Rules for basis-shifting transactions involving related parties

(a)

Distributions

(1)

Recognition of gain

Section 731 of the Internal Revenue Code of 1986 is amended by striking subsections (a) and (b) and inserting the following:

(a)

Partners

(1)

In general

In the case of a distribution by a partnership to a partner—(A)gain shall not be recognized to such partner, except to the extent that any money distributed exceeds the adjusted basis of such partner's interest in the partnership immediately before the distribution, and(B)loss shall not be recognized to such partner, except that upon a distribution in liquidation of a partner's interest in a partnership where no property other than that described in clause (i) or (ii) is distributed to such partner, loss shall be recognized to the extent of the excess of the adjusted basis of such partner's interest in the partnership over the sum of—(i)any money distributed, and(ii)the basis to the distributee, as determined under section 732, of any unrealized receivables (as defined in section 751(c)) and inventory (as defined in section 751(d)).

Any gain or loss recognized under this paragraph shall be considered as gain or loss from the sale or exchange of the partnership interest of the distributee partner.

(2)

Exception for certain related-party partnership distributions

Notwithstanding paragraph (1)(A)—(A)

In general

In the case of any distribution of property to which section 732(a)(2) or (b) applies which is made from an applicable partnership to a partner (including as part of the termination of such partnership), such partner shall, in addition to any amount which would be recognized without regard to this subparagraph, recognize gain in an amount equal to the applicable basis increase.(B)

Applicable basis increase

For purposes of this paragraph, the term applicable basis increase means, with respect to any distribution of any property described in subparagraph (A) to a partner, the aggregate increases in basis to one or more partnership properties under section 734(b)(1)(B) (without regard to whether any such increase is suspended under section 755) with respect to such distribution.(C)

Basis adjustment

In the case of each distributed property with respect to which gain is recognized by reason of subparagraph (A), the basis of such property after the distribution shall be the basis determined under section 732, increased by the amount of such gain with respect to such property.(D)

Character of gain

(i)

In general

If a distribution of any property to which subparagraph (A) applies results in any portion of any applicable basis increase in partnership property under section 734(b)(1)(B), gain under subparagraph (A) with respect to such distributed property shall have the same character as gain from the sale or exchange of the partnership property to which such portion is allocated under section 755.(ii)

Special rule where basis increase suspended

(I)

In general

If the allocation under section 755 of any portion of an applicable basis increase described in clause (i) is suspended under such section by the absence of property, or insufficient adjusted basis in property, to which such portion is to be so allocated, gain under subparagraph (A) with respect to such distributed property shall be treated as ordinary income.(II)

Secretarial authority

The Secretary may provide that subclause (I) shall not apply in cases where the Secretary determines necessary and appropriate to carry out, or prevent avoidance of, the purposes of this paragraph.(E)

Coordination with marketable securities rules

If any property described in subparagraph (A) consists of marketable securities (as defined in subsection (c)(2))—(i)this paragraph shall apply to such property before the application of subsection (c), and(ii)in applying subsection (c), the basis of such property shall be the basis determined after the application of subparagraph (C).

The Secretary shall provide rules for the application of this subparagraph, including coordination of the application of this subparagraph with subsection (c) and the other provisions of this subchapter.

(b)

Partnerships

(1)

In general

Except as provided in paragraph (2), no gain or loss shall be recognized to a partnership on a distribution to a partner of property, including money.(2)

Exception for certain related-party partnership distributions

(A)

In general

In the case of any distribution of property from an applicable partnership to a partner which under section 732(c) results in an increase in basis in one or more properties so distributed, gain shall be recognized to the partnership in an amount equal to the aggregate amount of such increases in basis.(B)

Basis adjustment

In the case of each partnership property with respect to which gain is recognized by reason of subparagraph (A), the basis of such property after the distribution shall be the basis determined under section 734, increased by the amount of such gain with respect to such property.(C)

Character of gain

Any gain recognized under this paragraph which is allocable to a portion of any basis increase in distributed property described in subparagraph (A) shall have the same character as gain from the sale or exchange of such property.

(2)

Applicable partnership

Section 731 of such Code is amended by adding at the end the following new subsections:

(e)

Applicable partnership

For purposes of this section—(1)

In general

The term applicable partnership means any partnership in which two or more partners are related persons immediately before or after any distribution to a partner. (2)

Small business exception

(A)

In general

A partnership shall not be treated as an applicable partnership with respect to any distribution made during a taxable year if such partnership meets the gross receipts test under section 448(c) (determined with the modification described in subparagraph (C)) for such taxable year. (B)

Exception not to apply to partnerships previously failing test or tax shelters

(i)

Partnerships failing test disqualified prospectively

If a partnership fails to meet the gross receipts test described in subparagraph (A) for any taxable year which begins after the date of the enactment of this subsection, subparagraph (A) shall not apply to such partnership (or any successor) for such taxable year or any succeeding taxable year.(ii)

Tax shelters

Subparagraph (A) shall not apply to a tax shelter prohibited from using the cash receipts and disbursements method of accounting under section 448(a)(3), except that, for purposes of applying this clause, a syndicate (as defined in section 1256(e)(3)(B)) shall not be treated as a tax shelter.(C)

Modification

In applying section 52(b) to section 448(c)(2) for purposes of this paragraph, the term trade or business shall include any activity treated as a trade or business under paragraph (5) or (6) of section 469(c) (determined without regard to the phrase To the extent provided in regulations in such paragraph (6)).(3)

Related person

A person shall be treated as related to another person if they bear a relationship to such other person described in section 267(b) (without regard to section 267(c)(3)) or 707(b)(1).(f)

Regulations relating to related-Partnership basis-Shifting transactions

The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of subsection (a)(2), subsection (b)(2), and section 743(g), including regulations or other guidance addressing distributions and transfers that are substantially similar to the distributions and transfers described in such provisions or which have substantially similar results (including through the participation of tax-indifferent parties). In the case of tax-indifferent parties, such regulations may provide for equivalent methods for the recognition of gain, including through the recognition of gain by the partner with an increase in basis under section 732 or by reason of section 734(b)(1).

(3)

Mandatory adjustments to applicable partnership property when partnership distributes property

Section 734(a) of such Code is amended—(A)by striking distribution of property to a partner unless the election and inserting

distribution of property to a partner unless—(1)the election

(B)by striking with respect to such partnership or unless there is and inserting

with respect to such partnership,(2)there is

(C)by striking the period at the end and inserting

, or(3)if paragraph (1) and (2) do not apply, such distribution is a distribution from an applicable partnership (as defined in section 731(e)) but only to the extent the application of this section to such distribution results in a decrease in basis to partnership property under subsection (b)(2).

(4)

Conforming amendments

(A)Section 731(c)(1) of such Code is amended by striking subsection (a)(1) and inserting subsection (a)(1)(A).(B)Section 734(b) of such Code is amended—(i)in the matter preceding paragraph (1)—(I)by striking or after effect and inserting a comma, and(II)by inserting or to which subsection (a)(3) applies, after reduction,,(ii)in paragraph (1)(A), by striking section 731(a)(1) and inserting section 731(a)(1)(A), and(iii)in paragraph (2)(A), by striking section 731(a)(2) and inserting section 731(a)(1)(B).(b)

Transfers of partnership interests

Section 743 of the Internal Revenue Code of 1986 is amended by adding at the end the following new subsection:

(g)

Special rules for related-Party transactions

(1)

In general

If subsection (b)(1) applies to an applicable transfer—(A)any increase to the adjusted basis of partnership property under subsection (b)(1) shall not exceed the total gain (determined without regard to any loss) recognized on such transfer, and(B)the adjusted basis of partnership property with respect to the transferee partner immediately after the transfer shall be equal to the sum of—(i)the adjusted basis of partnership property with respect to the transferor partner immediately before such transfer, plus(ii)the increase in the adjusted basis of the partnership property under subsection (b)(1) by reason of such transfer (determined after application of subparagraph (A)).(2)

Applicable transfer

For purposes of this subsection—(A)

In general

The term applicable transfer means any transfer of a partnership interest if—(i)two or more partners of the partnership are related persons immediately before or after the transfer, and (ii)any amount of gain on the transfer is not recognized under this chapter.

Such term shall not include any transfer of a partnership interest from a partner to the partner's estate or a deemed transfer from a grantor trust owned by the partner to a trust that becomes a separate entity for purposes of this chapter by reason of the partner's death.

(B)

Related person

For purposes of subparagraph (A), a person shall be treated as related to another person if they bear a relationship to such other person described in section 267(b) (without regard to section 267(c)(3)) or 707(b)(1).

(c)

Application of accuracy related penalties

(1)

In general

Section 6662(b) of the Internal Revenue Code of 1986 is amended by adding at the end the following new paragraph:

(11)Any related-party partnership distribution understatement.

(2)

Rules regarding related-party partnership transaction understatements

Section 6662 of such Code is amended by adding at the end the following new subsection:

(m)

Related-Party partnership distribution understatement

(1)

Related-party partnership distribution understatement

For purposes of this section, the term related-party partnership distribution understatement means, for any taxable year, the portion of the understatement for such taxable year which is attributable to gain recognized under section 731(a)(2) or 731(b)(2).(2)

Increase in penalty

In the case of any portion of an underpayment which is attributable to a related-party partnership distribution understatement, subsection (a) shall be applied with respect to such portion by substituting 40 percent for 20 percent.

(d)

Effective date

The amendments made by this section shall apply to distributions and transfers occurring after June 11, 2025.(e)

No inference

The amendments made by this section shall not be construed to create any inference with respect to whether any distribution to which subsection (a)(2) or (b)(2) of section 731 of the Internal Revenue Code of 1986 (as added by this section) applies, or any applicable transfer (as defined in section 743(g)(2) of such Code, as added by this section), has economic substance for purposes of applying the economic substance doctrine (as defined in section 7701(o) of such Code).