The Treasury Department and IRS issued Notice 2025-23 announcing the intent to publish a notice of proposed rulemaking (NPRM) to remove Treas. Reg. §1.6011-18 from the income tax regulations.
This is welcome relief for taxpayers and material advisors as the basis shifting TOI regulations would have imposed complex, burdensome and retroactive disclosure obligations on transactions that may have not been entered into with a tax avoidance purpose.
Treas. Reg. §1.6011-18 (basis shifting TOI regulations) identified certain related-party basis adjustment transactions and substantially similar transactions (partnership basis shifting transactions) as a transaction of interest. The basis shifting TOI regulations, which were effective Jan. 14, 2025, required participating partnerships, participating partners and material advisors to disclose partnership basis shifting transactions that met certain threshold reporting requirements, including those that occurred during a six-year lookback period.
Notice 2025-23 also announced two related actions:
- The withdrawal of Notice 2024-54 which described proposed regulations that the Treasury Department and IRS intended to issue under Subchapter K and the consolidated return rules to eliminate or limit basis shifting in partnership related-party basis shifting transactions (for example, single-entity treatment for members of a consolidated group that are partners in a partnership).
- The immediate waiver of (i) penalties under Section 6707A(a) for any failure to file a Form 8886, Reportable Transaction Disclosure Statement, that is otherwise required because of the basis shifting TOI regulations, and (ii) penalties under Section 6707(a) for any failure to file any Form 8918, Material Advisor Disclosure Statement, and penalties under section 6708 for failure to maintain a list under section 6112, that is otherwise required because of the basis shifting TOI regulations.
When finalized, the NPRM will conclusively remove the need for taxpayers and material advisors to comply with the disclosure requirements of the basis shifting TOI regulations. Until the NPRM is finalized, taxpayers and material advisors may rely on Notice 2025-23.
Importantly, Notice 2025-23 did not withdraw Revenue Ruling 2024-14. Issued in June of 2024, Revenue Ruling 2024-14 provides three factual situations involving partnership related-party basis adjustment transactions in which the IRS would disregard favorable basis adjustments under the codified economic substance doctrine described in Section 7701(o). See Tax Flash 2024-11 for more information on transactions covered by Revenue Ruling 2024-14.
Given that Revenue Ruling 2024-14 was not withdrawn, continued diligence is required in identifying any transactions that may fall within the scope of the revenue ruling or otherwise be subject to potential challenges under the economic substance doctrine, or other common law principles such as the substance-over-form doctrine or step transaction doctrine.
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