Related Party Partnerships: The Ultimate Tax Dodge

Document Type

Article

Journal Title

The Tax Lawyer

Volume

79

Publication Date

4-7-2026

Abstract

This article discusses "related-party basis shifting." This planning technique has only recently come to light and, typically, involves the use of various provisions of Subchapter K to increase the basis of partnership-related assets without a taxable transaction, an investment, or even a meaningful economic change of position. Basis shifting appears to be most commonly used by affiliated groups and is often abusive, with inappropriate tax savings running into the billions of dollars. The fees practitioners charge are commensurate. In response, in June of 2024, the Internal Revenue Service (the Service) and Treasury issued Notice 2024-54, which gave notice of plans to issue proposed regulations. But the Notice went beyond just giving notice and effectively contains both Proposed Related-Party Basis Adjustment Regulations and Proposed Consolidated Return Regulations. At the same time, the Service also issued Revenue Ruling 2024-14, and Treasury promulgated Proposed Regulations under section 6011. The Proposed Regulations have since been finalized. As a package, they were designed ultimately to restrict or eliminate abusive basis shifting. After the Article was written and edited by The Tax Lawyer, the Notice was withdrawn, and Treasury stated that it intended to go through "notice and comment" to withdraw the section 6011 Regulations. But the approach the Notice took remains highly relevant, and the Regulations remain valid. Thus, both are discussed in detail in the article. This Article reviews the area generally and critiques the governmental responses. It argues that the erstwhile Proposed Related-Party Basis Adjustment Regulations were overly broad and unlikely to survive in a post-Loper Bright world and proposes alternatives. But the Article is also skeptical as to whether the Proposed Related-Party Basis Adjustment Regulations are even needed in light of the section 6011 Regulations and (assuming they were finalized) the Proposed Consolidated Return Regulations. While the latter have been withdrawn and the former are proposed to be withdrawn, both represent good policy. The Article argues that these latter two efforts were well-advised and, if fully implemented, likely would be sufficient to address the vast majority of abusive basis shifting transactions. The Article includes a discussion of the relevant, and rather dramatic, developments that occurred in 2025. Finally, it questions whether practitioners are fulfilling their obligation to the tax system when designing many of the basis-shifting strategies and expresses its support for Sen. Wyden's partnership taxation reform proposals.

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