AICPA objects to IRS partnership basis-shifting guidance

The American Institute of CPAs sent a comment letter to the Treasury Department and the Internal Revenue Service objecting to their guidance around basis-shifting transactions involving partnerships and related parties.

The Treasury and the IRS issued a guidance package in June targeting related parties and partnerships, which structure transactions to take advantage of the basis-adjustment provisions of subchapter K. The AICPA believes the guidance package exceeded its intended scope by including real, substantive transactions, that would be considered reportable transactions causing undue hardship to taxpayers, especially due to the retroactive nature of the proposed rules.

In addition, the AICPA pointed to the Supreme Court's decision in June in the Loper Bright case that overturned the "Chevron deference" doctrine, meaning courts now interpret statutes without assuming agency interpretations are correct. The AICPA is asking the Treasury and the IRS to reconsider the guidance package, questioning if it represents the best interpretation of the existing statutes.

The AICPA recommended in an Oct. 3 comment letter that the final regulations eliminate the retroactive application of the proposed rules and state that they apply prospectively for participating parties and material advisors. In addition, the AICPA believes disclosure requirements under the proposed regulations should only apply in the year of the transaction of interest.

The Institute also wants the final regulations to significantly narrow the scope of the proposed regulations to only capture "carefully structured" transactions that "exploit the mechanical basis adjustments provisions of subchapter K." That way, the final regulations would exclude common transaction and normal basis adjustments captured under the proposed rules as drafted.

The AICPA also requested the Treasury and the IRS to significantly Increase the proposed $5 million threshold, contending that the final regulations should reflect a threshold of at least $50 million. It believes the threshold should be applied on a transaction-by-transaction basis and look to gain recognition by any party.

Finally, the AICPA asked the Treasury and the IRS to modify the distribution transaction of interest related party definition to say that in addition to being related to each other, related partners must also own 80% or more of the capital of profits interests of the partnership.

"Our recommendations would eliminate the retroactivity of the rules, significantly increase the $5 million transaction threshold, and exclude certain types of transactions from being subject to the rules," said AICPA director of tax policy and advocacy Kristin Esposito in a statement Monday. "This would considerably ease the administrative burden on our members."