Partnership Basis-Shifting Rules Removed Under EO

On April 17, the U.S. Department of the Treasury and the IRS released Notice 2025-23 announcing their intention to remove regulations published on Jan. 14 that require reporting of certain related-party partnership basis-shifting transactions as reportable transactions of interest. The notice states that it was issued pursuant to Executive Order 14219, "Ensuring Lawful Governance and Implementing the President’s ‘Department of Government Efficiency’ Deregulatory Initiative" (EO 14219), which requires agencies to identify and remove regulations meeting certain factors set forth in the executive order. Notice 2025-23 effectively eliminates all reporting and list maintenance obligations that would have been required under the final regulations as of the date the final regulations were published.

Crowe observation

The notice provides substantial relief to partnerships, partners, and advisers that might otherwise have been subject to burdensome retroactive and prospective reporting and list maintenance requirements.

Notice 2025-23 also withdraws Notice 2024-54, which describes regulations that Treasury and the IRS had intended to issue to tighten the rules for related-party partnership basis-shifting transactions.

Background

The Jan. 14 regulations identified the following transactions as TOIs if the amount of the basis step-up satisfied the single-year or lookback threshold:

• A partnership distributes property to a person who is a related partner in a current or liquidating distribution and the partnership increases the basis of one or more remaining properties under Sections 734(b) and (c).
• A partnership distributes property to a partner who is related to one or more partners in a complete liquidation of a partnership interest (or liquidation of the partnership) and the basis of one or more properties is increased under Sections 732(b) and (c).
• A partnership distributes property to a partner who is related to one or more partners and the basis of one or more distributed properties is increased under Section 732(d).
• A partner transfers an interest in a partnership to a related transferee nonrecognition transaction and the basis of one or more of the partnership properties is increased under Section 743(b)(1).

Under the Jan. 14 regulations, the single-year threshold is satisfied if the sum of all basis increases (without netting offsetting basis adjustments) exceeds by at least $10 million tax on the gain recognized from the transaction by a related or tax indifferent party. The lookback threshold is satisfied if over a six-year period the step-up is at least $25 million. The first lookback period for calendar year taxpayers would have been 2019-2024.

Notice 2025-23

The notice acknowledges comments criticizing the Jan. 14 regulations because they imposed complex, burdensome, and retroactive disclosure obligations on many ordinary-course and tax-compliant business activities, creating costly compliance obligations and uncertainty for businesses. The notice announces the following to address these comments and effectively make the Jan. 14 regulations inoperable ab initio:

• The Jan. 14 regulations will be removed using notice and comment procedures obviating the need to comply with the reportable transaction requirements for these transactions.
• The notice of proposed rulemaking (NPRM) removing the Jan. 14 regulations will have a proposed applicability date of April 17, the date the IRS released Notice 2025-23.
• The NPRM will propose to allow taxpayers and material advisers to apply the final regulations removing the Jan. 14 regulations retroactively to Jan. 14, 2025.
• Reportable transactions penalties related to transactions identified under the Jan. 14 regulations will be waived.
• Taxpayers and material advisers can rely on the notice until final regulations are issued.

Crowe observation

Revenue Ruling 2024-14, which provides examples of partnership basis-shifting transactions that the IRS believes lack economic substance and was issued when the Jan. 14 regulations and Notice 2024-54 were issued, was not addressed by Notice 2025-53. Therefore, this guidance still represents the position of the IRS.

Looking ahead

On April 9, the White House released a fact sheet related to the review under EO 14219 regarding immediate removal of regulations deemed unlawful without notice and comment. On April 14, the IRS released Notice 2025-22, which started its process under EO 14219 by obsoleting nine Internal Revenue Bulletin guidance documents. Notice 2025-23 is yet another step in the IRS’ implementation of EO 14219, although it does provide that an NPRM, generally the first stage of notice and comment procedures, will be followed.

Taxpayers and material advisers can breathe a sigh of relief and rely on Notice 2025-23 to avoid the retroactive and onerous disclosure requirements that were set forth in the Jan. 14 regulations. However, taxpayers concerned about transactions reflected in Revenue Ruling 2024-14 should consult their tax adviser to evaluate next steps.