IRS to End Basis-Shifting Tax Loophole

The IRS plans to close a tax loophole that could bring over $50 billion to the U.S. government in the next 10 years. On Monday, the IRS announced it will propose new rules and issue a revenue ruling to stop basis-shifting transactions used by complex partnerships.

The IRS will also hire outside experts to help find “abusive partnership transactions” and create new teams to focus on these issues, IRS leaders said in a call with reporters on Friday, before the official announcement.

“Basis shifting is like a shell game where rich taxpayers use tricky tax moves to avoid paying taxes,” IRS Commissioner Danny Werfel said. “These tricks are hard to find on tax returns. The new rules will tell everyone that the IRS thinks these transactions are wrong.”

In these schemes, partnerships move the tax basis from a property that doesn’t generate tax deductions, like stocks or land, to one that does, like equipment, Deputy Treasury Secretary Wally Adeyemo said. Businesses also use this technique to depreciate the same asset multiple times, he explained.

These transactions don’t add “any real economic value for the United States,” Adeyemo said. “They only aim to avoid taxes by moving assets around to create deductions.”

Werfel added, “We are worried that these maneuvers are becoming more common.”

The IRS will use outside experts with private sector experience to help its employees understand these complex moves. “Their experience will give us insights into partnership maneuvers,” Werfel said.

Additionally, the IRS Office of Chief Counsel is creating a new office to focus on partnerships, S corporations, trusts, and estates. “This new office will allow us to focus more on these problem areas and give extra attention to legal guidance and priorities involving partnerships,” Werfel said.

The actions include three proposed rules and a revenue ruling, the Treasury Department announced:

• 1. The first proposed rule will provide clear rules about the effects of basis adjustments from related-party partnership basis-shifting transactions. The goal is to “eliminate inappropriate tax benefits from these abusive transactions between related parties.”
• 2. The second proposed rule will treat partnerships held by members of a consolidated group (groups of corporations sharing 80% vote and stock ownership that file a single tax return) as a single entity. This aims to prevent basis shifting among members of a consolidated group.
• 3. The third proposed rule (REG-124593-23) identifies certain related-party basis adjustment transactions as transactions of interest. Taxpayers and their advisors must report if they participate in these transactions, helping the IRS better understand and enforce against these abuses. Reporting is required for adjustments of $5 million or more in a single tax year with no tax paid.

The revenue ruling (Rev. Rul. 2024-14) states that certain related-party basis shifting transactions lack economic substance. The IRS will use this ruling in audits and court cases to argue that these transactions have no real economic effect beyond creating tax benefits and therefore violate the law.