IRS proposes removing partnership basis adjustment regulations

Content

ACTION:

Notice of proposed rulemaking.

SUMMARY:

This document proposes to remove regulations that identify certain partnership related-party basis adjustment transactions
and substantially similar transactions as transactions of interest, a type of reportable transaction. The regulations would
affect participants in these transactions as well as material advisors.

DATES:

Electronic or written comments and requests for a public hearing must be received by April 6, 2026.

ADDRESSES:

Commenters are strongly encouraged to submit public comments electronically via the Federal eRulemaking Portal at https://www.regulations.gov (indicate IRS and REG-108921-25) by following the online instructions for submitting comments. Requests for a public hearing
must be submitted as prescribed in the “Comments and Requests for a Public Hearing” section. Once submitted to the Federal
eRulemaking Portal, comments cannot be edited or withdrawn. The Department of the Treasury (Treasury Department) and the IRS
will publish for public availability any comments submitted to the IRS's public docket. Send paper submissions to: CC:PA:01:PR
(REG-108921-25), Room 5503, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT:

Concerning the proposed regulations, Elizabeth V. Zanet of the Office of the Associate Chief Counsel (Passthroughs, Trusts,
and Estates), (202) 317-5279 (not a toll-free number); concerning submissions of comments and requests for a public hearing,
the Publications and Regulations Section at (202) 317-6901 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Authority

This document proposes to remove § 1.6011-18 (Basis Shifting TOI Regulations) from 26 CFR part 1 (Income Tax Regulations).
The Basis Shifting TOI Regulations were issued under section 6011 of the Internal Revenue Code (Code) pursuant to the authority
granted to the Secretary of the Treasury or the Secretary's delegate (Secretary) under sections 6001, 6011(a), 6111, 6112(a),
6707A(c)(1), and 7805(a) of the Code.

Background

On June 18, 2024, the Treasury Department and the IRS published a notice of proposed rulemaking (REG-124593-23) in the
Federal Register
(89 FR 51476) identifying certain partnership related-party basis adjustment transactions and substantially similar transactions
as transactions of interest, a type of reportable transaction (Basis Shifting TOI Proposed Regulations). On January 14, 2025,
the Treasury Department and the IRS finalized the Basis Shifting TOI Proposed Regulations with modifications in response to
comments with the publication of final regulations (Basis Shifting TOI Regulations) (TD 10028) in the
Federal Register
(90 FR 2958).

Since their publication, taxpayers and their material advisors have criticized the Basis Shifting TOI Regulations at § 1.6011-18
as imposing complex and burdensome compliance obligations on businesses. The Treasury Department and the IRS considered these
public comments and determined that the Basis Shifting TOI Regulations may be appropriate for removal.

On April 17, 2025, the Treasury Department and the IRS published Notice 2025-23 (2025-19 IRB 1428). Notice 2025-23 announced
that the Treasury Department and the IRS intended to publish a notice of proposed rulemaking proposing the removal of the
Basis Shifting TOI Regulations from the Income tax Regulations. Notice 2025-23 further stated that taxpayers and their material
advisors can rely on the notice until the Treasury Department and the IRS removed the Basis Shifting TOI Regulations from
the Income Tax Regulations. Notice 2025-23 additionally stated that the IRS will (i) waive penalties under section 6707A(a)
for participants in transactions identified in the Basis Shifting TOI Regulations, and (ii) waive penalties under sections
6707(a) and 6708 of the Code for material advisors to transactions identified in the Basis Shifting TOI Regulations.

Explanation of Provisions

Consistent with Notice 2025-23, this notice of proposed rulemaking (Removal NPRM) proposes to remove the Basis Shifting TOI
Regulations from the Income Tax Regulations.

Proposed Effective Date and Applicability Date

The proposed removal of the Basis Shifting TOI Regulations would be effective on the date that the Treasury Department and
the IRS publish final regulations (Forthcoming Final Regulations). The Treasury Department and the IRS intend that the Treasury
decision adopting the Forthcoming Final Regulations will provide that participants and material advisors may treat the removal
of the Basis Shifting TOI Regulations as occurring on January 14, 2025, which is the applicability date of the Basis Shifting
TOI Regulations. Thus, participants and material advisors will be able to treat the Basis Shifting TOI Regulations as never
having taken effect. See section 7805(b)(7). Consistent with Notice 2025-23, participants and material advisors may continue
relying on that notice until the Treasury Department and IRS finalize the Removal NPRM with the publication of the Forthcoming
Final Regulations.

Special Analyses

I. Executive Order 12866, 13563, and 14192

Executive Orders 12866 and 13563 direct agencies to assess costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental,
public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying
both costs and benefits, reducing costs, harmonizing rules, and promoting flexibility. This rule is expected to be an Executive
Order 14192 deregulatory action.

These proposed regulations have been designated by the Office of Management and Budget's (OMB's) Office of Information and
Regulatory Affairs (OIRA) as subject to review under Executive Order 12866 pursuant to the Memorandum of Agreement of July
4, 2025 (MOA) between the Department of the Treasury (Treasury Department) and the OMB regarding review of tax regulations.
OIRA has determined that this notice of proposed rulemaking (Removal NPRM) is significant and subject to review under Executive
Order 12866 and section 1(c) of the MOA. Accordingly, the Removal NPRM has been reviewed by OMB.

A. Need for Regulation

A transaction of interest (TOI) is a type of reportable transaction. On January 14, 2025, the Treasury Department and the
IRS published § 1.6011-18 (Basis Shifting TOI Regulations), which require taxpayers and material advisors to report information
identifying certain partnership related-party basis adjustment transactions. Taxpayers and their material advisors have criticized
the Basis Shifting TOI Regulations as imposing complex and burdensome compliance obligations on businesses. The Treasury Department
and the IRS received many public comments requesting that the Basis Shifting TOI Regulations be removed. The Treasury Department
and the IRS considered the public comments and determined that the Basis Shifting TOI Regulations may be appropriate for removal.

On April 17, 2025, the Treasury Department and the IRS published Notice 2025-23 (2025-19 IRB 1428), which announced that the
Treasury Department and the IRS intended to publish a notice of proposed rulemaking removing the Basis Shifting TOI Regulations.

Consistent with that intention, this notice of proposed rulemaking (Removal NPRM) proposes to remove the Basis Shifting TOI
Regulations from 26 CFR part 1 (Income Tax Regulations). The proposed removal of the Basis Shifting TOI Regulations would
be effective on the date that the Treasury Department and the IRS publish final regulations (Forthcoming Final Regulations).
The Treasury Department and the IRS intend that the Treasury decision adopting the Forthcoming Final Regulations will provide
that participants and material advisors may treat the removal of the Basis Shifting TOI Regulations as occurring on January
14, 2025, which is the applicability date of the Basis Shifting TOI Regulations. Thus, participants and material advisors
will be able to treat the Basis Shifting TOI Regulations as never having taken effect. See section 7805(b)(7) of the Internal
Revenue Code (Code).

B. The Statute and the Removal NPRM

Under subchapter K of chapter 1 of the Code, a distribution by a partnership of the partnership's property (partnership property)
or a transfer of an interest in a partnership (partnership interest) may result in an adjustment to the basis of the distributed
property, partnership property, or both.

A distribution of partnership property may result in an adjustment to the basis of the distributed property under sections
732(b) or (d) of the Code. In the case of a distribution of partnership property to a partner by a partnership with an election
under section 754 of the Code (section 754 election), or with respect to which there is a substantial basis reduction as described
in section 734(d) of the Code, the distribution may also result in an adjustment to the basis of the partnership's remaining
property under section 734(b).

If a partnership interest is transferred by sale or exchange or on the death of a partner, and the partnership either has
a section 754 election in effect or has a substantial built-in loss with respect to the transfer of the partnership interest
as described in section 743(d) of the Code, the transfer may result in an adjustment to the basis of partnership property
under section 743(b) with respect to the transferee partner.

As discussed above, the Basis Shifting TOI Regulations identify certain partnership related-party transactions and substantially
similar transactions that result in basis adjustments under sections 732(b), 732(d), 734(b), and 743(b) as transactions of
interest, a type of reportable transaction with disclosure requirements.

The purpose of the Basis Shifting TOI Regulations is to provide information to the IRS that could help identify abusive basis
shifting transactions. However, taxpayers and their material advisors have criticized the Basis Shifting TOI Regulations as
imposing complex, burdensome, and retroactive disclosure obligations on many ordinary-course and tax-compliant business activities,
creating costly compliance obligations and uncertainty for businesses. The Treasury Department and the IRS agree that the
compliance burden of the Basis Shifting TOI Regulations, as estimated below, is substantial and likely exceeds the benefits
of the Basis Shifting TOI Regulations.

Once the Removal NPRM is finalized, partnership related-party transactions and substantially similar transactions that result
in basis adjustments would no longer be treated as transactions of interest. Thus, participants and material advisors to these
transactions would no longer have the associated disclosure requirements.

C. Baseline

The Treasury Department and the IRS have assessed the benefits and costs of these proposed regulations once finalized (as
the Forthcoming Final Regulations) relative to a no-action baseline that reflects the anticipated Federal income tax-related
behavior of taxpayers under the Basis Shifting TOI Regulations.

D. Economic Effects

1. Participants—Forms 8886

Participants in transactions of interest must report their participation in the transaction on a Form 8886, Reportable Transaction Disclosure Statement. The Treasury Department and the IRS estimate that the aggregate costs of filing Forms 8886 under the Basis Shifting TOI Regulations
each year equal the product of (1) the number of affected basis adjustments, (2) the average number of participants per basis
adjustment, and (3) the average cost of filing a Form 8886 per participant.

a. Total Number of Basis Adjustments Affected

Based on analysis of partnership tax return data, the Treasury Department and the IRS have estimated that 10,000 basis adjustments
would be reported in the absence of the Forthcoming Final Regulations. Tax return data indicate as many as 12,000 basis adjustments
will be over the numeric thresholds in the Basis Shifting TOI Regulations each year under sections 732(b), 732(d), 734(b),
and 743(b). The Treasury Department and the IRS expect 10,000 of the 12,000

  basis adjustments to generate reporting by participants. The Treasury Department and the IRS have determined that most participants
  would choose to report any basis adjustment over the numeric thresholds in the Basis Shifting TOI Regulations rather than
  spending additional time and resources on determining whether the underlying transaction satisfied the other requirements
  of the regulations. For instance, if there was a question as to whether the underlying transaction satisfied the related party
  rules under sections 267 and 707 of the Code, the Treasury Department and the IRS have determined that a participant would
  likely choose to disclose the basis adjustment rather than spending additional time and resources on the nuanced related party
  analysis.

b. Average Number of Participants per Basis Adjustment

Under the Basis Shifting TOI Regulations, the type of basis adjustment determines the number of participants. For example,
a basis adjustment under section 732(b) would have two participants, the distributee partner and the distributing partnership.
In contrast, a basis adjustment under section 743(b) would have three participants, the transferor partner, the transferee
partner, and the partnership. The Treasury Department and the IRS have therefore estimated that each basis adjustment would
have 2.5 participants on average.

c. Average Cost of Filing a Form 8886

The IRS's Research, Applied Analytics, and Statistics division (RAAS) estimates that the burden of filing Form 8886 is approximately
10 hours, 16 minutes for recordkeeping, 4 hours, 50 minutes for learning about the law or the form, and 6 hours, 25 minutes
for preparing, copying, assembling, and sending the form to the IRS, for a total of 21 hours and 31 minutes. In the Special
Analyses of the Basis Shifting TOI Regulations, RAAS estimated that the appropriate wage rate was $102.00 (2022 dollars, equivalent
to $109.33 in 2024 dollars) per hour. However, one commenter indicated that a better estimate is approximately $177.29 (2022
dollars, equivalent to $190.03 in 2024 dollars) per hour, as many affected individuals may seek specialists with higher hourly
fees. The Treasury Department and the IRS have accepted the commenter's suggested wage. Therefore, the estimated burden of
filing Form 8886 equals $4,088.81 (2024 dollars) (that is, $190.03 × 21 hours and 31 minutes).

d. Summary of Yearly Economic Effects Related to Filing Form 8886

Based on the above, the Treasury Department and the IRS estimate that the aggregate costs of filing Form 8886 under the Basis
Shifting TOI Regulations are approximately $102 million per year (2024 dollars) (that is, the product of (i) 10,000 basis
adjustments, (ii) 2.5 participants per basis adjustment, and (iii) $4,088.81 average filing burden).

2. Material Advisors—Forms 8918

Material advisors to transactions of interests identified under the Basis Shifting TOI Regulations must file Form 8918, Material
Advisor Disclosure Statement. The Treasury Department and the IRS have assumed that the aggregate costs of filing Forms 8918
under the Basis Shifting TOI Regulations each year equal the product of (1) the number of affected basis adjustments, (2)
the average number of material advisors per basis adjustment, and (3) the average cost of filing a Form 8918 per advisor.

a. Total Number of Basis Adjustments Affected

For the same reasons discussed in Section IV.A.1., the Treasury Department and the IRS have estimated that 10,000 basis adjustments
would be reported under the Basis Shifting TOI Regulations.

b. Average Number of Participants per Basis Adjustment

The Treasury Department and the IRS estimate that each transaction that results in a reported basis adjustment will have at
least one professional services firm that advises on the tax implications of the transaction (for example, a law firm or an
accounting firm) and at least one accounting firm that prepares the relevant tax returns. The Treasury Department and the
IRS therefore estimate that each transaction that results in a reported basis adjustment will have 2.2 material advisors on
average.

c. Average Cost of Filing a Form 8918

RAAS estimates that the burden of filing Form 8918 is approximately 8 hours, 7 minutes for recordkeeping, 3 hours, 4 minutes
for learning about the law or the form, and 3 hours, 20 minutes for preparing, copying, assembling, and sending the form to
the IRS, for a total of 14 hours and 31 minutes. If the appropriate wage rate is the same as Form 8886 ($190.03 (2024 dollars)
per hour), the burden of filing Form 8918 is $2,758.60 (2024 dollars).

d. Summary of Yearly Economic Effects Related to Filing Form 8918

Based on the above, the Treasury Department and the IRS estimate that the aggregate costs of filing Form 8918 under the Basis
Shifting TOI Regulations equals $61 million per year (2024 dollars) (that is, the product of (i) 10,000 basis adjustments,
(ii) 2.2 material advisors per basis adjustment, and (iii) $2,758.60 average filing burden).

3. Economic Effects, in Summary

In total, the annual burden estimate related to the Basis Shifting TOI Regulations is $163 million (that is, $102 million
per year with respect to Form 8886, plus $61 million per year with respect to Form 8918). The Treasury Department and the
IRS do not anticipate any other material economic effects of the Forthcoming Final Regulations beyond the filing burden reduction.
Therefore, the Treasury Department and the IRS estimate that the aggregate economic effects of the Forthcoming Final Regulations
would be a reduction in filing burdens by $163 million. The Treasury Department and the IRS request comments on the magnitude
of this estimate.

II. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) generally requires that a Federal agency obtain OMB approval before
collecting information from the public, whether such collection of information is mandatory, voluntary, or required to obtain
or retain a benefit. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information
unless the collection of information displays a valid control number. These proposed regulations (Removal NPRM), which propose
removing § 1.6011-18 (Basis Shifting TOI Regulations) from 26 CFR part 1 (Income Tax Regulations), do not contain a collection
of information and, in fact, remove what would otherwise have been a collection of information requirement in the Basis Shifting
TOI Regulations.

III. Regulatory Flexibility Act

The Secretary of the Treasury (Secretary) hereby certifies that these proposed regulations (Removal NPRM) will not have a
significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (RFA) (5 U.S.C.
chapter 6). This certification is based on IRS data that allowed an estimate of the percentage of partnerships required to
file disclosure statements under the proposed

  regulations that the Department of the Treasury (Treasury Department) and the IRS published on June 18, 2024 (Basis Shifting
  TOI Proposed Regulations) and the final regulations published on January 14, 2025 (Basis Shifting TOI Regulations). The data
  indicated that the percentage of partnerships that would have a disclosure obligation under the Basis Shifting TOI Proposed
  Regulations or Basis Shifting TOI Regulations and considered to be small business for purposes of the RFA would be low. Accordingly,
  the removal of the disclosure requirements under the Removal NPRM is not anticipated to have a significant economic impact
  on a substantial number of small entities.

The RFA discussion in the Basis Shifting TOI Proposed Regulations referenced data provided by IRS's Research, Applied Analytics,
and Statistics (RAAS) division, which estimated the percentage of partnerships with gross receipts or sales of $25 million
or less that might have been subject to the disclosure obligations as a result of a basis adjustment under section 743(b)
of more than $5 million during the taxable year. That data suggested that of all partnerships with related parties and a basis
adjustment under section 743(b) of more than $5 million during the taxable year, approximately two-thirds of the partnerships
would have gross receipts or sales of $25 million or less and approximately one-third would have gross receipts or sales of
$25 million or more. The Treasury Department and the IRS determined that the data did not indicate that the Basis Shifting
TOI Proposed Regulations would have a significant economic impact on a substantial number of small entities because not all
partnerships with gross receipts or sales of $25 million or less are considered small businesses (see 13 CFR 121.201), and the data did not provide information on whether the partnerships with gross receipts or sales of $25
million or less were part of larger enterprises.

The RFA discussion in the Basis Shifting TOI Regulations referenced data from the IRS that indicated that, in the case of
partnerships with gross assets of less than $25 million that reported basis adjustments under section 734(b) or section 743(b)
for the taxable year, the average basis adjustment was less than the applicable threshold amount of $10 million or more. Thus,
the Treasury Department and the IRS anticipated that many partnerships with gross assets of less than $25 million would not
be subject to the disclosure requirements. Further, the data indicated that partnerships with gross assets of more than $25
million that reported basis adjustments under section 734(b) or section 743(b) for the taxable year that met the applicable
threshold amount of $10 million or more represented less than one percent of all partnerships that file tax returns for the
taxable year.

Pursuant to section 7805(f), this notice of proposed rulemaking has been submitted to the Chief Counsel for the Office of
Advocacy of the Small Business Administration for comment on its impact on small business.

IV. Unfunded Mandates Reform Act

Section 202 of the Unfunded Mandates Reform Act of 1995 requires that agencies assess anticipated costs and benefits and take
certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any
one year by a State, local, or Tribal government, in the aggregate, or by the private sector, of $100 million (updated annually
for inflation). These proposed rules do not include any Federal mandate that may result in expenditures by State, local, or
Tribal governments, or by the private sector in excess of that threshold.

V. Executive Order 13132: Federalism

Executive Order 13132 (Federalism) prohibits an agency from publishing any rule that has federalism implications if the rule
either imposes substantial, direct compliance costs on State and local governments, and is not required by statute, or preempts
State law, unless the agency meets the consultation and funding requirements of section 6 of Executive Order 13132. These
proposed regulations do not have federalism implications and do not impose substantial direct compliance costs on State and
local governments or preempt State law within the meaning of Executive Order 13132.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to comments that are submitted
timely to the IRS as prescribed in the preamble under the
ADDRESSES
section. All comments and a plain language summary of the proposed rule will be made available at https://www.regulations.gov or upon request. A public hearing will be scheduled if requested in writing by any person that timely submits electronic or
written comments. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published
in the
Federal Register
.

Statement of Availability of IRS Documents

Notices cited in this document are published in the Internal Revenue Bulletin and are available from the Superintendent of
Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at https://www.irs.gov.

Drafting Information

The principal authors of this notice of proposed rulemaking are personnel of the Office of the Associate Chief Counsel (Passthroughs,
Trusts, and Estates). However, other personnel from the Treasury Department and the IRS participated in its development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, the Treasury Department and the IRS propose to amend 26 CFR part 1 as follows:

PART 1—INCOME TAXES

Paragraph 1.
The authority citation for part 1 is amended by removing the entry for § 1.6011-18 to read in part as follows:

Authority:

26 U.S.C. 7805 * * *

§ 1.6011-18 [Removed] Par. 2.
Section 1.6011-18 is removed.

Frank J. Bisignano, Chief Executive Officer. [FR Doc. 2026-04432 Filed 3-5-26; 8:45 am] BILLING CODE 4831-GV-P

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