On 17 June, 2024, the U.S. Department of the Treasury and the Internal Revenue Service (IRS), in a release, announced a new regulatory initiative to close a major tax loophole exploited by large, complex partnerships.

This initiative is one step in ongoing efforts to close loopholes, shut down abusive transactions using existing regulatory authority, and ensure wealthy individuals, complex partnerships, and large corporations pay their taxes owed.

The Treasury and IRS released guidance kicks off a multi-stage regulatory effort that will stop large, complex partnerships from using opaque business structures to inflate tax deductions and avoid taxes. The new guidance will also complement the IRS’ ongoing enforcement campaign to recover revenue from large partnerships that are not paying the taxes they owe.

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

Wealthy taxpayers and businesses are paying accountants and lawyers millions of dollars to develop these complex, abusive transactions, costing the federal government billions of dollars each year. And while these abusive schemes flourished, the IRS was severely underfunded, so audit rates for these increasingly complex structures plummeted.

Following over a year of study of these issues, the Treasury and IRS announced their intent to propose regulations under existing regulatory authority to stop related parties in complex partnership structures from shifting the tax basis of their assets amongst each other to take abusive deductions or reduce gains when the asset is sold, effectively making taxable income disappear.

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

“Treasury and the IRS are focused on addressing high-end tax abuse from all angles, and the proposed rules released today will increase tax fairness and reduce the deficit,” said U.S. Secretary of the Treasury Janet L. Yellen. “Thanks to resources from President Biden’s Inflation Reduction Act, Treasury and the IRS have the tools to stop longstanding abuses.”

Today’s announcement includes several pieces of guidance.