Basis Shifting is a Rip-off Act

Bill Summary: Basis Shifting is a Rip-off Act (S. 2094)

Overview

The Basis Shifting is a Rip-off Act is a legislative proposal designed to close tax loopholes related to "basis shifting" in partnership transactions. The bill specifically targets transactions between related parties (such as family members or affiliated entities) where partnership assets are distributed or interests are transferred in a way that artificially increases the tax basis of property without triggering an immediate tax liability.

The primary intent of the bill is to ensure that when a basis increase occurs through these related-party mechanisms, the corresponding gain is recognized and taxed.

Key Provisions

1. Related-Party Partnership Distributions

The bill amends Section 731 of the Internal Revenue Code to change how distributions from a partnership to a partner are taxed if the partnership is an "applicable partnership" (one where two or more partners are related).

• Gain Recognition for Partners: Partners receiving property from an applicable partnership must now recognize gain equal to the "applicable basis increase" (the amount by which the basis of partnership property was increased due to the distribution).
• Gain Recognition for Partnerships: The partnership itself must recognize gain if a distribution results in a basis increase for the distributed property.
• Character of Gain: The recognized gain generally retains the character (capital or ordinary) of the underlying property. If the basis increase was suspended due to a lack of property, it is treated as ordinary income.

2. Transfers of Partnership Interests

The bill adds new rules to Section 743 regarding the transfer of partnership interests between related parties:
* Capping Basis Increases: For "applicable transfers" (transfers between related parties where gain is not recognized), the increase to the adjusted basis of partnership property cannot exceed the total gain recognized on the transfer.
* Exemptions: Transfers to a partner's estate or transfers from a grantor trust upon the partner's death are exempt from these new restrictions.

3. Penalties and Enforcement

To discourage the avoidance of these rules, the bill introduces steep financial penalties:
* Increased Penalties: Underpayments of tax resulting from "related-party partnership distribution understatements" will be subject to an accuracy-related penalty of 40%, doubling the standard 20% penalty.
* Regulatory Authority: The Secretary of the Treasury is empowered to create regulations to prevent "substantially similar" transactions designed to circumvent these rules, including those involving "tax-indifferent parties."

Who is Affected?

• Related-Party Partnerships: Partnerships consisting of related persons (as defined by Sections 267(b) and 707(b)(1) of the Code) are the primary targets.
• Exemption for Small Businesses: Partnerships that meet the gross receipts test (under section 448(c)) are generally exempt, ensuring that small family businesses are not unfairly burdened. However, this exemption does not apply to tax shelters.
• High-Net-Worth Individuals/Entities: Those utilizing complex partnership structures to shift basis and defer capital gains taxes.

Timeline and Procedural Details

• Effective Date: The provisions apply to distributions and transfers occurring after June 11, 2025.
• Current Status: The bill was introduced in the Senate on June 17, 2025, and referred to the Committee on Finance.