Kate Rice
Associate Editor
Loyola University Chicago School of Law, JD 2026
On June 17, 2024, the Biden Administration issued a press release detailing plans to push forward a new multi-stage regulatory initiative targeting tax evasion among large business partnerships. The Internal Revenue Service (IRS) and U.S. Treasury Department will lead the charge to end abuses of a practice known as “basis shifting,” often used by complex partnerships to maximize deductions and consequentially minimize tax liability.
What is basis shifting?
Basis shifting refers to a tax planning strategy that occurs when entities that share common ownership transfer tax basis from non-depreciable assets (i.e. stock or land) to assets that qualify for depreciation deductions (i.e. equipment), repeatedly depreciating the same asset to increase deductions. These related-party partnership transactions are governed by Subchapter K of the Internal Revenue Code, which dictates when a basis “step-up” is warranted, triggering further depreciation and increased or decreased taxable gain or loss. The IRS seeks to target entities that manipulate these rules to receive tax relief without a corresponding economic impact. Deputy Treasury Secretary Wally Adeyemo refers to this practice as a “shell game,” and “something that can only be pulled off, frankly, by the wealthiest of wealthy taxpayers, because it takes an army of accountants and lawyers … these transactions in no way tie to any legitimate economic activity, their sole purpose is to avoid tax bills.”
The initiative
The Treasury and IRS propose using their regulatory authority to curb partnerships’ ability to engage in basis shifting transactions and strengthen disclosure requirements. It is estimated that over the next decade, this initiative could raise more than $50 billion in revenue.
Along with the press release, the Treasury Department and IRS published several pieces of guidance, including a notice of intent to issue two proposed rules: the first would eliminate tax benefits resulting from basis shifting by business partnerships, and the second would apply a single-entity approach to interests in a partnership held by members of a consolidated group (groups of corporations sharing an 80% vote and value stock ownership and file consolidated tax returns).
A Notice of Proposed Rulemaking was also published on a rule that would set reporting requirements for taxpayers and material advisers for participation in any form of basis shifting transactions with an annual reporting threshold of $5 million in positive basis adjustments generated through covered transactions.
The last piece of guidance released was a Revenue Ruling establishing that certain related-party partnership transactions involving basis shifting lack economic substance, which would support the IRS in audits and litigation that challenge whether these transactions violate the codified economic substance doctrine.
The greater focus on large and complex pass-through entities
This latest guidance from the Treasury and IRS reflects the Biden Administration’s overarching priority of addressing tax accountability among large corporations. The Treasury Department has previously referenced making other proposed reforms to the tax code, such as closing the carried interest, estate and gift tax, and life insurance loopholes. Treasury Secretary Janet Yellen said on the matter, “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.” Additionally, earlier this year, the IRS used Inflation Reduction Act funds to establish a new unit within its Large Business and International division with more than 3,700 positions dedicated exclusively to investigating large business partnerships. IRS Commissioner Danny Werfel explained, “We are honing in on areas where we believe non-compliance among our wealthiest filers has proliferated over the last decade of IRS budget cuts, and pass-throughs are high on our list of concerns.”
Mixed reactions from Congress and the legal community
Senator Ron Wyden (D-OR), Chairman of the U.S. Senate Committee on Finance, said in a press release on the initiative, “This new effort by the IRS focused on large partnerships represents a major enforcement upgrade in one of the most challenging and complex areas of tax law . . . I’m also continuing to develop my proposal to reform the rules on partnerships because today those rules allow the wealthiest individuals and most profitable corporations to decide when, and whether, to pay taxes at all.” The fact that the White House and Senate Democrats are unified on pushing tax compliance specifically among partnerships suggests that there will likely be more movement on the matter to come. These considerations are especially relevant as many Tax Cuts and Jobs Act provisions are set to sunset next year and tax issues take center stage in D.C.
However, this new initiative also has its critics; Robert Kovacev, a tax attorney at Miller & Chevalier who represents several large business partnerships, said in response to the IRS/Treasury focus on basis shifting, “I don’t think it’s tax evasion at all. That has a fraudulent tinge to it that I don’t think exists here. It’s a tax planning tool that follows what Congress said you can do.” He argues that the practice is entirely allowed under the tax code, and plans to challenge these new rules in court should they be enforced.
The unknown future of implementation and enforcement
While feedback has been varied, this initiative is undoubtedly a step in the right direction to bolstering federal tax oversight and increasing fairness in the tax system. By targeting abusive partnership transactions resulting in significant tax benefits without a meaningful change in the economics of the business, the proposed rules would discourage wealthy corporations and high earners from manipulating basis shifting to their unfair advantage, and as a result, foster a more equitable distribution of taxes.
However, it will remain to be seen how these rules will be enforced, and the subsequent reaction of the business community. Additionally, the implementation of this initiative depends on the results of the upcoming presidential election. If there are major changes in administrative leadership, it could be stalled or halted completely. Neither candidates Kamala Harris nor Donald Trump have directly addressed how they plan to approach complex business partnerships in terms of tax compliance, but a Harris administration would be far more likely to advance this agenda. Given all of these unknowns, the business and legal communities should continue to watch closely for further developments.