portal, 
comments cannot be edited or withdrawn.
    A public hearing has been scheduled for September 17, 2024 
beginning at 10 a.m. ET, in the Auditorium at the Internal Revenue 
Building, 1111 Constitution Avenue NW, Washington, DC. 20224. Due to 
building security procedures, visitors must enter at the Constitution 
Avenue entrance. In addition, all visitors must present photo 
identification to enter the building. Because of access restrictions, 
visitors will not be admitted beyond the immediate entrance area more 
than 30 minutes before the hearing starts. Participants may 
alternatively attend the public hearing by telephone.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit an outline of 
the topics to be discussed and the time to be devoted to each topic by 
August 19, 2024. A period of 10 minutes will be allotted to each person 
for making comments. An agenda showing the scheduling of the speakers 
will be prepared after the deadline for receiving outlines has passed. 
Copies of the agenda will be available free of charge at the hearing. 
If no outline of the topics to be discussed at the hearing is received 
by August 19, 2024, the public hearing will be cancelled. If the public 
hearing is cancelled, a notice of cancellation of the public hearing 
will be published in the Federal Register.
    Individuals who want to testify in person at the public hearing 
must send an email to [email protected] to have your name added to 
the building access list. The subject line of the email must contain 
the regulation number REG-124593-23 and the language TESTIFY In Person. 
For example, the subject line may say: Request to TESTIFY In Person at 
Hearing for REG-124593-23.
    Individuals who want to testify by telephone at the public hearing 
must send an email to [email protected] to receive the telephone 
number and access code for the hearing. The subject line of the email 
must contain the regulation number REG-125593-23 and the language 
TESTIFY Telephonically. For example, the subject line may say: Request 
to TESTIFY Telephonically at Hearing for REG-124593-23.
    Individuals who want to attend the public hearing in person without 
testifying must also send an email to [email protected] to have 
your name added to the building access list. The subject line of the 
email must contain the regulation number REG-

[[Page 51488]]

124593-23 and the language ATTEND In Person. For example, the subject 
line may say: Request to ATTEND Hearing In Person for REG-124593-23. 
Requests to attend the public hearing must be received by 5 p.m. ET on 
September 13, 2024.
    Individuals who want to attend the public hearing by telephone 
without testifying must also send an email to [email protected] to 
receive the telephone number and access code for the hearing. The 
subject line of the email must contain the regulation number REG-
124593-23 and the language ATTEND Hearing Telephonically. For example, 
the subject line may say: Request to ATTEND Hearing Telephonically for 
REG-124593-23. Requests to attend the public hearing must be received 
by 5 p.m. ET on September 13, 2024.
    Hearings will be made accessible to people with disabilities. To 
request special assistance during a hearing please contact the 
Publications and Regulations Section of the Office of Associate Chief 
Counsel (Procedure and Administration) by sending an email to 
[email protected] (preferred) or by telephone at (202) 317-6901 
(not a toll-free number) at least September 12, 2024.

Drafting Information

    The principal author of these proposed regulations is Elizabeth 
Zanet, Office of Associate Chief Counsel (Passthroughs and Special 
Industries). However, other personnel from the Treasury Department and 
the IRS participated in the development of these regulations.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, the Treasury Department and the IRS propose to amend 
26 CFR part 1 as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding an 
entry for Sec.  1.6011-18 in numerical order to read in part as 
follows:

    Authority: 26 U.S.C. 7805 * * *
* * * * *
    Section 1.6011-18 also issued under 26 U.S.C. 6001 and 26 U.S.C. 
6011.
* * * * *
0
Par. 2. Section 1.6011-18 is added to read as follows:


Sec.  1.6011-18  Certain partnership related-party basis adjustment 
transactions as transactions of interest.

    (a) Identification as transaction of interest. Transactions that 
are the same as or substantially similar (within the meaning of Sec.  
1.6011-4(c)(4)) to the transactions described in paragraph (c) of this 
section are identified as transactions of interest for purposes of 
Sec.  1.6011-4(b)(6). Transactions that are substantially similar 
(within the meaning of Sec.  1.6011-4(c)(4)) to the transactions 
described in paragraph (c) of this section include, but are not limited 
to, transactions described in paragraph (d) of this section.
    (b) Definitions. The following definitions apply for purposes of 
this section:
    (1) Code means the Internal Revenue Code.
    (2) Nonrecognition transaction means a nonrecognition transaction 
within the meaning of section 7701(a)(45) of the Code (other than a 
transfer on the death of a partner).
    (3) Participating partner means any partner that directly receives 
a distribution of property or an interest in a participating 
partnership, or directly transfers an interest in a participating 
partnership, in a transaction described in paragraph (c) of this 
section, including a person that becomes or ceases to be a partner as a 
result of such transaction. In the case of a participating partnership 
interest held by an entity that is disregarded as separate from its 
owner within the meaning of Sec.  301.7701-2(c)(2)(i) of this chapter, 
participating partner means the owner of the disregarded entity for 
Federal income tax purposes. In the case of a participating partnership 
interest held by a grantor trust within the meaning of section 671 of 
the Code, participating partner means the grantor or other person 
designated under sections 671 through 679 of the Code as the owner of 
that portion of the trust that holds the participating partnership 
interest.
    (4) Participating partnership means any partnership--
    (i) That makes a distribution of property to a participating 
partner in a transaction described in paragraph (c)(1) of this section, 
or
    (ii) A partnership interest which is transferred in a transaction 
described in paragraph (c)(2) of this section.
    (5) Participating partnership interest means any partnership 
interest in a participating partnership.
    (6) Recognition transaction means a transaction other than a 
nonrecognition transaction within the meaning of paragraph (b)(2) of 
this section.
    (7) Recoverable property means property of a character subject to 
an allowance for depreciation, amortization, or depletion under 
subtitle A of the Code (subtitle A).
    (8) Related means having a relationship described in section 267(b) 
of the Code (without regard to section 267(c)(3)) or section 707(b)(1) 
of the Code.
    (9) Related partners mean partners of a partnership that are 
related in the following manner:
    (i) In the case of a transaction described in paragraph (c)(1) of 
this section, the partnership has two or more direct or indirect 
partners that are related immediately before or immediately after a 
transaction described in paragraph (c)(1) of this section.
    (ii) In the case of a transaction described in paragraph (c)(2) of 
this section, the transferor of a partnership interest is related to 
the transferee, or the transferee is related to one or more of the 
partners in the partnership, immediately before or immediately after a 
transaction described in paragraph (c)(2) of this section.
    (10) Related subsequent transferee means any person who is related 
to a participating partner and directly received in a nonrecognition 
transaction, a transfer (including a distribution) of property that was 
subject to an increase in basis as a result of a transaction described 
in paragraph (c) of this section.
    (11) Tax-indifferent party means a person that is either not liable 
for Federal income tax because of its tax-exempt or, in certain cases, 
foreign status or to which gain from a transaction described in 
paragraph (c) of this section would not result in Federal income tax 
liability for the person's taxable year within which such gain is 
recognized.
    (c) Transaction description. A transaction is described in this 
paragraph (c) if the factual elements of the transaction described in 
paragraph (c)(1)(i) through (iii) or (c)(2) of this section are met.
    (1) Distributions by partnership. A partnership engages in any of 
the transactions described in paragraphs (c)(1)(i) through (iii) of 
this section with one or more of the related partners:
    (i) The partnership distributes property to a person who is a 
related partner in a current or liquidating distribution, the 
partnership increases the basis of one or more of its remaining 
properties under section 734(b) and (c) of the Code, and the $5 million 
threshold described in paragraph (c)(3) of this section is met.

[[Page 51489]]

    (ii) The partnership distributes property to a person who is a 
related partner in liquidation of the person's partnership interest (or 
in complete liquidation of the partnership), the basis of one or more 
distributed properties is increased under section 732(b) and (c) of the 
Code, and the $5 million threshold described in paragraph (c)(3) of 
this section is met.
    (iii) The partnership distributes property to a person who is a 
related partner, the basis of one or more distributed properties is 
increased under section 732(d) of the Code, the related partner 
acquired all or a part of its interest in the partnership in a 
transaction that would have been a transaction described in paragraph 
(c)(2) of this section if the partnership had a section 754 election in 
effect for the year of transfer, and the $5 million threshold described 
in paragraph (c)(3) of this section is met.
    (2) Transfer of partnership interest. A partner transfers an 
interest in a partnership to a related partner in a nonrecognition 
transaction, the basis of one or more partnership properties is 
increased under section 743(b)(1) and (c) of the Code, and the $5 
million threshold described in paragraph (c)(3) of this section is met.
    (3) $5 million threshold. For the purpose of determining whether a 
transaction is described in paragraph (c)(1), (c)(2), (d)(1), or (d)(2) 
of this section, the $5 million threshold is met for a taxable year if 
the sum of all basis increases resulting from all such transactions of 
a partnership or partner during the taxable year (without netting for 
any basis adjustment in the same transaction or another transaction 
that reduces basis) exceeds by at least $5 million the gain recognized 
from such transactions, if any, on which tax imposed under subtitle A 
is required to be paid by any of the related partners (or tax-
indifferent party, in the case of a transaction described in paragraphs 
(d)(1) and (2) of this section) to such transactions.
    (d) Substantially similar transaction. A transaction that is 
substantially similar (within the meaning of Sec.  1.6011-4(c)(4)) to a 
transaction described in paragraph (c) of this section includes, but is 
not limited to:
    (1) A transaction that is described in paragraph (c) of this 
section except that the partners of the partnership are not related and 
one or more partners of the partnership is a tax-indifferent party that 
facilitates, by receiving a distribution of property from the 
partnership or otherwise, an increase in the basis of partnership 
property or an increase in the basis of property held by another 
partner in the partnership; and
    (2) A transaction in which a partner transfers an interest in a 
partnership to a related partner in a recognition transaction, and the 
$5 million threshold described in paragraph (c)(3) of this section is 
met.
    (e) Participation--(1) In general. Whether a taxpayer has 
participated in a transaction of interest described in paragraph (c) of 
this section during a taxable year is determined under this paragraph 
(e).
    (2) Participating partners. A participating partner participates in 
a transaction of interest described in paragraph (c) of this section in 
any taxable year in which the partner directly receives a distribution 
of property or an interest in a participating partnership, or directly 
transfers an interest in a participating partnership, in a transaction 
described in paragraph (c) of this section.
    (3) Participating partnerships. A participating partnership 
participates in a transaction of interest described in paragraph (c) of 
this section in any taxable year in which the partnership makes a 
distribution of property to a participating partner in a transaction 
described in paragraph (c)(1) of this section, or a participating 
partnership interest is transferred in a transaction described in 
paragraph (c)(2) of this section.
    (4) Related subsequent transferees. A related subsequent transferee 
participates in a transaction of interest described in paragraph (c) of 
this section in any taxable year in which the related subsequent 
transferee directly receives, in a nonrecognition transaction, a 
transfer (including a distribution) of property that was subject to an 
increase in basis as a result of a transaction described in paragraph 
(c) of this section.
    (5) Subsequent realization of tax benefit. A participating 
partnership, participating partner or related subsequent transferee 
also participates in a transaction of interest described in paragraph 
(c) of this section in any taxable year in which its tax return 
reflects the tax consequences of a basis increase resulting from a 
transaction of interest described in paragraph (c) of this section. For 
example, if a participating partner sells property the basis of which 
has been increased as a result of a transaction of interest described 
in paragraph (c) of this section during a taxable year after the year 
in which the transaction of interest described in paragraph (c) of this 
section resulting in the basis increase occurred, the participating 
partner participates in a transaction of interest described in 
paragraph (c) of this section during the taxable year(s) in which the 
tax consequences of the sale are reported on the participating 
partner's tax return.
    (f) Disclosure requirements--(1) In general. Participants must 
provide the information required under Sec.  1.6011-4(d) and the 
Instructions to Form 8886, Reportable Transaction Disclosure Statement 
(or successor form) for each taxable year in which the participant 
participated in a transaction described in paragraph (c) of this 
section as determined under paragraph (e) of this section. For all 
participants, describing the transaction in sufficient detail includes 
describing the information described in paragraphs (f)(1)(i) through 
(iii) of this section, as applicable, on Form 8886 (or successor form) 
for the taxable year of a transaction described in paragraph (c) of 
this section.
    (i) The names and identifying numbers of all participants, 
including the participating partnership, participating partners and any 
related subsequent transferees or tax-indifferent parties.
    (ii) All basis adjustments resulting from a transaction described 
in paragraph (c) of this section, and basis information, including the 
participating partnership's adjusted basis in the distributed property 
immediately before the distribution, any adjustments to basis under 
section 732(a)(2), (b), (d) or 734(b), any adjustments to basis under 
section 743(b) with respect to a participating partner that is 
transferred an interest in a participating partnership, and with 
respect to a participating partner that transfers an interest in a 
participating partnership, that participating partner's adjusted basis 
in the participating partnership interest and share of the 
participating partnership's adjusted basis in its property immediately 
before the transfer.
    (iii) Any Federal income tax consequences realized during the 
taxable year, as a result of a transaction described in paragraph (c) 
of this section, including cost recovery allowances attributable to an 
increase in basis as a result of a transaction described in paragraph 
(c) of this section, and taxable gain or taxable loss attributable to 
the disposition of property that was subject to an increase in basis as 
a result of a transaction described in paragraph (c) of this section. 
For example, in the case of a distribution of depreciable property that 
was subject to an increase in basis as a result of a transaction 
described in paragraph (c) of this section, the Federal

[[Page 51490]]

income tax consequences realized during the taxable year include the 
basis increase and cost recovery allowances attributable to the basis 
increase during the taxable year.
    (2) Disposition in subsequent taxable years. If the property 
subject to an increase in basis as a result of a transaction described 
in paragraph (c) of this section is disposed of in a transaction in 
which gain or loss is recognized in whole or in part in a subsequent 
taxable year, the participant must send a copy of Form 8886 to the 
Office of Tax Shelter Analysis (OTSA). This requirement is in addition 
to the requirement that a participant send a copy of Form 8886 to OTSA 
for the taxable year of the basis increase.
    (g) Examples. The following examples illustrate the provisions of 
this section.
    (1) Example 1: Reporting by a participating partner and 
participating partnership in the taxable year of the transaction, 
including cost recovery allowances--(i) Facts. ABC Partnership is owned 
by partners A, B and C. Partners A, B and C are related within the 
meaning of paragraphs (b)(8) and (9) of this section. At the beginning 
of taxable year 1, ABC Partnership distributes a depreciable asset, 
Property X, to Partner A in liquidation of Partner A's interest in ABC 
Partnership. The distribution is a transaction described in paragraph 
(c)(1)(ii) of this section. As a result of the distribution, the basis 
of Property X is increased by $5 million. On its tax return for taxable 
year 1, Partner A reports deductions for depreciation expense 
attributable to the $5 million increase in the basis of Property X 
resulting from the transaction under paragraph (c)(1)(ii) of this 
section. ABC Partnership and Partner A have the same taxable year.
    (ii) Analysis. Partner A is a participant during taxable year 1 
within the meaning of paragraph (e) of this section because it is a 
participating partner within the meaning of paragraph (b)(3) of this 
section since it directly received a distribution of property during 
taxable year 1 in a transaction described in paragraph (c) of this 
section. ABC Partnership is a participant during taxable year 1 within 
the meaning of paragraph (e) of this section because it is a 
participating partnership within the meaning of paragraph (b)(4) of 
this section since it made a distribution of property to a 
participating partner during taxable year 1 in a transaction described 
in paragraph (c) of this section. As part of its disclosure 
requirements under paragraph (f) of this section and Sec.  1.6011-4(d) 
and (e), Partner A must disclose the distribution as a transaction of 
interest under this section on Form 8886 (or successor form) and file 
the form with its tax return for taxable year 1. Partner A must include 
the information described in paragraph (f) of this section, including 
the amount of the deductions attributable to the $5 million increase in 
the basis of Property X resulting from the transaction described in 
paragraph (c)(1)(ii) of this section. As part of its disclosure 
requirements under paragraph (f) of this section and Sec.  1.6011-4(d) 
and (e), ABC Partnership must disclose the distribution as a 
transaction of interest under this section on Form 8886 (or successor 
form) and file the form with its tax return for taxable year 1, 
including the information described in paragraph (f) of this section. 
In addition, Partner A and ABC Partnership must send a copy of their 
respective Form 8886 (or successor form) to OTSA.
    (2) Example 2: Reporting of the Federal income tax consequences 
(cost recovery allowances) of the transaction in all taxable years--(i) 
Facts. Under the same facts as in paragraph (g)(1)(i) of this section 
(Example 1), on its tax returns for taxable years 2 through 5, Partner 
A reports deductions for depreciation expense attributable to the $5 
million increase in the basis of Property X related to the transaction 
described in paragraph (c)(1)(ii) of this section, which occurred in 
taxable year 1.
    (ii) Analysis. As part of its disclosure requirements under 
paragraph (f) of this section and Sec.  1.6011-4(d) and (e), Partner A 
must disclose the deductions on Form 8886 (or successor form) for 
taxable years 2 through 5 as the Federal income tax consequences of the 
transaction described in paragraph (c)(1)(ii) of this section. As a 
result, for each taxable year 2 through 5, Partner A must file the form 
with its tax return for the taxable year with the information described 
in paragraph (f) of this section, including the amount of the 
deductions attributable to the $5 million increase in the basis of 
Property X resulting from the transaction described in paragraph 
(c)(1)(ii) of this section.
    (3) Example 3: Reporting by a participating partner, participating 
partnership, and related subsequent transferee in the taxable year of 
the transaction--(i) Facts. The facts are the same as in paragraph 
(g)(1)(i) of this section (Example 1), except that at the beginning of 
taxable year 1, ABC Partnership distributes a nondepreciable asset, 
Land with an adjusted basis of $1 million, to Partner A in liquidation 
of Partner A's interest in ABC Partnership. The distribution is a 
transaction described in paragraph (c)(1)(ii) of this section. As a 
result of the distribution, the basis of Land is increased to $6 
million. Subsequently in taxable year 1, Partner A contributes Land to 
another partnership, AX Partnership, in a transfer that is treated as a 
contribution of property under section 721(a). Partner A and AX 
Partnership are related within the meaning of paragraph (b)(8) of this 
section. ABC Partnership, Partner A and AX Partnership have the same 
taxable year.
    (ii) Analysis. Partner A is a participant during taxable year 1 
within the meaning of paragraph (e) of this section because it is a 
participating partner within the meaning of paragraph (b)(3) of this 
section since it directly received a distribution of property during 
taxable year 1 in a transaction described in paragraph (c) of this 
section. ABC Partnership is a participant during taxable year 1 within 
the meaning of paragraph (e) of this section because it is a 
participating partnership within the meaning of paragraph (b)(4) of 
this section since it made a distribution of property to a 
participating partner during taxable year 1 in a transaction described 
in paragraph (c) of this section. AX Partnership is a participant 
during taxable year 1 within the meaning of paragraph (e) of this 
section because it is a related subsequent transferee within the 
meaning of paragraph (b)(10) of this section since it directly received 
in a nonrecognition transaction, a transfer of property during taxable 
year 1 that was subject to an increase in basis as a result of a 
transaction described in paragraph (c) of this section. As part of its 
disclosure requirements under paragraph (f) of this section and Sec.  
1.6011-4(d) and (e), Partner A must disclose the distribution as a 
transaction of interest under this section on Form 8886 (or successor 
form) and file the form with its tax return for taxable year 1. Partner 
A must include the information described in paragraph (f) of this 
section. As part of its disclosure requirements under paragraph (f) of 
this section and Sec.  1.6011-4(d) and (e), ABC Partnership must 
disclose the distribution as a transaction of interest under this 
section on Form 8886 (or successor form) and file the form with its tax 
return for taxable year 1, including the information described in 
paragraph (f) of this section. Further, AX Partnership is subject to 
the disclosure requirements under paragraph (f) of this section and 
Sec.  1.6011-4(d) and (e). AX Partnership must disclose that it is a 
related subsequent transferee within the meaning of paragraph (b)(10) 
of this section that received, in a

[[Page 51491]]

nonrecognition transaction, a transfer of property that was distributed 
in a transaction of interest under this section on Form 8886 (or 
successor form) and file the form with its tax return for taxable year 
1. In addition, Partner A, ABC Partnership and AX Partnership must send 
a copy of their respective Form 8886 (or successor form) to OTSA.
    (4) Example 4: Reporting of the Federal income tax consequences 
(reduced taxable gain) of the transaction in the taxable year of 
disposition of the property--(i) Facts. Under the same facts as in 
paragraph (g)(3)(i) of this section (Example 3), in taxable year 2, AX 
Partnership disposes of Land in a taxable sale for its fair market 
value of $6 million and recognizes gain of zero.
    (ii) Analysis. As part of its disclosure requirements under 
paragraph (f) of this section and Sec.  1.6011-4(d) and (e), AX 
Partnership must disclose the taxable gain (zero) on the disposition of 
Land on Form 8886 (or successor form) for taxable year 2 as the Federal 
income tax consequences of the transaction described in paragraph 
(c)(1)(ii) of this section. AX must file the form with its tax return 
for taxable year 2 and send a copy of the form to OTSA.
    (h) Applicability date. This section's identification of 
transactions that are the same as or substantially similar (within the 
meaning of Sec.  1.6011-4(c)(4)) to the transactions described in 
paragraph (c) of this section as transactions of interest for purposes 
of Sec.  1.6011-4(b)(6) and sections 6111 and 6112 of the Code is 
effective on the date the regulations are published as final 
regulations in the Federal Register.

Douglas W. O'Donnell,
Deputy Commissioner.
[FR Doc. 2024-13282 Filed 6-17-24; 8:45 am]
BILLING CODE 4830-01-P