The IRS and Treasury Department have released proposed regulations (REG-108921-25, Proposed Regulations) that would eliminate Treas. Reg. Section 1.6011-18, which designates certain partnership related-party basis-adjustment transactions, and substantially similar transactions, as transactions of interest (TOIs). The removal is expected to apply retroactively to January 14, 2025, allowing taxpayers and material advisors to treat the rules as if they never became effective.

Background

On January 14, 2025, Treasury finalized regulations under Treas. Reg. Section 1.6011-18 (Final Regulations) classifying certain partnership related-party basis-adjustment transactions as TOIs (see Tax Alert 2025-0360). These rules required extensive reporting by participating partnerships, partners, and material advisors and applied to a wide range of basis adjustments under IRC Sections 732, 734, and 743.

As detailed in the Final Regulations, transactions could be treated as TOIs if they involved related parties, resulted in basis adjustments above specified thresholds, or were "substantially similar" to enumerated transactions. The required disclosures included detailed basis information, partner relationships, the federal income tax consequences of the use of such TOI basis adjustments (such as additional depreciation or reduced sale gain), and cross-referenced lists of material advisors.

On April 17, 2025, Treasury and the IRS announced in Notice 2025-23 (Notice) their intent to withdraw the Final Regulations (see Tax Alert 2025-0957). The Notice provided immediate penalty relief for participants and material advisors under IRC Sections 6707A, 6707, and 6708 and permitted taxpayers to rely on the Notice pending formal withdrawal of the Final Regulations.

The Proposed Regulations

The Notice of Proposed Rulemaking released on March 5, 2026, formally proposes removing the Final Regulations in full. Treasury acknowledged that the rules generated substantial burdens and uncertainty, and their removal reflects the government's reassessment of whether the TOI designation is the appropriate mechanism for identifying potentially abusive basis-shifting transactions.

Consistent with the Notice, the Proposed Regulations state that the removal of the Final Regulations is intended to apply retroactively. Taxpayers and material advisors may treat the regulations as never having taken effect once the final regulations are published. The forthcoming final removal regulations are expected to formally confirm retroactive treatment under IRC Section 7805(b)(7).

The Proposed Regulations preserve the penalty relief previously granted in the Notice, on which participants and material advisors may continue to rely until the removal is finalized. This includes relief from penalties under:

• IRC Section 6707A for failure to file Form 8886, Reportable Transaction Disclosure Statement
• IRC Section 6707 for failure to file Form 8918, Material Advisor Disclosure Statement
• IRC Section 6708 for failure by material advisors to maintain lists of participants under IRC Section 6112

Implications

If finalized as proposed, the removal would fully eliminate the obligation to determine whether a basis-adjustment transaction meets the TOI definition and all disclosure obligations on Forms 8886 and 8918 for such transactions. While the TOI regime is being eliminated for this category of transactions, other provisions — including the economic substance doctrine — continue to apply independently. Taxpayers should note that Revenue Ruling 2024-14, addressing economic substance concerns for certain basis-shifting transactions, remains in effect and could form the basis for IRS challenges. Taxpayers should continue to maintain adequate documentation supporting the economic and non-tax-motivated nature of partnership transactions, especially those involving related parties.