On April 17, 2025, the IRS and Treasury Department announced in Notice 2025-23 (the Notice) that forthcoming proposed regulations would withdraw Treas. Reg. Section 1.6011-18 (Final Regulations), which identifies certain partnership related party basis-shifting transactions as transactions of interest (Basis Shifting TOIs). The Notice provides immediate relief from penalties imposed by IRC Sections 6707A(a), 6707(a) and 6708 related to reporting transactions of interest for participants and material advisors.

The Notice also withdraws Notice 2024-54, which outlined certain proposed regulations intended to be issued on the tax treatment of partnership related party basis-shifting transactions.

Background

In the Final Regulations, which were released on January 10, 2025, the IRS and Treasury Department identified certain partnership related-party basis adjustment transactions, and substantially similar transactions, as "transactions of interest" under Treas. Reg. Section 1.6011-4(b), which must be reported to the IRS by participants and material advisors (see Tax Alert 2025-0360 for a full discussion of the transactions subject to reporting). The final rules became effective on January 14, 2025.

On February 19, 2025, President Donald Trump issued Executive Order 14219, which directed agencies to identify and remove regulations and other guidance that meet certain criteria. The Notice states the IRS and Treasury Department identified the Final Regulations for removal and Notice 2024-54 for withdrawal.

Notice 2025-23

The Notice states the IRS and Treasury Department will publish a forthcoming notice of proposed rulemaking (NPRM) that will remove the Final Regulations and obviate the need for participants and material advisors to comply with all the transaction of interest requirements related to such regulation. The Notice states that taxpayers and material advisors may rely on it until the forthcoming NPRM is finalized. The NPRM will have an applicability date that corresponds to the date on which the Notice was published, but taxpayers will be able to choose to apply it retroactively to January 14, 2025.

According to the Notice, the IRS will waive penalties under IRC Section 6707A(a) for failure to file

Form 8886, Reportable Transaction Disclosure Statement, that would be required under the Final Regulations. The penalty waiver under IRC Section 6707(a) also applies to failure to file Form 8918, Material Advisor Disclosure Statement. Further, penalties will also be waived under IRC Section 6708 for failure by material advisors to maintain a list under IRC Section 6112 that would otherwise be required by the Final Regulations.

The Notice also withdraws Notice 2024-54, in which the Treasury and the IRS had announced their intention to issue two sets of regulations addressing related-party basis adjustment transactions.

Implications                                                          

The Notice announces the IRS's withdrawal of Notice 2024-54, and the IRS's intention to withdraw the Final Regulations, in light of their complexity, retroactivity, and potential to apply to ordinary course, tax-compliant transactions. The broad terms of the Notice appear to reflect the IRS's intention that relief be available on a fully retroactive basis, as if the Final Regulations had not been issued. Furthermore, the Notice provides relief from penalties under IRC Sections 6707A(a), 6707(a), and 6708 for taxpayers and material advisors related to disclosure and list maintenance obligations otherwise imposed by the Final Regulations. Although the Final Regulations remain in place until formally withdrawn, the Notice also specifically permits taxpayers and material advisors to rely on the new guidance until the forthcoming NPRM is finalized.

The Notice thus marks an at least partial reversal of course by the IRS with respect to its efforts to address related-party basis-shifting transactions. Taxpayers, however, should be mindful that the Notice left undisturbed Revenue Ruling 2024-14, in which the IRS asserted that certain related party basis-shifting transactions (i) were subject to recast under the economic substance doctrine of IRC Section 7701(o) and (ii) may be subject to challenge under other rules as well, depending on the circumstances.

The debate about basis shifting may now make its way to the halls of Congress. It is possible that the topic could arise again as part of Congressional 2025 budget reconciliation negotiations.