Certain Partnership Related-Party Basis Adjustment Transactions as Transactions of Interest, 2958-2977 [2025-00324]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 90, Number 8 (Tuesday, January 14, 2025)]
[Rules and Regulations]
[Pages 2958-2977]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-00324]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 10028]
RIN 1545-BR07


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

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final rule.

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SUMMARY: This document contains final regulations that identify certain 
partnership related-party basis adjustment transactions and 
substantially similar transactions as transactions of interest, a type 
of reportable transaction. Material advisors and certain participants 
in these transactions are required to file disclosures with the IRS and 
are subject to penalties for failure to disclose. The final regulations 
affect participants in these transactions as well as material advisors.

DATES: 
    Effective date: These regulations are effective on January 14, 
2025.
    Applicability date: For the date of applicability, see Sec.  
1.6011-18(h) and (i).

FOR FURTHER INFORMATION CONTACT: Concerning these final regulations, 
contact Elizabeth Zanet of the Office of Associate Chief Counsel 
(Passthroughs and Special Industries), (202) 317-6007 (not a toll-free 
number).

SUPPLEMENTARY INFORMATION:

Authority

    This document amends the Income Tax Regulations (26 CFR part 1) by 
adding final regulations under section 6011 of the Internal Revenue 
Code (Code). The document adds Sec.  1.6011-18 to identify certain 
partnership related-party basis adjustment transactions and 
substantially similar transactions as transactions of interest, a type 
of

[[Page 2959]]

reportable transaction (final regulations). These regulations are 
issued pursuant to the authority conferred on the Secretary of the 
Treasury or her delegate (Secretary) under the following provisions of 
the Code.
    Section 6001 of the Code provides an express delegation of 
authority to the Secretary of the Treasury or her delegate (Secretary), 
requiring every taxpayer to keep the records, render the statements, 
make the returns, and comply with the rules and regulations that the 
Secretary deems necessary to demonstrate tax liability, as prescribed, 
either by notice served or by regulations.
    Section 6011(a) provides an express grant of regulatory authority 
for the Secretary to prescribe regulations requiring any person who is 
liable for any tax imposed by the Code, or with respect to the 
collection thereof, to make a return or statement according to the 
forms and regulations prescribed by the Secretary. Section 6011(a) adds 
that every person who is required to make a return or statement must 
include the information required by forms or regulations.
    In addition, section 6707A(c)(1) of the Code defines the term 
``reportable transaction'' for purposes of imposing penalties under 
section 6707A(a) relating to persons who fail to include on any return 
or statement any information with respect to a reportable transaction 
that is required under section 6011 to be included with such return or 
statement. In doing so, it provides an express delegation of authority 
to the Secretary, stating that, ``[t]he term 'reportable transaction' 
means any transaction with respect to which information is required to 
be included with a return or statement because, as determined under 
regulations prescribed under section 6011, such transaction is of a 
type which the Secretary determines as having a potential for tax 
avoidance or evasion.''
    Section 6111(a) provides an express grant of regulatory authority 
for the Secretary to require that each material advisor with respect to 
any reportable transaction make a return setting forth any information 
as the Secretary may prescribe. Such return must be filed not later 
than the date specified by the Secretary.
    Finally, section 7805(a) of the Code authorizes the Secretary to 
``prescribe all needful rules and regulations for the enforcement of 
[the Code], including all rules and regulations as may be necessary by 
reason of any alteration of law in relation to internal revenue.''

Background

I. 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 key factor is 
whether an election made by the partnership in accordance with 
regulations prescribed by the Secretary under section 754 of the Code 
(section 754 election) is in effect.
    Section 754 provides that if a section 754 election is in effect 
for a partnership, the basis of its partnership property will be 
adjusted, in the case of a distribution of property, in the manner 
provided by section 734 of the Code, and in the case of a transfer of a 
partnership interest, in the manner provided in section 743 of the 
Code. Unless a section 754 election is revoked in accordance with the 
regulations under section 754, the section 754 election applies to all 
distributions of property by the partnership and to all transfers of 
interests in the partnership in the taxable year for which the section 
754 election was properly made and all subsequent taxable years.
    In the case of a distribution of partnership property to a partner 
by a partnership for which a section 754 election is in effect, or with 
respect to which there is a substantial basis reduction as described in 
section 734(d), the distribution may result in an adjustment to the 
basis of the partnership's remaining property (remaining partnership 
property) under section 734(b). A distribution of partnership property 
may also result in an adjustment to the basis of the distributed 
property under section 732(a), (b), or (d) of the Code.
    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), the transfer may result in an adjustment to the basis of 
partnership property under section 743(b) with respect to the 
transferee partner.
B. Basis Adjustments Under Section 732
    Section 732 applies to determine a distributee partner's basis in 
distributed property other than money. In the case of a distribution of 
partnership property other than in liquidation of the distributee 
partner's partnership interest (current distribution), and except as 
provided under section 732(a)(2), section 732(a)(1) 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 distribution of partnership property in 
liquidation of the distributee partner's partnership interest 
(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). Section 732(d) through 
(f) provide additional rules applicable to certain distributed 
property. See also Sec. Sec.  1.732-1 through 1.732-3.
C. Basis Adjustments Under Section 734
    In the case of a distribution of property by a partnership for 
which a section 754 election is 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 no section 754 election is in 
effect for the partnership.
    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

[[Page 2960]]

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 in the distribution only money, 
unrealized receivables described in section 751(c) of the Code, or 
inventory items described in section 751(d). 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 items 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 for which no section 754 election is 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 the transferee partner's 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 a section 754 election is in effect for the partnership, 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 for which a section 754 election is 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 for which no section 754 election is in effect is 
subject to a mandatory basis 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.
    The flush language at the end of section 743(b) provides that, 
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. See generally Sec.  1.743-
1. 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 Sec.  1.743-1(d).
    In the case of a transferee partner who acquired all or part of the 
partner's partnership interest by a transfer with respect to which no 
section 754 election was in effect for the partnership, 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 the partner's partnership interest 
by a transfer from a partnership

[[Page 2961]]

for which no section 754 election is 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 prescribed by the Secretary. 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 that is related to a 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.

II. Proposed Regulations

    On June 18, 2024, the Department of the Treasury (Treasury 
Department) and the IRS published a notice of proposed rulemaking (REG-
124593-23) in the Federal Register (89 FR 51476) containing proposed 
regulations under section 6011 (proposed regulations).\1\ The proposed 
regulations would have added Sec.  1.6011-18 identifying certain 
partnership related-party basis adjustment transactions as 
``transactions of interest'' for purposes of sections 6011, 6111, and 
6112 and Sec.  1.6011-4(b)(6). The provisions of the proposed 
regulations are explained in greater detail in the preamble to the 
proposed regulations.
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    \1\ On July 24, 2024, a notice of correction was published in 
the Federal Register (89 FR 59864) to correct minor typographical 
errors in the preamble of REG-124593-23.
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    The Treasury Department and the IRS received written comments in 
response to the proposed regulations. The comments are available for 
public inspection at www.regulations.gov or upon request. A public 
hearing on the proposed regulations was conducted in person and 
telephonically on September 17, 2024, during which two presenters 
provided comments. After full consideration of the comments received, 
these final regulations adopt the proposed regulations with 
modifications in response to the comments as described in the Summary 
of Comments and Explanation of Revisions.

Summary of Comments and Explanation of Revisions

    This Summary of Comments and Explanation of Revisions summarizes 
the comments received in response to the proposed regulations, and 
describes and responds to comments concerning: (1) transactions of 
interest generally, (2) the usefulness and burden of reporting the 
transactions of interest identified by the proposed regulations, (3) 
the specific transactions of interest identified by the proposed 
regulations, (4) the proposed $5 million threshold amount for reporting 
(proposed $5 million threshold amount), (5) the relatedness standard, 
(6) substantially similar transactions, and (7) participation in a 
transaction of interest identified by the proposed regulations. In 
general, as described herein, the final regulations adopt several 
commenters' suggestions, which limit the scope of the transactions 
identified by the proposed regulations in an effort to exclude from 
additional reporting certain common business transactions that do not 
meet large economic thresholds.
    Comments merely summarizing the statute or proposed regulations, 
recommending revisions to the Code, addressing unrelated issues, or 
recommending changes to IRS forms or procedures are generally not 
addressed in this Summary of Comments and Explanation of Revisions or 
adopted in these final regulations. Additionally, this Treasury 
decision does not address comments addressing the issues and rules 
specific to Notice 2024-54, 2024-28 IRB 24, which the Treasury 
Department and the IRS continue to consider. Unless otherwise indicated 
in this Summary of Comments and Explanation of Revisions, provisions of 
the proposed regulations with respect to which no comments were 
received are adopted without substantive change.

I. Transactions of Interest Generally

A. General Reporting Rules Under Sec.  1.6011-4
    Section 1.6011-4(e)(2)(i) requires a taxpayer to report a 
transaction entered into prior to the publication of guidance 
identifying the transaction as a transaction of interest after the 
filing of the taxpayer's tax return (including an amended return) 
reflecting the taxpayer's participation in the transaction of interest 
(later identified transaction) if the statute of limitations for 
assessment of tax is still open when the transaction becomes a 
transaction of interest. Under Sec.  1.6011-4(e)(2)(i), taxpayers are 
generally required to report a later identified transaction by filing a 
disclosure statement with the Office of Tax Shelter Analysis (OTSA) 
within 90 calendar days after the date on which a transaction becomes a 
transaction of interest.
    Some commenters asserted that taxpayers should not be required to 
report later identified transactions because taxpayers were not on 
notice that certain partnership related-party basis adjustment 
transactions would be identified as transactions of interest. These 
commenters asserted that certain of the transactions identified in the 
proposed regulations are typical business transactions for which 
taxpayers would not have known to keep records. Two commenters 
requested that the required time for filing a disclosure statement with 
the OTSA should be expanded to one year. Another commenter recommended 
that the final regulations apply prospectively to transactions of 
interest that occur in taxable years beginning on or after the date of 
the final regulations.

[[Page 2962]]

    Although the reporting required by Sec.  1.6011-4(e)(2)(i) may 
apply to transactions undertaken before the identification of the 
transactions as transactions of interest, the disclosure obligation is 
prospective rather than retroactive, since it arises only when the 
transaction becomes a transaction of interest after the final 
regulations are published in the Federal Register. Additionally, 
taxpayers have been on notice since the issuance of the proposed 
regulations that reporting of partnership related-party basis 
adjustment transactions may soon be required. Nevertheless, given the 
additional time that taxpayers may need to identify and prepare 
disclosures for already-completed transactions, Sec.  1.6011-18(h)(1) 
provides an extension of time of 90 additional calendar days after the 
date specified in Sec.  1.6011-4(e)(2)(i) for taxpayers to meet their 
obligations to disclose to the OTSA their participation in such later 
identified transactions.
B. Material Advisor Rules
    The proposed regulations provided no special rules for material 
advisors. One commenter requested that the final regulations add an 
``actual knowledge'' qualifier for material advisors such that advisors 
would be required to disclose and list only those transactions 
described by the proposed regulations that would be reportable based on 
their actual knowledge. The rules for material advisors under sections 
6111 and 6112, and the corresponding regulations under Sec. Sec.  
301.6111-3 and 301.6112-1 of the Procedure and Administration 
Regulations (26 CFR part 301), which apply to all transactions of 
interest, do not have a knowledge qualifier. After consideration of 
this comment, the Treasury Department and the IRS have determined that 
adding a knowledge qualifier for this transaction of interest is not 
warranted. Accordingly, this comment is not adopted in the final 
regulations.
    One commenter requested that the final regulations apply reporting 
requirements for material advisors only prospectively for transactions 
of interest that occur in taxable years beginning on or after the date 
of the final regulations, or, alternatively, that material advisors be 
permitted to report transactions of interest to the OTSA within one 
year as opposed to by the last day of the month following the end of 
the calendar quarter in which the final regulations are published. 
Section 301.6111-3 sets forth the requirements for disclosures from 
material advisors. In particular, Sec.  301.6111-3(e) provides that a 
material advisor's disclosure statement 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 became a material advisor with respect to the 
transaction. Section 301.6111-3(b)(4)(iii) provides that for a 
transaction that was not a reportable transaction but is identified as 
a transaction of interest in published guidance after the occurrence of 
the events described in Sec.  301.6111-3(b)(4)(i), the person will be 
treated as becoming a material advisor on the date the transaction is 
identified as a transaction of interest. Additionally, material 
advisors have been on notice since the issuance of the proposed 
regulations that reporting of partnership related-party basis shifting 
transactions may soon be required. However, given the additional time 
that may be needed for material advisors to identify and prepare 
disclosures for already-completed transactions, Sec.  1.6011-18(h)(2) 
provides an extension of 90 additional calendar days after the date 
specified in Sec.  301.6111-3(e) for material advisors to meet their 
disclosure obligations.

II. Usefulness and Burden of Reporting the Transactions of Interest 
Identified by the Proposed Regulations

A. Comments Suggesting the IRS Already Has the Information It Needs
    One commenter stated that the Treasury Department and the IRS 
already have sufficient information to determine that the transactions 
identified by the proposed regulations are abusive and thus the 
proposed regulations are unnecessary.\2\ This commenter stated that the 
Treasury Department and the IRS have already concluded that the 
transactions identified in the proposed regulations are abusive through 
IRS positions taken in litigation and the issuance of Rev. Rul. 2024-
14, 2024-28 IRB 18 (advising taxpayers that the IRS would challenge 
certain partnership related-party basis adjustment transactions under 
the codified economic substance doctrine in section 7701(o) of the 
Code). The commenter also asserted that transactions of interest are 
reserved for transactions that have the potential for tax avoidance, 
but that the Treasury Department and the IRS failed to articulate a 
rational connection between ``the facts found and the choice made.'' 
Another commenter suggested that the proposed regulations relied on the 
application of Rev. Rul. 2024-14, implying that the proposed 
regulations cannot have effect if the IRS does not prevail in pending 
litigation.
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    \2\ The commenter also argued that it would be inappropriate to 
identify the transactions identified in the proposed regulations as 
listed transactions under Sec.  1.6011-4(b)(2). This comment is not 
relevant to these final regulations, which solely identify certain 
transactions as transactions of interest and not as listed 
transactions.
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    The Treasury Department and the IRS do not agree with these 
comments. The final regulations identify certain partnership related-
party basis adjustment transactions as transactions of interest under 
Sec.  1.6011-4(b)(6), rather than as listed transactions under Sec.  
1.6011-4(b)(2). This is because the Treasury Department and the IRS 
have determined that these transactions have the potential for tax 
avoidance through the IRS's examination of certain transactions that 
are abusive but are not aware of the entire universe of partnership 
related-party basis adjustment transactions and whether every 
transaction is per se abusive. As explained in the preamble to the 
proposed regulations, the Treasury Department and the IRS have become 
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 and wish to gather additional 
information. This awareness results from the IRS's examination of 
various partnership transactions involving related parties in which 
basis in distributed property or partnership property is shifted in a 
manner that results in significant tax benefits attributable to the 
basis shift for the related parties but with little or no tax or 
economic cost (abusive partnership related-party basis adjustment 
transactions), thus artificially generating (or regenerating) Federal 
income tax benefits that results in significant tax savings without a 
corresponding economic outlay. The transactions identified as 
transactions of interest in these final regulations have the potential 
for tax avoidance because they share certain indicia with these abusive 
partnership related-party transactions. Rev. Rul. 2024-14 contains 
several examples of abusive transactions discovered by the IRS, and the 
legal analysis it contains is independent of the requirement to 
disclose the transactions described in these regulations as 
transactions of interest. In other words, the issuance of a revenue 
ruling does not preclude further scrutiny of partnership related-party 
basis adjustment transactions by identifying those transactions as 
transactions of interest. Similarly, pending litigation is irrelevant 
to the

[[Page 2963]]

identification of these transactions as transactions of interest. 
Accordingly, the final regulations do not adopt these comments.
    A few commenters questioned why the Treasury Department and the IRS 
need to identify certain partnership related-party basis adjustment 
transactions as transactions of interest if these transactions are 
already disclosed as part of the Form 1120, U.S. Corporation Income Tax 
Return, or Form 1065, U.S. Return of Partnership Income. These 
commenters generally contended that existing reporting requirements 
already accomplish the objectives of the proposed regulations and that 
adding these transactions as transactions of interest is therefore 
unnecessary. One commenter recommended that instead of identifying the 
transactions described in the proposed regulations as transactions of 
interest, the Form 1065 should be modified to ask questions to 
determine whether partnership related-party basis adjustment 
transactions occurred during the taxable year.
    The Forms 1120 and 1065, including statements or schedules required 
to be attached thereto, are filed as a part of a taxpayer's tax return 
and do not include all the information contained on Form 8886, 
Reportable Transaction Disclosure Statement. The Forms 1120 and 1065 
also do not alert the OTSA to the taxpayer's participation in a 
transaction of interest, nor does the filing of a tax return result in 
disclosure and other obligations of material advisors to the 
transaction. Moreover, the purpose of the reporting requirements for a 
transaction of interest is to allow the OTSA and the IRS to learn 
detailed information about the identified transaction using limited 
resources, and without having to distill information obtained through 
annual filing requirements or to open taxpayer examinations. 
Accordingly, these comments are not adopted in the final regulations.
B. Comments Addressing Compliance Burdens and Costs
    Several commenters asserted that complying with the reporting 
requirements for the transactions identified by the proposed 
regulations would be unduly burdensome and result in excessive costs 
for small businesses. One commenter asserted that the proposed 
regulations stray from Congressional intent of simplicity by subjecting 
family business owners and their advisors to substantial reporting 
obligations and penalties. Another commenter asserted that the proposed 
regulations would result in many protective disclosures that the 
Treasury Department and the IRS could not handle.
    The impact on taxpayers who engage in legitimate business 
transactions with related parties resulting in positive partnership 
basis adjustments that meet the increased threshold amounts in these 
final regulations (applicable threshold amounts) discussed in Part IV 
of this Summary of Comments and Explanation of Revisions, or who may 
decide they need to file a protective disclosure, is far outweighed by 
the benefit of requiring disclosure for the identified transactions, 
which have the potential for tax avoidance. Combatting abusive tax 
avoidance is a priority for the Federal Government and partnership 
transactions that shift basis among related parties without a 
corresponding economic or tax impact have the potential for tax 
avoidance. Moreover, the identification of the transactions described 
in these final regulations should not impact small business owners. If 
a taxpayer is engaging in one or more of the complex transactions 
identified by these final regulations with a related party that results 
in positive basis adjustments in a single taxable year that exceed the 
applicable threshold amounts of $10 million or more (or $25 million for 
later identified transactions), the taxpayer is not likely a small 
business owner and the reporting obligations outlined in these final 
regulations should not be unduly burdensome. Accordingly, these 
comments are not adopted in the final regulations.
C. Comments Requesting That the Proposed Regulations Be Withdrawn or 
Reissued
    A few commenters suggested that the proposed regulations be 
withdrawn, stating that they are overbroad. One commenter suggested 
that due to the number of their recommendations, the proposed 
regulations should be reproposed. Another commenter suggested that the 
proposed regulations be withdrawn and reproposed after the forthcoming 
proposed regulations described in Notice 2024-54 are finalized. The 
final regulations are narrowly tailored to identify transactions in 
which taxpayers may be exploiting the mechanical basis adjustment 
provisions in subchapter K to produce significant tax benefits with 
little to no economic cost to the partners. Taxpayers are able to 
engage in these transactions because the parties are related. In most 
cases, these transactions would not likely occur between partners 
negotiating on an arm's length basis. The purpose of the final 
regulations is to determine the ways in which related taxpayers are 
inappropriately shifting basis using the provisions of subchapter K, 
how they are creating opportunities to engage in transactions that 
generate inappropriate basis shifts (for example, how inside-outside 
basis disparities are being created), and the economic impact of the 
Federal income tax consequences created by the basis shifting 
transactions (for example, the extent to which gain is reduced or cost 
recovery is increased). It is in the interest of sound tax 
administration to gather this information now. As disclosures pursuant 
to this regulation will inform the Treasury Department and the IRS on 
transactions for which further examination or further guidance may be 
warranted, it does not make sense to withdraw the proposed regulations 
and wait to repropose them until the forthcoming regulations described 
in Notice 2024-54 are both proposed and finalized. Moreover, these 
final regulations are separate from, and do not rely on, the 
forthcoming proposed regulations described in Notice 2024-54. The 
comments to these proposed regulations have been helpful and have 
allowed the Treasury Department and the IRS to make several 
modifications in response to comments that limit the scope of the 
rules, as described in this Summary of Comments and Explanation of 
Revisions.

III. Transactions of Interest Identified in the Proposed Regulations

    The proposed regulations would have identified four kinds of 
partnership related-party basis adjustment transactions as transactions 
of interest. A basis adjustment transaction under proposed Sec.  
1.6011-18(c)(1)(i) would occur if a 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), and a proposed $5 
million threshold amount is met (section 734(b) TOI). A basis 
adjustment transaction under proposed Sec.  1.6011-18(c)(1)(ii) would 
occur if 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 a 
proposed $5 million threshold amount is met (section 732(b) TOI). A 
basis adjustment transaction under proposed Sec.  1.6011-18(c)(1)(iii) 
would occur if a partnership distributes property to a partner who is 
related to

[[Page 2964]]

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 a proposed $5 million threshold amount is met (section 
732(d) TOI). A basis adjustment transaction under proposed Sec.  
1.6011-18(c)(2) would occur if 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 (as 
defined in proposed Sec.  1.6011-18(b)(6)), the basis of one or more 
partnership properties is increased under section 743(b)(1) and (c), 
and a proposed $5 million threshold amount is met (section 743(b) TOI).
A. General Reporting Exclusions
1. Tax-Avoidance Indicators
    One commenter recommended requiring reporting only for transactions 
with defined indicators of potential tax avoidance or evasion, rather 
than the involvement of a related or tax-indifferent party, but did not 
suggest other indicators or explain how the current indicators are 
insufficient. The Treasury Department and the IRS have made 
modifications to the proposed regulations as described herein to better 
target the identification of transactions for which reporting is 
required.
2. Basis Shifts Between Assets of Like Character
    One commenter recommended excluding transactions identified as a 
basis adjustment transaction of interest in cases in which (1) basis is 
shifted between assets of like character (that is, capital asset to 
capital asset or ordinary income asset to ordinary income asset), (2) 
basis is shifted from non-recoverable property to non-recoverable 
property or the basis adjustment does not provide a shorter recovery 
period, and (3) the property receiving the basis increase is not sold 
within two years of the basis increase. The Treasury Department and the 
IRS agree that a basis shift to a like-kind asset that has the same or 
a longer recovery period than the asset to which the basis was shifted 
from presents less risk of tax avoidance. However, the Treasury 
Department and the IRS do not agree that it would be appropriate in 
such circumstances to require reporting only if the property is 
disposed of within two years after the basis increase as there is still 
a potential for abuse if the property is disposed of after two years. A 
two-year rule would allow related taxpayers to increase the basis in 
property in anticipation of a future sale and would exclude 
transactions that present significant risks of tax avoidance. 
Accordingly, it is in the interest of sound tax administration to 
identify certain partnership related-party basis adjustment 
transactions as transactions of interest in the year of the basis shift 
and the commenter's recommendation is not adopted in the final 
regulations.
3. Requiring Knowledge or Intent
    A few commenters recommended including an intent requirement for 
the transactions identified by the proposed regulations as transactions 
of interest. One commenter recommended that taxpayers that are unaware 
of or have no reason to know that a transaction identified by the 
proposed regulations is reportable be excused from disclosure. Another 
commenter recommended including a subjective test for intent and 
providing safe harbors and exceptions for business separations and 
succession-planning transactions.
    Including an intent requirement for the transactions identified by 
the proposed regulations would introduce a subjective element, which is 
inconsistent with the IRS's need to gather additional information on 
the identified transactions to ascertain their potential for tax 
avoidance. Including an intent requirement in these regulations would 
also frustrate the IRS's ability to determine which of the basis 
adjustment transactions are impermissible tax avoidance transactions 
and to effectively and efficiently address the tax avoidance. Moreover, 
the general transaction of interest reporting requirements under 
section 6011 do not include a knowledge component; taxpayers are 
required to report the tax consequences of their transactions 
identified as transactions of interest regardless of whether they are 
aware of the reporting requirements. As further described in Parts 
III.A.4 and III.E of this Summary of Comments and Explanation of 
Revisions, it is not appropriate to incorporate an exception or safe 
harbor for business separations or succession-planning transactions 
into the final regulations as these transactions are no less likely to 
be structured to avoid tax, and thus may also have the potential for 
tax avoidance. Accordingly, these comments are not adopted in the final 
regulations.
4. Excluding Certain Basis-Adjustment Transactions
    One commenter recommended excluding certain basis-adjustment 
transactions that cure inside-outside basis disparities created by 
section 734(b) adjustments, section 704(c) methods, contributions, 
distributions, and revaluations. Another commenter recommended that the 
final regulations consider common reasons why an inside-outside basis 
disparity might arise, such as transaction costs required to be 
capitalized to outside basis, certain income exclusions related to 
foreign corporations owned through a partnership, or the use of various 
section 704(c) methods. This commenter recommended that certain 
acquisitions of partnership businesses that may involve or create 
related-partner relationships, including distributions of lower-tier 
partnership interests to an upper-tier partnership and liquidations of 
blocker subsidiaries, be excluded as transactions of interest. Another 
commenter requested that the final regulations exclude partnership-
incorporation transactions, including transactions described in Rev. 
Rul. 84-111, 1984-2 C.B. 88, Situation 2 (assets-up incorporation) and 
Situation 3 (interests-over incorporation). A few commenters requested 
that the final regulations exclude from the transactions identified as 
section 732(b) TOIs and section 734(b) TOIs any basis adjustments 
resulting from an actual or deemed distribution in the case of a 
partnership merger or division done for commercial reasons, such as to 
allow a partial sale and continuation of certain investments held by a 
private equity or other investment fund.
    In response to comments received on the proposed regulations, these 
final regulations adopt several suggestions to limit the scope of the 
transactions identified by the proposed regulations to exclude from 
reporting common business transactions that do not meet large, economic 
thresholds. However, providing a blanket exclusion for certain 
transactions that may be common business transactions under specific 
circumstances, but may also have the potential for tax avoidance, would 
defeat the purpose of identifying the transactions as transactions of 
interest. For example, a partnership merger or division involving 
related parties may be undertaken with the intent to increase the basis 
of an asset that is subsequently disposed of in a recognition 
transaction or to increase cost recovery deductions. Moreover, one of 
the purposes of the final regulations is to gather additional 
information on

[[Page 2965]]

how taxpayers are creating opportunities to shift basis between related 
parties using the provisions of subchapter K (for example, information 
related to how inside-outside basis disparities are being created). 
Providing an exclusion from reporting for transactions that cure 
inside-outside disparities created through certain section 704(c) 
methods, contributions, adjustments, distributions or revaluations 
would nullify most of the disclosures required by the final regulations 
as these are the techniques used to create opportunities for 
partnership related-party basis shifting. For these reasons, the 
commenters' suggestions for exclusions of certain transactions are not 
adopted in the final regulations.
5. Publicly Traded Partnerships
    One commenter expressed concern that publicly traded partnerships 
within the meaning of section 7704 of the Code (PTPs) are unable to 
identify the buyers and sellers of interests therein, making it 
impossible to determine whether a transfer is made between related 
parties. This commenter stated that PTPs frequently engage in 
transactions that result in section 743(b) adjustments as part of 
normal public trading and capital-markets transactions and that the 
final regulations should add carveouts for transactions of PTPs. At a 
minimum, the commenter recommended that the final regulations implement 
an ownership threshold for related partners of five percent or more of 
the PTP to allow such persons to be identified by disclosures required 
to be made to the U.S. Securities and Exchange Commission. Another 
commenter recommended that basis adjustments resulting from an 
acquisition of a unit in a PTP, including as part of any redemption of 
publicly traded units by the PTP, should be excluded from the 
transactions identified as transactions of interest.
    The Treasury Department and the IRS agree that due to PTPs having a 
large number of PTP unitholders that are not related partners within 
the meaning of the final regulations, and the unlikelihood that 
unrelated PTP unitholders would engage in the transactions identified 
as transactions of interest in the final regulations, it is appropriate 
to exclude basis adjustments involving a transfer of or a distribution 
with respect to partnership interests in a PTP, except basis 
adjustments resulting from certain material transactions involving 
partnership interests held by related partners in a PTP. Accordingly, 
the final regulations provide that in the case of a PTP, a 
participating partner means a partner of the PTP but only to the extent 
that the partner engages in a private transfer (as described in Sec.  
1.7704-1(e)), redemption and repurchase agreement (as described in 
Sec.  1.7704-1(f)), or private placement (as described in Sec.  1.7704-
1(h)) of a partnership interest with a related partner and the 
transaction is not otherwise excluded as a transaction of interest 
described in the final regulations.
B. Cash as Property for Purposes of Section 734(b) TOIs
    One commenter requested that the final regulations clarify that 
cash is not included as ``property'' for purposes of a section 734(b) 
TOI and thus positive basis adjustments resulting from a distribution 
of cash be excluded from transactions identified as transactions of 
interest. Another commenter asked for clarification that cash 
distributions in excess of basis that result in positive basis 
adjustments under section 734(b) are identified as transactions of 
interest only to the extent that the distributions are made to a tax-
indifferent party.
    As a general matter, the text of section 734 makes no distinction 
between cash and other partnership property. A cash distribution to a 
related partner could be treated as a section 734(b) TOI to the extent 
that any basis increases generated under section 734(b)(1) exceed the 
gain recognized under section 731(a)(1) (or otherwise) with respect to 
which any tax imposed under subtitle A of the Code (subtitle A) is 
required to be paid by the related partners. However, the Treasury 
Department and the IRS note that if gain is recognized on a 
distribution of cash that results in a basis adjustment under section 
734(b)(1)(A) and tax imposed under subtitle A is required to be paid on 
such gain by any of the related partners, that portion of the basis 
adjustment would not be counted towards the overall applicable 
threshold amount in determining whether disclosure of a transaction of 
interest is required.
C. Acquisition and Integration Transactions for Purposes of Section 
743(b) TOIs
    A few commenters recommended excluding from a section 743(b) TOI 
transactions in which a party purchases a partnership interest in an 
arm's-length transaction, receives a basis adjustment under section 
743(b), then transfers the partnership interest to a related person in 
a nonrecognition transaction (for example, a transfer to a corporation 
under section 351(a) or to a partnership under section 721(a)) that 
causes a re-computation and re-allocation of the section 743(b) 
adjustment for the benefit of the related-party transferee. Under the 
proposed regulations, assuming the proposed $5 million threshold amount 
was met, such a transaction would be reportable if the nonrecognition 
transfer to the related transferee results in a positive basis 
increase.
    The Treasury Department and the IRS agree that a positive section 
743(b) basis adjustment acquired through an arm's-length transaction 
(for example, a transaction that would not be a reportable transaction 
under these final regulations, without regard to the six-year lookback 
period) to which a related transferee succeeds should not be a 
reportable transaction, except to the extent of any additional positive 
basis adjustment resulting from the nonrecognition transfer. This is 
because if the original section 743(b) adjustment was acquired through 
an arm's length transaction that would not be reportable under the 
final regulations, a corresponding amount of gain should have been 
recognized and tax imposed under subtitle A should have been paid by 
the original transferor. Thus, a subsequent nonrecognition transfer by 
the original transferee that results in the same section 743(b) 
adjustment has little potential for tax abuse. Accordingly, the final 
regulations provide that if a partner receives an interest in a 
partnership from a person in a recognition transaction (first transfer) 
and the basis of one or more partnership properties is increased under 
section 743(b)(1) and (c), and subsequently the partner (transferor) 
transfers the partnership interest to a person related to the 
transferor (transferee) in a nonrecognition transaction (subsequent 
transfer), the subsequent transfer is a transaction of interest only if 
the transferee's basis adjustment under section 743(b)(1) and (c) 
resulting from the subsequent transfer exceeds the amount of the 
transferor's remaining basis adjustment that is attributable to the 
transferred partnership interest (excess amount), and the applicable 
threshold amount is met. The final regulations further provide that 
only the excess amount is counted towards the applicable threshold 
amount and that a transferor's remaining basis adjustment is equal to 
the amount of the transferor's basis adjustment under section 743(b)(1) 
and (c) resulting from the first transfer as adjusted under section 
1016(a)(2) to reflect any recovery of the basis adjustment or as 
otherwise adjusted prior to the subsequent transfer.

[[Page 2966]]

D. Transfers Between Unrelated Partners for Purposes of Section 743(b) 
TOIs
    Many commenters recommended excluding transfers between unrelated 
parties from a section 743(b) TOI if the transferee is related to one 
or more existing partners. Several of these commenters recommended that 
the transaction identified by proposed Sec.  1.6011-18(c)(2) should be 
limited to transfers between related transferors and transferees. The 
Treasury Department and the IRS agree with this suggestion as transfers 
between related parties have a clear potential for tax avoidance 
whereas transfers between unrelated parties if the transferee is 
related to one or more existing partners may be much harder to 
structure to achieve the desired tax avoidance. Additionally, an 
unrelated transferor may not have reason to know that a transferee is 
related to one or more existing partners. Accordingly, the definition 
of ``related partner'' in Sec.  1.6011-18(b)(9) in the final 
regulations provides that in the case of a section 743(b) TOI, a 
related partner means a transferor and transferee of a partnership 
interest that are related to each other immediately before or 
immediately after a section 743(b) TOI. The definition in the final 
regulations does not include a transferee that is unrelated to a 
transferor but is related to one or more of the partners in the 
partnership.
E. Transfers Upon Death
    For purposes of a section 743(b) TOI, proposed Sec.  1.6011-
18(b)(2) would have defined a nonrecognition transaction as defined in 
section 7701(a)(45)--that is, any disposition of property in a 
transaction in which gain or loss is not recognized in whole or in part 
for purposes of subtitle A--other than a transfer on the death of a 
partner.
    One commenter requested clarification that a step up in basis that 
results from the transfer of an interest on the death of a partner is 
not a transaction of interest. Another commenter requested 
clarification that the following transactions are ``transfers on the 
death of a partner'' excluded from the definition of a nonrecognition 
transaction under the final regulations: (1) any deemed transfer to 
what had been a grantor trust, including an intentionally defective 
grantor trust; and (2) a transfer on the death of a beneficiary of a 
trust that is a partner. This same commenter requested clarification 
that a ``transfer on the death of a partner'' is neither a 
``nonrecognition transaction,'' nor a ``recognition transaction'' as 
defined in the proposed regulations. Section 1.6011-18(c)(4) of the 
final regulations clarifies that transfers on the death of a partner 
are not identified as transactions of interest or as substantially 
similar transactions. Section 1.6011-18(b)(13) of the final regulations 
also provides that the term ``transfer on the death of a partner'' 
means a transfer of a partnership interest from a partner to the 
partner's estate or a deemed transfer from a grantor trust owned by the 
partner to a trust that becomes a separate entity for Federal income 
tax purposes by reason of the partner's death.
    One commenter recommended excluding distributions of partnership 
property to transferees of an interest in a partnership owned (or 
deemed owned) by a decedent at the time of death that occur during the 
administration of the decedent's estate, or a trust created by the 
decedent. This commenter also recommended excluding transfers of 
partnership interests owned (or deemed owned) by a decedent that occur 
during the administration of the decedent's estate or by a trust that 
was created by the decedent. Although not specifically stated in the 
commenter's letter, presumably, both of the commenter's recommendations 
would not be relevant in cases in which a section 754 election was made 
at the time of the decedent's death because there would be no disparity 
between the outside basis in the decedent's partnership interest and 
its share of inside basis in the partnership's properties. The Treasury 
Department and the IRS agree that transfers of partnership interests 
resulting from the death of a partner should be excluded from the 
transactions identified as transactions of interest and thus these 
transfers are not identified as such by the final regulations. However, 
if a section 754 election is not made for the taxable year that 
includes the death of the partner, subsequent transactions that 
generate positive basis adjustments, such as distributions of 
partnership property to the estate or transfers of partnership 
interests to beneficiaries that may resolve an inside-outside basis 
disparity created by a step-up to the basis of the decedent's 
partnership interest upon death, will be included as transactions of 
interest, provided that the applicable threshold amount is met. The 
Treasury Department and the IRS appreciate that a section 754 election, 
once made, is irrevocable without seeking permission from the IRS, and 
that a section 754 election at the time of a partner's death may 
require the partnership to maintain a separate set of calculations of 
the transferee beneficiaries' distributive shares of partnership items 
that reflect the section 743(b) adjustment. But making a section 754 
election at the time of death would be the mechanism by which to avoid 
the reporting requirements imposed by the regulations (assuming the 
applicable threshold amount is met). Providing an exception to 
reporting for transactions that result in basis adjustments because a 
section 754 election was not made on the death of a partner due to 
potential administrative burdens would result in additional requests 
for reporting exceptions in other fact patterns in which a section 754 
election was not made on an original transaction due to potential 
administrative burdens, and a subsequent nonrecognition transaction 
results in a basis adjustment that would otherwise be reportable. 
Including such exceptions in the final regulations would defeat the 
purpose of identifying the transactions of interest, as there may be 
circumstances in which the lack of a section 754 election was part of a 
strategy to generate more beneficial results using a transaction 
identified as a transaction of interest by the regulations. Thus, these 
final regulations do not exclude transactions in which a basis increase 
arises because a section 754 election was not made for a transaction 
that would have provided a basis adjustment to offset an inside-outside 
basis disparity. The Treasury Department and the IRS note that relief 
under Sec. Sec.  301.9100-1 through 301.9100-3 may be available for 
section 754 elections should a partnership fail to make the election in 
the time prescribed by the Code and regulations.

IV. Threshold Amount for Reporting

A. Amount Generally
    Under proposed Sec.  1.6011-18(c)(3), a partnership related-party 
basis adjustment transaction would have included those transactions in 
which the total basis increases from all transactions described in 
proposed Sec.  1.6011-18(c)(1) or (2), (d)(1) or (2) engaged in by the 
same partner or partnership during the taxable year (without netting 
for any basis adjustment that results in a basis decrease in the same 
transaction or another transaction), reduced 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 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 resulted in a 
basis increase of less than $5 million during the taxable year would 
have been a transaction of

[[Page 2967]]

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.
    Many commenters recommended increasing the proposed $5 million 
threshold amount, asserting that the $5 million threshold was too low, 
particularly considering the aggregation requirement, and would catch 
common business transactions. Several commenters recommended increasing 
the proposed $5 million threshold amount to an amount between $10 
million and $100 million. One commenter recommended making the 
threshold amount $10 million for transactions of interest occurring 
after the applicability date of these final regulations and $50 million 
for transactions of interest occurring before that date.
    The Treasury Department and the IRS have determined that increasing 
the proposed $5 million threshold amount is appropriate to reduce the 
administrative burden imposed on taxpayers. The purpose of these final 
regulations is to learn more about partnership related-party basis 
adjustment transactions and the Treasury Department and the IRS are 
conscious of overburdening taxpayers in that pursuit. Accordingly, the 
final regulations provide that, in the case of related-party basis 
adjustment transactions occurring within the six-year lookback period 
described in Sec.  1.6011-18(c)(3)(ii), the applicable threshold amount 
is $25 million. For related-party basis adjustment transactions 
occurring after the six-year lookback period, the final regulations 
provide an applicable threshold amount of $10 million. In each case, 
the applicable threshold amount is met for a taxable year if the sum of 
all related-party basis increases (as determined under Part IV.B. of 
this Summary of Comments and Explanation of Revisions) resulting from 
all transactions described in the final regulations of a participant 
during the taxable year (without netting for any downward basis 
adjustment in the same transaction or another transaction) exceeds by 
at least the applicable threshold amount 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) 
who are a party to such transactions. If the applicable threshold 
amount is met for a taxable year, all transactions of the participant 
described in the final regulations for the taxable year are reportable 
as transactions of interest regardless of whether an individual 
transaction meets the applicable threshold amount.
B. Calculation of Threshold Amount
    Commenters also recommended changing how the threshold amount is 
calculated. A few commenters recommended allowing basis increases to be 
offset by basis decreases for purposes of determining whether the 
threshold amount has been reached. Another commenter recommended taking 
basis increases into account only to the extent that corresponding 
basis decreases are borne by related parties. The same commenter 
recommended exempting transactions from the proposed regulations for 
which only a small portion (for example, 10 percent) of an overall 
basis decrease impacts parties related to those with corresponding 
basis increases, or vice versa. One commenter recommended that if its 
recommendation to limit reporting to the year of the transaction of 
interest is not adopted, that the threshold amount look to net taxable 
income--that is, reporting should be required only if the tax benefit 
reduced taxable income by the threshold amount. This commenter also 
suggested eliminating aggregation of basis increases. Another commenter 
recommended using a threshold amount that is not related to basis (for 
example, the book value of distributed property).
    The Treasury Department and the IRS agree that the calculation of 
the applicable threshold amount for purposes of section 734(b) TOIs 
should include only related partners' shares of basis increases and not 
the shares of unrelated parties, who can negotiate transactions at 
arm's length to protect their interests. The Treasury Department and 
the IRS also agree that the calculation of the applicable threshold 
amount for purposes of section 732(b) TOIs should exclude basis 
increases that correspond to basis decreases borne by unrelated 
partners (other than tax-indifferent parties) as basis decreases borne 
by unrelated partners should be negotiated at arm's length unless the 
unrelated partner is a tax-indifferent party. Accordingly, Sec.  
1.6011-18(c)(3)(iii) of the final regulations provide that in the case 
of a section 734(b) TOI, other than a substantially similar transaction 
described in Sec.  1.6011-18(d)(1), for determining whether the 
applicable threshold amount is met for a taxable year, a basis increase 
is an increase to the adjusted basis of the partnership's property 
under section 734(b)(1) and (c) only to the extent of each related 
partner's share of the basis increase. Section 1.6011-18(c)(3)(iv) of 
the final regulations provides that in the case of a section 732(b) 
TOI, other than a substantially similar transaction described in Sec.  
1.6011-18(d)(1), for determining whether the applicable threshold 
amount is met for a taxable year, a basis increase is an increase to 
the basis of property distributed to one of the related partners under 
section 732(b) or (c), but excluding the amount of any basis increase 
that corresponds to a decrease to the basis of property distributed to 
unrelated partners (other than tax-indifferent parties) under section 
732(b) and (c) or to unrelated partners' (other than tax-indifferent 
parties') shares of a corresponding decrease to the basis of the 
partnership's remaining property under section 734(b)(2) and (c). In 
the case of a substantially similar transaction described in Sec.  
1.6011-18 (d)(1), for purposes of determining whether the applicable 
threshold amount is met for a taxable year, a basis increase is an 
increase to the basis of property distributed to one of the partners 
under section 732(b) or (c) only to the extent of a corresponding 
decrease to the basis of property distributed to a tax-indifferent 
party under section 732(b) and (c) or to one or more tax-indifferent 
party's shares of a corresponding decrease to the basis of the 
partnership's remaining property under section 734(b)(2) and (c). For 
purposes of all of these rules, a partner's share of a basis decrease 
is determined immediately after the distribution under rules similar to 
the rules of Sec.  1.197-2(h)(12)(iv)(D).
    The Treasury Department and the IRS do not agree, however, that 
additional changes to the calculation of the applicable threshold 
amount, such as eliminating aggregation, calculating the applicable 
threshold amount based on increases to taxable income, or using an 
economic threshold that is based on book amounts, are appropriate in 
light of the modifications made. If aggregation were eliminated from 
the calculation of the applicable threshold amount, taxpayers would be 
incentivized to separate transactions described in the final 
regulations into multiple transactions that result in positive basis 
adjustments in an amount below the applicable threshold amount to avoid 
reporting obligations.

[[Page 2968]]

Incentivizing such behavior would defeat the purpose of the final 
regulations, which is to gather information on partnership related-
party basis adjustment transactions. Additionally, calculating the 
applicable threshold amount based on taxable income or book amounts 
would introduce unnecessary complexity for both taxpayers and the IRS 
in identifying the transactions described in the final regulations. The 
calculation of the applicable threshold amount in the final regulations 
represents an appropriate methodology for quantifying the magnitude of 
partnership related-party basis adjustment transactions a taxpayer 
engages in for a taxable year. As described in Part IV.A of this 
Summary of Comments and Explanation of Revisions, the increases to the 
threshold amount made by these final regulations should also address 
concerns that the applicable threshold amount is overly inclusive.
    Finally, one commenter requested clarification that substantially 
similar transactions are subject to the threshold amount. The Treasury 
Department and the IRS clarify that a transaction cannot be a 
substantially similar transaction if the applicable threshold amount is 
not met. As described in part VI of this Summary of Comments and 
Explanation of Revisions, transactions would be ``substantially 
similar'' transactions if they are (1) expected to obtain the same or 
similar types of tax consequences as the transactions described in the 
final regulations, (2) factually similar or based on the same or 
similar tax strategy, and (3) the applicable threshold amount is met.

V. Relatedness Standard

    Proposed Sec.  1.6011-18(b)(8) would have defined ``related'' as 
having a relationship described in section 267(b) (without regard to 
section 267(c)(3)) or section 707(b)(1). Proposed Sec.  1.6011-18(b)(9) 
would have defined ``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). Under the proposed 
regulations, this relatedness requirement would have been met if the 
requisite relatedness exists either immediately before or immediately 
after a partnership related-party basis adjustment transaction 
described in proposed Sec.  1.6011-18(c)(1) or (2).
    Several commenters recommended changes to the relatedness 
requirement, stating that it was overbroad and difficult to comply with 
as partnerships and partners may not be able to identify their related 
parties. One commenter recommended importing concepts found in section 
1563(a)(2) of the Code (related to brother-sister controlled groups of 
corporations) that would limit the definition of related partnerships 
by taking into account common ownership of capital or profits interests 
in the partnerships only to the extent that such ownership is identical 
with respect to each partnership.
    In the case of transactions of interest involving section 734(b) or 
section 732(b) or (d), one commenter recommended requiring related 
partners to own 80 percent or more of the capital or profits interests 
of the partnership. Similarly, another commenter recommended that for 
all purposes of the final regulations, reporting should be required 
only if related parties own 80 percent or more of the capital or 
profits of a participating partnership. This commenter also recommended 
that the standard for relatedness be modified by substituting ``80 
percent'' for ``50 percent'' in the relevant relationships defined 
within sections 267(b) or section 707(b)(1).
    The Treasury Department and the IRS appreciate that the standard of 
relatedness used in the proposed regulations, combined with the scope 
of the transactions identified as transactions of interest, the 
proposed $5 million threshold amount, and the proposed definition of 
participation could result in administrative burdens on partnerships 
and their partners. The final regulations address these burdens by 
limiting the scope of the transactions identified, increasing the 
applicable threshold amounts, and limiting the application of the 
subsequent realization of tax benefit rule as described in Part VII.A. 
of this Summary of Comments and Explanation of Revisions. For example, 
in response to comments requesting that the standard of relatedness be 
narrowed, in the case of a section 734(b), 732(b) or 732(d) TOI, the 
final regulations provide that only directly related partners (and not 
also indirectly related partners) are considered in determining whether 
partners are related within the meaning of Sec.  1.6011-18(b)(8) of the 
final regulation.
    The final regulations do not adopt the additional changes to the 
standard of relatedness recommended by commenters because the Treasury 
Department and the IRS are concerned that counting only identical 
ownership as between related partnerships, or requiring related 
partners to own 80 percent or more of the capital or profits interests 
in a partnership, would more easily permit partnership structures with 
only marginally different ownership, including through the use of 
accommodation parties, to avoid such higher ownership thresholds 
without substantially affecting the partners' economics. Likewise, the 
Treasury Department and the IRS are concerned that increasing the 
relatedness standard from 50 percent to 80 percent could allow 
taxpayers to structure their affairs to stay below an 80-percent-
relatedness standard, while simultaneously engaging in abusive 
partnership related-party basis adjustment transactions. Adding an 
ownership threshold or increasing the relatedness standard would 
frustrate the purpose of identifying the transactions described in the 
proposed regulations as transactions of interest. Accordingly, the 
commenters' recommendations are not adopted in the final regulations.
    A commenter recommended excluding transactions between family 
members from those defined as transactions of interest and focusing 
instead on transactions involving controlled corporations described in 
section 267(f). The commenter noted that if relatedness is determined 
immediately before or after a transaction, parties undergoing divorce 
may be subject to these rules even though they have competing interests 
and will not be related after the divorce. Another commenter 
recommended excluding brothers and sisters from a person's family for 
purposes of determining relatedness, stating that, in the commenter's 
experience, siblings often have a contentious business relationship and 
are less likely to engage in transactions that confer large, gratuitous 
economic or tax benefits to one another. The Treasury Department and 
the IRS do not agree that familial relationships, including sibling 
relationships, should be excluded from the definition of relatedness. 
Family members, including siblings, often work in concert in ways that 
arm's-length parties do not. For those reasons, Congress included these 
familial relationships as part of the limitation rules in sections 267 
and 707(b). Additionally, section 1041 of the Code is intended to 
address transfers of

[[Page 2969]]

property between spouses incident to divorce. For these reasons, the 
final regulations retain familial relationships, including sibling 
relationships, in the definition of relatedness.

VI. Substantially Similar Transactions

    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. 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)--that 
is, if they are expected to obtain the same or similar types of tax 
consequences and are either factually similar or based on the same or 
similar tax strategy. Proposed Sec.  1.6011-18(a) would have provided 
that substantially similar transactions include, but are not limited 
to, the transactions described in proposed Sec.  1.6011-18(d).
    Some commenters recommended clarifying or narrowing the definition 
of ``substantially similar'' transactions generally. Several commenters 
noted that the broad definition of ``substantially similar 
transactions'' in Sec.  1.6011-4 increases uncertainty and compliance 
costs. Suggestions to amend Sec.  1.6011-4, including that provision's 
definition of a ``substantially similar'' transaction, are outside the 
scope of these final regulations. As a result, the commenters' 
suggestions are not adopted in the final regulations.
A. Tax-Indifferent Parties
    Under proposed Sec.  1.6011-18(d)(1), a transaction would have been 
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 have meant 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).
    Two commenters recommended eliminating transactions involving tax-
indifferent parties from those identified as transactions of interest. 
Many commenters noted that partners and partnerships may be unaware 
that a person engaging in a transaction identified by the proposed 
regulations is a tax-indifferent party. Some commenters requested 
clarification to the definition of tax-indifferent party, such as 
whether it includes direct or indirect partners that are exempt from 
Federal income tax under section 115 of the Code (relating to the 
income of State, territorial, or local governments), entities treated 
as partnerships or S corporations for Federal tax purposes, or a person 
that, due to tax attributes or for other reasons, is subject to tax on 
only part of its income. One commenter requested confirmation that the 
definition of a tax-indifferent party does not include a party with a 
capital loss carryover. The commenter raised that a capital loss 
carryover may be unrelated to a partner's partnership interest and 
unknown by other partners, particularly if the partner is unrelated.
    One commenter recommended limiting the rule to situations in which 
the tax-indifferent party knows or has reason to know of the tax 
benefits arising in connection with its participation in a basis-
adjustment transaction and that the other partners that are party to 
the transaction know of the partner's tax-indifferent status. One 
commenter recommended an exception for taxpayers who do not have 
knowledge or reason to know that its transaction is reportable because 
a person that is a party to the transaction is tax-indifferent. Another 
commenter recommended modifying the tax-indifferent party rule to apply 
only to situations in which the taxpayer knowingly participates in the 
transaction to which the tax-indifferent party facilitates a basis 
step-up.
    Eliminating the tax-indifferent party rule would frustrate the 
purpose of identifying substantially similar transactions to the 
identified transactions of interest that use tax-indifferent parties 
instead of related parties to achieve the same economic or tax results. 
Accordingly, the Treasury Department and the IRS decline to eliminate 
the tax-indifferent party rule entirely in the final regulations. 
However, in response to these comments, the Treasury Department and the 
IRS have determined that certain changes to the scope of transactions 
of interest involving tax-indifferent parties are appropriate.
    Accordingly, the final regulations include a knowledge element in 
the definition of a tax-indifferent party. Section 1.6011-18(b)(12) of 
the final regulations provides that a tax-indifferent party means a 
person that is either not liable for Federal income tax by reason of 
its tax-exempt or, in certain cases, foreign status, or to which any 
gain, or portion of any gain, that would have resulted from a section 
732(b) TOI or a section 734(b) TOI if the property subject to a basis 
decrease in such transaction were sold immediately after such 
transaction, would not result in Federal income tax liability for the 
person's taxable year within which such gain would have been 
recognized, and whose status as a tax-indifferent party is known or 
should be known to any other person that participates in the 
transaction or to a partner in a partnership that participates in such 
a transaction. Thus, a tax-indifferent party would include a person 
that is partially taxable, for example, due to tax attributes, to the 
extent that the person's status as a tax-indifferent party is known or 
should be known by any other person participating in the transaction or 
to a partner in a partnership that participates in such a transaction. 
Because partnerships or S corporations are generally not liable for 
tax, and because the tax status of their partners or shareholders could 
be diverse, the final regulations also provide that partnerships or S 
corporations are not tax-indifferent parties except in cases in which a 
principal purpose of the use of the partnership or S corporation is to 
avoid tax-indifferent party status.
    Additionally, the final regulations limit the scope of a 
substantially similar transaction with a tax-indifferent party under 
Sec.  1.6011-18(d)(1) by limiting the calculation of the applicable 
threshold amount to basis increases that correspond to a basis decrease 
to the tax-indifferent party for sections 732 and 734 TOIs. See Part 
IV.B. of this Summary of Comments and Explanation of Revisions. These 
modifications are intended to address concerns that the tax-indifferent 
party rules in the proposed regulations were overbroad.
    The final regulations also clarify that a transaction with a tax-
indifferent party includes a transaction in which the tax-indifferent 
party facilities the increase in the basis of partnership property in a 
section 732 TOI by having a share of a corresponding decrease to the 
basis of partnership property.
B. Recognition Transactions
    Proposed Sec.  1.6011-18(d)(2) would have defined as a 
substantially similar transaction a transaction in which a partner 
transfers the partner's partnership interest in a recognition

[[Page 2970]]

transaction to a related transferee or to a person related to one or 
more existing partners, and the proposed $5 million threshold amount 
was met. Proposed Sec.  1.6011-18(b)(6) would have defined a 
``recognition transaction'' as a transaction other than a 
nonrecognition transaction.
    One commenter requested clarification that proposed Sec.  1.6011-
18(d)(2) applies only to transfers between related parties, meaning the 
transferor and transferee must be related. The Treasury Department and 
the IRS agree with this comment and have made clarifying changes to 
confirm that the rule in Sec.  1.6011-18(d)(2) does not apply to 
transfers of partnership interests between persons that are not 
related.

VII. Participation in a Transaction of Interest Identified by the 
Proposed Regulations

A. Subsequent Realization of Tax Benefit Rule
    Under proposed Sec.  1.6011-18(e)(2)-(4), a participating 
partnership, participating partner, or related subsequent transferee 
would have participated in a transaction of interest in any taxable 
year in which it participates in a transaction described in proposed 
Sec.  1.6011-18(c). Additionally, under proposed Sec.  1.6011-18(e)(5), 
a participating partnership, participating partner, or related 
subsequent transferee would have participated in a transaction of 
interest in any taxable year in which its tax return reflected the tax 
consequences of a basis increase resulting from a transaction described 
in proposed Sec.  1.6011-18(c) (subsequent realization of tax benefit 
rule). Therefore, under the proposed regulations, as a result of the 
subsequent realization of tax benefit rule, a transaction described in 
proposed Sec.  1.6011-18(c) that occurred many years ago could require 
reporting if a taxpayer's tax return in an open tax year reflected the 
tax consequences (such as cost-recovery deductions) arising from the 
transaction of interest.
    Several commenters recommended eliminating the retroactive effect 
of the subsequent realization of tax benefit rule. These commenters 
stated that complying with the rule would be burdensome given that it 
could require taxpayers and their advisors to reconstruct transactions 
and their resulting tax consequences from many years ago. Commenters 
asserted that, in many cases, taxpayers and their advisors will not 
have sufficient information to comply with the rule.
    Several commenters recommended that the proposed regulations apply 
prospectively to transactions that occur in taxable years beginning on 
or after the date the final regulations are adopted, whereas one 
commenter recommended applying the proposed regulations solely to 
transactions effected on or after January 1, 2023. One commenter 
recommended applying the subsequent realization of tax benefit rule 
only to partnership related-party basis adjustment transactions that 
occur within partnership tax years that remain open under the period of 
limitations set forth in section 6235 of the Code. Section 6235 
provides rules on the period of limitations for making adjustments with 
respect to partnerships subject to the Centralized Partnership Audit 
Regime under the Bipartisan Budget Act of 2015 (BBA partnerships). 
Under section 6235(a)(1), the time for the IRS to make an adjustment 
for a taxable year of a BBA partnership generally is the later of the 
date which is three years after the latest of (1) the date on which the 
partnership return for the taxable year was filed, (2) the return due 
date for the taxable year, or (3) the date on which the partnership 
filed an administrative adjustment request under section 6227 of the 
Code with respect to the taxable year. In the case of a BBA partnership 
that makes a substantial omission of gross income within the meaning of 
section 6501(e)(1), section 6235(c)(2) provides that the period of 
limitations on making adjustments is six years instead of three years.
    The Treasury Department and the IRS do not agree with eliminating 
all reporting that would occur under the subsequent realization of tax 
benefit rule as this would defeat the purpose of providing the IRS with 
information regarding transactions with tax consequences occurring over 
more than one taxable year. However, the Treasury Department and the 
IRS agree that it is appropriate to limit the retroactive information 
effect of the subsequent realization of tax benefit rule because of 
administrative concerns with compliance for transactions that would 
meet the elements of Sec.  1.6011-18(c) and (d) except that they 
occurred many years ago.
    In determining the appropriate limitation for the subsequent 
realization of tax benefit rule, limiting the look back period to the 
prior six years as recommended by one commenter allows the IRS to 
preserve its ability to assess tax in cases in which the statute of 
limitations for assessment of tax is six years pursuant to section 
6501(e) or section 6235(c)(2). In addition, a six-year lookback period 
aligns with the requirement under Sec.  301.6112-1(b)(2) that material 
advisors of transactions of interests maintain lists of advisees, but 
not if the person entered into the transaction more than six years from 
the date the transaction was identified as a transaction of interest 
under published guidance. Accordingly, the final regulations adopt a 
six-year lookback period for required disclosures. Under the final 
regulations at Sec.  1.6011-18(f)(2), for a taxable year described in 
Sec.  1.6011-4(e)(2)(i), a participant must provide the information 
described in the final regulations only if the transaction of interest 
occurred within the six-year lookback period. Section 1.6011-18(b)(11) 
of the final regulations provides that the six-year lookback period 
means the seventy-two months immediately preceding the first month of 
the taxpayer's most recent taxable year that began before January 14, 
2025. The final regulations include examples demonstrating the six-year 
lookback period rule.
B. Limiting the Definition of Participation
    Several commenters recommended requiring reporting only in the 
taxable year the transaction of interest occurs and eliminating the 
subsequent realization of tax benefit rule. These commenters asserted 
that reporting only in the year in which the transaction of interest 
first arises would reduce compliance burdens and costs for taxpayers 
and limit the potential for missed reporting. One commenter suggested 
adopting a one-time disclosure mechanism like that adopted in Form 
1065, Schedule B, questions 11 and 12 for the ``drop and swap'' or 
``swap and drop'' transactions to which section 1031 of the Code 
applies. Another commenter recommended requiring reporting only at the 
partnership level to avoid duplicative reporting. Reporting by all 
participants in any taxable year in which the participant's tax return 
reflects the tax consequences of a basis increase resulting from a 
transaction of interest is the most appropriate for tax compliance and 
administration. Accordingly, the commenters' recommendations are not 
adopted in the final regulations.

Special Analyses

I. Paperwork Reduction Act

    The collection of information contained in these final regulations 
is reflected in the collection of information for Form 8886 and Form 
8918, Material Advisor Disclosure Statement, that have been reviewed 
and approved by the

[[Page 2971]]

Office of Management and Budget (OMB) in accordance with the Paperwork 
Reduction Act (44 U.S.C. 3507(c)) under control numbers 1545-1800 and 
1545-0865.
    To the extent there is a change in burden as a result of these 
final regulations, the change in burden will be reflected in the 
updated burden estimates for the Forms 8886 and 8918. The requirement 
to maintain records to substantiate information on Forms 8886 and 8918 
is already contained in the burden associated with the control number 
for the forms and remains unchanged.
    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 OMB control number.

II. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (5 U.S.C. chapter 6) requires 
agencies to ``prepare and make available for public comment an initial 
regulatory flexibility analysis,'' which will ``describe the impact of 
the rule on small entities.'' Section 605(b) of the RFA allows an 
agency to certify a rule if the rulemaking is not expected to have a 
significant economic impact on a substantial number of small entities.
    The Secretary of the Treasury hereby certifies that these final 
regulations will not have a significant economic impact on a 
substantial number of small entities pursuant to the RFA. This 
certification is based on IRS data that estimates the percentage of 
partnerships that would have been required to file a disclosure 
statement under the proposed regulations and those that may be required 
to file a disclosure statement under the final regulations.
    The IRS's Research, Applied Analytics, and Statistics division 
(RAAS) provided data that indicated the percentage of partnerships with 
gross receipts or sales of $25 million or less that might have been 
subject to the disclosure obligations under the proposed regulations 
because of a basis adjustment under section 743(b) of more than $5 
million during the taxable year. In addition, RAAS provided data that 
indicated the percentage of partnerships with gross receipts or sales 
of $25 million or more that might have been subject to the disclosure 
obligations under the proposed regulations because of a basis 
adjustment under section 743(b) of more than $5 million during the 
taxable year. The data suggested that of all partnerships with related 
parties and a basis adjustment under section 743(b) of more than $5 
million during the taxable year, approximately two-thirds of the 
partnerships would have gross receipts or sales of $25 million or less 
and approximately one-third would have gross receipts or sales of $25 
million or more. The Treasury Department and the IRS determined that 
the data did not indicate that the proposed regulations would have a 
significant economic impact on a substantial number of small entities 
because not all partnerships with gross receipts or sales of $25 
million or less are considered small businesses,\3\ and the data did 
not provide information on whether the partnerships with gross receipts 
or sale of $25 million or less were part of larger enterprises.
---------------------------------------------------------------------------

    \3\ See, 13 CFR 121.201.
---------------------------------------------------------------------------

    As discussed in Part II of the Summary of Comments and Explanation 
of Revisions, several commenters stated that the scope of the proposed 
regulations would be overbroad and the number of entities that would be 
subject to disclosure was underestimated. In addition, commenters 
asserted that taxpayers would be subject to substantial costs for 
complying with the proposed regulations because compliance required 
reviewing transactions from prior taxable years to determine whether a 
continuing tax benefit was attributable to a transaction identified as 
a transaction of interest under the proposed regulations. These 
comments are addressed in Parts II and VII of the Summary of Comments 
and Explanation of Revisions.
    One commenter asserted that the Treasury Department and the IRS 
underestimated the likely cost of complying with the proposed 
regulations. Specifically, the commenter asserted that the likely wage 
of tax preparers and costs of due diligence, as well as the number of 
parties affected by each transaction of interest were underestimated.
    As indicated in the Summary of Comments and Explanation of 
Revisions, the final regulations include changes that should 
significantly limit the total number of entities and more specifically, 
small businesses, subject to the disclosure obligations. Most 
significantly, the applicable threshold amount is increased from $5 
million to $10 million; the period for reporting under Sec.  1.6011-
4(e)(2)(i) is limited to a six-year lookback period and the applicable 
threshold amount for the six-year lookback period is $25 million; in 
the case of a section 734(b) TOI, the applicable threshold amount is 
determined by generally only taking into account only the amount of the 
basis increase shared by related partners; in the case of a section 
732(b) TOI, the applicable threshold amount is determined by generally 
only taking into account only the amount of the basis increase that 
corresponds to a basis decrease shared by the related partners.
    In addition, more recent data from the IRS indicates that, in the 
case of partnerships with gross assets of less than $25 million that 
reported basis adjustments under section 734(b) or section 743(b) for 
the taxable year, the average basis adjustment was less than the 
applicable threshold amount of $10 million or more in the final 
regulations. Thus, the Treasury Department and the IRS anticipate that 
many partnerships with gross assets of less than $25 million should not 
be subject to the disclosure obligations under the final regulations. 
Further, the data indicates that partnerships with gross assets of more 
than $25 million that reported basis adjustments under section 734(b) 
or section 743(b) for the taxable year that met the applicable 
threshold amount of $10 million or more in the final regulations 
represent less than one percent of all partnerships that filed tax 
returns for the taxable year. Accordingly, as a result of the changes 
made to the final regulations in response to comments received on the 
proposed regulations, the disclosure obligations in the final 
regulations should affect a low percentage of partnerships and most of 
those partnerships will be partnerships with less than $25 million of 
gross assets.
    The final regulations should not have a significant economic impact 
on small entities subject to the reporting requirements of the final 
regulations because the final regulations merely implement sections 
6011, 6111 and 6112 and Sec.  1.6011-4 by specifying the manner in 
which and the time at which a transaction identified as a transaction 
of interest in the final regulations must be reported. Accordingly, 
because the final regulations will 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 estimated that the appropriate wage rate for complying with 
the proposed regulations is $102.00 (2022

[[Page 2972]]

dollars) per hour. Thus, it was estimated that persons required to 
comply with the proposed regulations would have incurred costs totaling 
approximately $2,194.70 per filing. One commenter indicated that this 
per hour dollar amount is too small and that a better estimate is 
approximately $177.29 per hour or approximately $3,814.69 per filing 
(subject to the taxpayer potentially seeking specialists with a higher 
hourly fee to comply with the proposed regulations). Either of these 
amounts is small in comparison to an aggregate basis increase of $10 
million or more as the result of a transaction identified as a 
transaction of interest under the final regulations. Thus, the 
relatively small cost to comply with the final regulations will not 
pose any significant economic impact to any small entities that would 
be subject to the final regulations.
    For the reasons stated, a regulatory flexibility analysis under the 
RFA is not required. Pursuant to section 7805(f) of the Code, the 
proposed rule preceding this rulemaking was submitted to the Chief 
Counsel for the Office of Advocacy of the Small Business Administration 
for comment on its impact on small business, and no comments were 
received.

III. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 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 in 1995 dollars, updated annually for 
inflation. This 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.

IV. 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. These final regulations do not have 
federalism implications and do not impose substantial direct compliance 
costs on State and local governments or preempt state law within the 
meaning of the Executive order.

V. Regulatory Planning and Review

    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.

VI. Congressional Review Act

    Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), 
the Office of Information and Regulatory Affairs has designated this 
rule as not a ``major rule,'' as defined by 5 U.S.C. 804(2).

Statement of Availability of IRS Documents

    Guidance cited in this preamble is published in the Internal 
Revenue Bulletin and is available from the Superintendent of Documents, 
U.S. Government Publishing Office, Washington, DC 20402, or by visiting 
the IRS website at https://www.irs.gov.

Drafting Information

    The authors of these regulations are Elizabeth Zanet and Cameron 
Williamson, Office of the Associate Chief Counsel (Passthroughs and 
Special Industries). However, other personnel from the Treasury 
Department and the IRS participated in their development.

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.
    (3) Participating partner means--
    (i) Except as provided in paragraph (b)(3)(ii), (iii), or (iv) of 
this section, any partner that directly receives a distribution of 
property from, or an interest in, a participating partnership, or 
directly transfers an interest in a participating partnership, in a 
transaction described in paragraph (c) or (d) of this section, 
including a person that becomes or ceases to be a partner as a result 
of such transaction.
    (ii) 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.
    (iii) In the case of a participating partnership interest held by a 
trust for which the grantor or another person is treated as the owner 
of the trust that holds the participating partnership interest as 
provided in 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 the trust that holds the participating 
partnership interest.
    (iv) In the case of a publicly traded partnership within the 
meaning of section 7704 of the Code, participating partner means a 
partner of the publicly traded partnership but only to the extent that 
the partner engages in a private transfer (as described in Sec.  
1.7704-1(e)), redemption or repurchase agreement (as described in Sec.  
1.7704-1(f)), or private placement (as described in Sec.  1.7704-1(h)) 
of a partnership interest with a related partner and the transaction is 
not otherwise excluded as a transaction described in paragraph (c) or 
(d) of this section.
    (4) Participating partnership means any partnership--
    (i) That makes a distribution of property to a participating 
partner in a

[[Page 2973]]

transaction described in paragraph (c)(1) or (d)(1) of this section, or
    (ii) A partnership interest in which is transferred by a 
participating partner in a transaction described in paragraph (c)(2) or 
(d)(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 means:
    (i) In the case of a transaction described in paragraph (c)(1) of 
this section, two or more direct partners of a partnership 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) or 
(d)(2) of this section, a transferor and transferee of a partnership 
interest that are related to each other immediately before or 
immediately after a transaction described in paragraph (c)(2) of this 
section.
    (10) Related subsequent transferee means any person that 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 from a transaction described in 
paragraph (c) or (d) of this section.
    (11) Six-year lookback period means the seventy-two months 
immediately preceding the first month of the taxpayer's most recent 
taxable year that began before January 14, 2025.
    (12) Tax-indifferent party means a person that is either not liable 
for Federal income tax by reason of the person's tax-exempt or, in 
certain cases, foreign status, or to which any gain, or portion of any 
gain, that would have resulted from a transaction described in 
paragraph (d)(1) of this section if the property subject to a basis 
decrease in such transaction were sold immediately after such 
transaction would not result in Federal income tax liability for the 
person's taxable year within which such gain would have been 
recognized, and whose status as a tax-indifferent party is known or 
should be known to any other person that participates in a transaction 
described in paragraph (d)(1) of this section or to a partner in a 
partnership that participates in such a transaction. A tax-indifferent 
party does not include a partnership or S corporation except in a case 
in which a principal purpose of the use of the partnership or S 
corporation is to avoid tax-indifferent party status.
    (13) Transfer on the death of a partner means a transfer of a 
partnership interest from a partner to the partner's estate or a deemed 
transfer from a grantor trust owned by the partner to a trust that 
becomes a separate entity for Federal income tax purposes by reason of 
the partner's death.
    (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 a partnership. A partnership with two or more 
related partners engages in any of the transactions described in 
paragraphs (c)(1)(i) through (iii) of this section as follows:
    (i) The partnership distributes property to one of the related 
partners 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 applicable threshold 
described in paragraph (c)(3) of this section is met.
    (ii) The partnership distributes property to one of the related 
partners in liquidation of that person's partnership interest (or in 
complete liquidation of the partnership), the basis of one or more of 
those distributed properties is increased under section 732(b) and (c) 
of the Code, and the applicable threshold described in paragraph (c)(3) 
of this section is met.
    (iii) The partnership distributes property to one of the related 
partners, the basis of one or more of those distributed properties is 
increased under section 732(d) of the Code, the distributee 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 applicable threshold described in paragraph 
(c)(3) of this section is met.
    (2) Transfers of a partnership interest--(i) In general. Except as 
otherwise provided in paragraph (c)(2)(ii) or (c)(4) of this section, a 
partner transfers all or a portion of a partnership interest 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 applicable threshold described in paragraph 
(c)(3) of this section is met.
    (ii) Subsequent nonrecognition transfers--(A) In general. If a 
partner receives an interest in a partnership from a person in a 
recognition transaction (first transfer) and the basis of one or more 
partnership properties is increased under section 743(b)(1) and (c) of 
the Code, and subsequently the partner (transferor) transfers the 
partnership interest to a person related to the transferor (transferee) 
in a transaction described in paragraph (c)(2)(i) of this section 
(subsequent transfer), the subsequent transfer is a transaction 
described in paragraph (c)(2)(i) of this section only to the extent, if 
any, that the transferee's basis adjustment under section 743(b)(1) and 
(c) resulting from the subsequent transfer exceeds the amount of the 
transferor's remaining basis adjustment described in paragraph 
(c)(2)(ii)(B) of this section that is attributable to the transferred 
partnership interest (excess amount), and the applicable threshold 
described in paragraph (c)(3) of this section is met. Only the excess 
amount is counted towards the applicable threshold described in 
paragraph (c)(3) of this section.
    (B) Transferor's remaining basis adjustment. A transferor's 
remaining basis adjustment is equal to the amount of the transferor's 
basis adjustment under section 743(b)(1) and (c) resulting from the 
first transfer as adjusted under section 1016(a)(2) of the Code to 
reflect the recovery of the basis adjustment or as otherwise adjusted 
prior to the subsequent transfer.
    (3) Applicable threshold--(i) In general. Except as otherwise 
provided in paragraph (c)(3)(ii) of this section, for determining 
whether a transaction is described in paragraph (c)(1) or (2), (d)(1) 
or (2) of this section, the applicable 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 that results in a basis 
decrease in the same transaction or another transaction) exceeds by at 
least $10 million the gain recognized from such transactions during the 
same taxable year, 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 paragraph (d)(1) of 
this section) who are a party to such transactions.
    (ii) Six-year lookback period threshold. In the case of a 
transaction described in (c) or (d) of this section that

[[Page 2974]]

occurred within the six-year lookback period, paragraph (c)(3)(i) 
applies by substituting ``$25 million'' for ``$10 million'' for 
determining whether the applicable threshold is met for a taxable year.
    (iii) Basis increase under section 734(b) and (c) only for shares 
of basis increase to related partners. In the case of a transaction 
described in paragraph (c)(1)(i) of this section for determining 
whether the applicable threshold is met for a taxable year, a basis 
increase is an increase to the adjusted basis of the partnership's 
property under section 734(b)(1) and (c) only to the extent of a 
related partner's share of the basis increase. For purposes of this 
paragraph (c)(3)(iii), a partner's share of a basis increase is 
determined immediately after the distribution under rules similar to 
the rules of Sec.  1.197-2(h)(12)(iv)(D).
    (iv) Basis increase under sections 732(b) or (c) only for shares of 
corresponding basis decreases under section 734(b) to related partners 
or tax-indifferent parties. In the case of a transaction described in 
paragraph (c)(1)(ii) of this section for determining whether the 
applicable threshold is met for a taxable year, a basis increase is an 
increase to the basis of property distributed to one of the related 
partners under section 732(b) or (c), but excluding the amount of any 
basis increase that corresponds to a decrease to the basis of property 
distributed to unrelated partners (other than tax-indifferent parties) 
under section 732(b) and (c) or to unrelated partners' (other than tax-
indifferent parties') shares of a corresponding decrease to the basis 
of the partnership's remaining property under section 734(b)(2) and 
(c). For purposes of this paragraph (c)(3)(iv), a partner's share of a 
basis decrease is determined immediately after the distribution under 
rules similar to the rules of Sec.  1.197-2(h)(12)(iv)(D). In the case 
of a transaction described in paragraph (d)(1) of this section, for 
purposes of determining whether the applicable threshold is met for a 
taxable year, a basis increase is an increase to the basis of property 
distributed to one of the partners under section 732(b) or (c) only to 
the extent of a corresponding decrease to the basis of property 
distributed to a tax-indifferent party under section 732(b) and (c) or 
to one or more tax-indifferent party's shares of a corresponding 
decrease to the basis of the partnership's remaining property under 
section 734(b)(2) and (c).
    (4) Exclusion of a transfer on the death of a partner. A 
transaction described in paragraph (c)(2) or (d)(2) of this section 
does not include a transfer of a partnership interest that is a 
transfer on the death of a partner within the meaning of paragraph 
(b)(13) of this section.
    (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)(1)(i) or (ii) 
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 an increase in the basis of 
partnership property or an increase in the basis of property held by 
another partner in the partnership by receiving a distribution of 
property from the partnership or having a share of a corresponding 
decrease to the basis of partnership property, and the applicable 
threshold described in paragraph (c)(3) of this section is met; and
    (2) A transaction in which a transferor transfers an interest in a 
partnership to a transferee that is related to the transferor in a 
recognition transaction, and the applicable 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 or a substantially similar transaction described in 
paragraph (d) 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)(1) of this section 
or a substantially similar transaction described in paragraph (d)(1) of 
this section in any taxable year in which the partner directly receives 
a distribution of property, or directly transfers or receives an 
interest in a participating partnership, in a transaction described in 
paragraph (c)(2) of this section or a substantially similar transaction 
described in paragraph (d)(2) of this section.
    (3) Participating partnerships. A participating partnership 
participates in a transaction of interest described in paragraph (c) or 
a substantially similar transaction described in paragraph (d) 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) or (d)(1) of this section, or a 
participating partnership interest is transferred in a transaction 
described in paragraph (c)(2) or (d)(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 or a substantially similar transaction described in 
paragraph (d) 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) or (d) of this section that was required to be 
disclosed under paragraph (f) 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) or a substantially similar transaction described in paragraph (d) 
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) or (d) of this section, taking 
into account the limitations provided in paragraphs (c)(3)(iii) and 
(iv) 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 taxable year in which the transaction 
of interest occurred, the participating partner participates in a 
transaction of interest described in paragraph (c) of this section in 
the taxable year of the basis increase and in the taxable year of the 
sale.
    (f) Disclosure requirements--(1) In general. Except as otherwise 
provided in this paragraph (f)(1), 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), and in the manner described in Sec.  1.6011-4(e), for each 
taxable year in which the participant participated in a transaction 
described in paragraph (c) or (d) 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) or (d) of this section. In the 
case of a participant that is a tax-indifferent party, the disclosure 
requirements of this paragraph (f) apply only if the tax-indifferent 
party is otherwise required to file a tax return (or an information 
return) for the taxable year of the

[[Page 2975]]

transaction described in paragraph (d)(1) of this section.
    (i) The names and identifying numbers of all participants, 
including the participating partnership, participating partners and any 
related subsequent transferees.
    (ii) All basis adjustments resulting from a transaction described 
in paragraph (c) or (d) of this section, including--
    (A) Basis information, including the participating partnership's 
adjusted basis in the distributed property immediately before the 
distribution,
    (B) Any adjustments to basis under section 732(a)(2), (b), (d) or 
section 734(b),
    (C) Any adjustments to basis under section 743(b) with respect to a 
participating partner that is transferred an interest in a 
participating partnership, and
    (D) 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) or 
(d) of this section, including any cost recovery allowances 
attributable to any increase in basis as a result of a transaction 
described in paragraph (c) of this section, and any gain or 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) or (d) of this section. The Federal income tax consequences 
attributable to an increase in basis resulting from a transaction 
described in paragraph (c) or (d) of this section are limited to those 
attributable to the increase in basis, taking into account the 
limitations of paragraph (c)(3)(iii) or (iv) of this section. For 
example, in the case of a distribution of depreciable property that was 
subject to an increase in basis because of a transaction described in 
paragraph (c) or (d) of this section, the Federal 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) Six-year lookback period for taxable years described in special 
rule of Sec.  1.6011-4(e)(2)(i). For purposes of the special rule of 
Sec.  1.6011-4(e)(2)(i) (describing the disclosure requirement with 
respect to a transaction that is identified as a transaction of 
interest after the filing of the taxpayer's tax return (including an 
amended return) reflecting the taxpayer's participation in the 
transaction of interest but before the end of the period of limitations 
for assessment of tax for such taxable year), a participant must 
provide the information described in paragraph (f)(1) of this section 
for such open years only if the transaction described in paragraph (c) 
or (d) of this section occurred within the six-year lookback period 
described in paragraph (b)(11) of this section.
    (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 2025, 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 $10 million in Partner A's hands. On its 
tax return for taxable year 2025, Partner A reports deductions for 
depreciation expense attributable to the $10 million increase in the 
basis of Property X resulting from the transaction under paragraph 
(c)(1)(ii) of this section. In addition, ABC Partnership must reduce 
the basis of its remaining property under section 734(b)(2) as a result 
of the distribution of Property X to Partner A by $10 million. ABC 
Partnership and Partner A use the calendar year as their taxable year.
    (ii) Analysis. Partner A is a participant during taxable year 2025 
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 2025 in a transaction described in paragraph (c) of this 
section. ABC Partnership is a participant during taxable year 2025 
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 2025 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 2025. Partner A must 
include the information described in paragraph (f) of this section, 
including the amount of the deductions attributable to the $10 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 2025, 
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 the Office of Tax Shelter 
Analysis (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 2026 through 2030, 
Partner A reports deductions for depreciation expense attributable to 
the $10 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 2025.
    (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 2026 through 2030 as the Federal income tax consequences 
of the transaction described in paragraph (c)(1)(ii) of this section. 
As a result, for each of taxable years 2026 through 2030, 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 for the taxable year attributable to the $10 
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 2025, instead of distributing a depreciable asset, ABC 
Partnership distributes a nondepreciable asset, Land with an adjusted 
basis of $5

[[Page 2976]]

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 $15 million in Partner A's hands. Subsequently 
in the same taxable year 2025, 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 use the calendar 
year as their taxable year.
    (ii) Analysis. Partner A is a participant during taxable year 2025 
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 Partner A directly received a distribution of property 
during taxable year 2025 in a transaction described in paragraph (c) of 
this section. ABC Partnership is a participant during taxable year 2025 
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 2025 in a transaction 
described in paragraph (c) of this section. AX Partnership is a 
participant during taxable year 2025 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 2025 that was subject to an increase in 
basis because 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 2025. 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 2025, 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 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 2025. In 
addition, Partner A, ABC Partnership and AX Partnership must send a 
copy of their respective Form 8886 (or successor form) to the 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 2026, 
AX Partnership disposes of Land in a taxable sale for its fair market 
value of $15 million and recognizes no gain or loss.
    (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 2026 as the 
Federal income tax consequences of the transaction described in 
paragraph (c)(1)(ii) of this section. AX Partnership must file the form 
with its tax return for taxable year 2026. Partner A does not have a 
disclosure requirement with respect to AX Partnership's disposition of 
Land because the disposition is a subsequent realization of a tax 
benefit within the meaning of paragraph (e)(5) of this section with 
respect to AX Partnership.
    (5) Example 5. Reporting of a transaction of interest that occurred 
within the six-year lookback period--(i) Facts. The facts are the same 
as in paragraph (g)(1)(i) of this section (Example 1), except that 
instead of ABC Partnership distributing Property X in taxable year 
2025, the distribution is made in May of taxable year 2022, which is 
within the six-year lookback period described in paragraph (b)(11) of 
this section. That is, the distribution occurred within the seventy-two 
months immediately preceding January 2025, the first month of the 
taxpayer's most recent taxable year that began before January 14, 2025. 
Further, taxable year 2022 is an open taxable year subject to the 
special rule of Sec.  1.6011-4(e)(2)(i). Additionally, neither Partner 
A nor ABC Partnership engages in any other transaction described in 
paragraph (c) or (d) of this section for taxable year 2022.
    (ii) Analysis. Because the transaction occurred within the six-year 
lookback period described in paragraph (b)(11) of this section, the 
applicable threshold described in paragraph (c)(3)(i) of this section 
is $25 million as provided in paragraph (c)(3)(ii) of this section. The 
distribution of Property X to Partner A is not a transaction described 
in paragraph (c)(1)(ii) of this section with respect to either Partner 
A or ABC Partnership because the applicable threshold is not met for 
taxable year 2022. Had the applicable threshold for taxable year 2022 
been met, all the information required by paragraph (f)(1) of this 
section must be reported in its disclosure for taxable year 2022 and 
for any subsequent taxable year for which the taxpayer's return 
reflected the tax consequences of the transaction.
    (6) Example 6. No reporting of a transaction of interest for 
transaction that occurred prior to the six-year lookback period--(i) 
Facts. The facts are the same as in paragraph (g)(1)(i) of this section 
(Example 1), except that as a result of the distribution of Property X 
to Partner A, the basis of Property X is increased by $30 million, and 
the distribution occurred in December of taxable year 2018, which is 
prior to the six-year lookback period described in paragraph (b)(11) of 
this section. That is, the transaction occurred prior to January 2019, 
which is the beginning of the seventy-two-month period that ends in 
December 2024. In addition, taxable year 2018 is an open taxable year 
subject to the special rule of Sec.  1.6011-4(e)(2)(i). Further, 
Partner A realized Federal income tax consequences (depreciation 
expense) in taxable year 2019 attributable to the $30 million increase 
to the basis of Property X and taxable year 2019 is an open taxable 
year subject to the special rule of Sec.  1.6011-4(e)(2)(i).
    (ii) Analysis. Because taxable year 2018 is not within the six-year 
lookback period, under paragraph (f)(2) of this section, neither the 
distribution of Property X to Partner A, nor any of the Federal income 
tax consequences arising in that taxable year or later taxable years 
(such as depreciation expense in taxable year 2019 or any later taxable 
year) from such distribution, is required to be disclosed under 
paragraph (f) of this section and Sec. Sec.  1.6011-4(d) and (e).
    (7) Example 7. Corresponding basis decrease under section 
734(b)(2)(B) shared by an unrelated partner--(i) Facts. The facts are 
the same as in paragraph (g)(1)(i) of this section (Example 1), except 
Partner C is unrelated to Partners A and B and is not a tax-indifferent 
party. As a result of the

[[Page 2977]]

distribution of Property X to Partner A, and the increase to the basis 
of Property X by $10 million in Partner A's hands, ABC Partnership is 
required to reduce the adjusted basis of its remaining properties under 
section 734(b)(2)(B) by $10 million. Partner B's and Partner C's share 
of ABC Partnership's basis decrease to its remaining properties is $5 
million each. Neither Partner A nor ABC Partnership engages in any 
other transaction described in paragraph (c) of this section for 
taxable year 2025.
    (ii) Analysis. For purposes of paragraphs (c)(1)(ii) and (c)(3)(i) 
of this section, under paragraph (c)(3)(iv) of this section, only $5 
million of the $10 million basis increase to Property X counts toward 
the applicable threshold because $5 million of the basis increase 
corresponds to unrelated Partner C's share of the decrease to the basis 
of ABC Partnership's remaining properties under section 734(b)(2)(B) 
and thus, is excluded from the calculation of the applicable threshold. 
Thus, the distribution of Property X to Partner A is not a transaction 
described in paragraph (c)(1)(ii) of this section with respect to 
either Partner A or ABC Partnership because the applicable threshold is 
not met for taxable year 2025.
    (h) Extension of time--(1) Taxpayer disclosures. Taxpayers will be 
treated as having met their requirements to disclose timely under Sec.  
1.6011-4(e)(2)(i) if they file their disclosure with the OTSA by July 
14, 2025.
    (2) Material advisor disclosures. Material advisors who have made a 
tax statement before January 14, 2025 will be treated as having met 
their requirements to disclose timely under Sec.  301.6111-3(e) of this 
chapter if they file their disclosure with the OTSA by the date that is 
an additional 90 days beyond the last day for filing specified in Sec.  
301.6111-3(e) of this chapter.
    (i) Applicability date--(1) In general. 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 January 14, 2025.
    (2) Material advisors. Notwithstanding Sec.  301.6111-3(b)(4)(i) 
and (iii) of this chapter, material advisors are required to disclose 
only if they have made a tax statement on or after January 14, 2019.

Douglas W. O'Donnell,
Deputy Commissioner.
    Approved: January 3, 2025.
Aviva R. Aron-Dine,
Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2025-00324 Filed 1-10-25; 8:45 am]
BILLING CODE 4830-01-P