Revocation of IRC 501(c)(3) Organizations for failure to meet the code section requirements. Contributions made to the organizations by individual donors are no longer deductible under IRC 170(b)(1)(A).

Notice 2024-55 provides guidance in the form of questions and answers with respect to sections 115 and 314 of Division T of the Consolidated Appropriations Act, 2023, Pub. L. 117-328, 136 Stat. 4459 (2022), known as the SECURE 2.0 Act of 2022 (SECURE 2.0 Act). Section 115 of the SECURE 2.0 Act adds section 72(t)(2)(I) to the Internal Revenue Code (Code), which permits a distribution from an applicable eligible retirement plan to an individual for purposes of meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. Section 314 of the SECURE 2.0 Act adds section 72(t)(2)(K) to the Code, which permits a distribution from an applicable eligible retirement plan to a domestic abuse victim if made during the 1-year period beginning on the date on which the individual is a victim of domestic abuse by a spouse or domestic partner. These two types of distributions are includible in gross income but are not subject to the 10 percent additional tax under section 72(t)(1).

This notice announces that the Department of the Treasury and the Internal Revenue Service intend to issue two sets of proposed regulations that would provide special rules for certain transactions under §§ 732, 734, 743, 755, and 1502 of the Internal Revenue Code. First, proposed regulations under §§ 732, 734, 743, and 755 would provide special rules for the cost recovery of positive basis adjustments or the ability to take positive basis adjustments into account in computing gain or loss on the disposition of basis adjusted property following certain transactions. Second, proposed regulations under § 1502 would provide rules to clearly reflect the taxable income and tax liability of a consolidated group whose members own interests in a partnership.

REG-124593-23 is a notice of proposed rulemaking (NPRM) that identifies certain partnership transactions as “transactions of interest,” a type of reportable transaction. The transactions include either the distribution of partnership property when the partnership has two or more related partners, or the transfer of a partnership interest in a nonrecognition transaction when the transferor is related to the transferee or the transferee is related to one or more of the partners. The transactions of interest involve related parties as defined under section 267(b) (without regard to section 267(c)(3)) or section 707(b)(1), a transfer of a partnership interest or distribution of partnership property, and a resulting aggregate increase to the basis of partnership property or distributed property under sections 732(b) or (d), 734(b), or 743(b) for the taxable year that exceeds the gain recognized, if any on which tax is required to be paid by any of the related partners by $5 million or more. The basis increase allows related parties an opportunity to decrease their taxable income through increased cost recovery allowances or reduced taxable gain (or increased taxable loss) on the disposition of the property in a transaction in which gain or loss is recognized in whole or in part.

Federal rates; adjusted federal rates; adjusted federal long-term rate, and the long-term tax exempt rate. For purposes of sections 382, 1274, 1288, 7872 and other sections of the Code, tables set forth the rates for July 2024.

(Also Sections 42, 280G, 382, 467, 468, 482, 483, 1288, 7520, 7872.)

This Revenue Ruling advises taxpayers of the Service’s position challenging certain partnership related-party transactions under the codified economic substance doctrine in § 7701(o). Under the ruling, the Service applies the economic substance doctrine in three situations involving related parties where some or all of whom are partners in a partnership, and the parties: (1) create basis disparities through various methods; (2) capitalize on these basis disparities either by transferring a partnership interest in a nonrecognition transaction or by making a current or liquidating distribution of partnership property to a partner; and (3) claim a basis adjustment under §§ 732(b), 734(b), or 743(b). The ruling holds that these transaction structures lack economic substance under § 7701(o). In such cases, the Service will disregard the basis adjustments.

(Also §§ 732, 734, 743, 754, 755)

This revenue ruling provides various prescribed rates for federal income tax purposes for July 2024 (the current month). Table 1 contains the short-term, mid-term, and long-term applicable federal rates (AFR) for the current month for purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for the current month for purposes of section 1288(b). Table 3 sets forth the adjusted federal long-term rate and the long-term tax-exempt rate described in section 382(f). Table 4 contains the appropriate percentages for determining the low-income housing credit described in section 42(b)(1) for buildings placed in service during the current month. However, under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July 30, 2008, shall not be less than 9%. Table 5 contains the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of section 7520. Finally, Table 6 contains the blended annual rate for 2024 for purposes of section 7872.

The applicable federal short-term, mid-term, and long-term rates are set forth for the month of July 2024. See Rev. Rul. 2024-13, page 15.

The applicable federal short-term, mid-term, and long-term rates are set forth for the month of July 2024. See Rev. Rul. 2024-13, page 15.

The adjusted applicable federal long-term rate is set forth for the month of July 2024. See Rev. Rul. 2024-13, page 15.

The applicable federal short-term, mid-term, and long-term rates are set forth for the month of July 2024. See Rev. Rul. 2024-13, page 15.

The applicable federal short-term rates are set forth for the month of July 2024. See Rev. Rul. 2024-13, page 15.

The applicable federal short-term, mid-term, and long-term rates are set forth for the month of July 2024. See Rev. Rul. 2024-13, page 15.

The applicable federal short-term, mid-term, and long-term rates are set forth for the month of July 2024. See Rev. Rul. 2024-13, page 15.

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of July 2024. See Rev. Rul. 2024-13, page 15.

The applicable federal mid-term rates are set forth for the month of July 2024. See Rev. Rul. 2024-13, page 15.

The applicable federal short-term, mid-term, and long-term rates are set forth for the month of July 2024. See Rev. Rul. 2024-13, page 15.

Does the economic substance doctrine apply to disallow tax benefits associated with a series of transactions involving a related-party partnership, through which the parties first generate a disparity between inside basis and outside basis and then trigger a basis adjustment to property under § 732(b), § 734(b), or § 743(b),¹ which generates increased cost recovery deductions with respect to the property or reduced gain (or increased loss) upon a sale of the property?

C is a domestic corporation engaged in operating a trade or business, including through several subsidiary entities commonly managed by C or in which C directly or indirectly holds controlling financial interests (C Subsidiaries) such that C is related to each of the C Subsidiaries under § 267(b) or § 707(b)(1). The C Subsidiaries include, among other entities, Sub 1, Sub 2, Sub 3, Partnership A, Partnership B, Partnership C, and Partnership D, each of which is indirectly owned by C through one or more C Subsidiaries. The C Subsidiaries own various depreciable or amortizable assets used in, and have incurred various liabilities as part of, the conduct of C’s trade or business. C issues financial statements for its trade or business that report these assets and liabilities of the C Subsidiaries (C Financial Statements).

Situation 1. C indirectly owns more than 50 percent of the stock of each of Sub 1, Sub 2, and Sub 3, all domestic corporations. Sub 1 and Sub 2 are the only partners in Partnership A with each holding a 50 percent interest in the capital, profits, and losses of Partnership A. Sub 1 and Sub 3 are the only partners in Partnership B with each holding a 50 percent interest in the capital, profits, and losses of Partnership B.

Prior to Date 1, Partnership A had a valid election in place under § 754. Also prior to Date 1, Sub 1’s share of the adjusted tax basis of Partnership A’s property (that is, Sub 1’s share of Partnership A’s inside basis) was equal to $20x and the adjusted tax basis of Sub 1’s interest in Partnership A (that is, Sub 1’s outside basis) was $100x. This $80x disparity between Sub 1’s share of Partnership A’s inside basis and Sub 1’s outside basis in Partnership A prior to Date 1 resulted from Sub 1 and Sub 2 making contributions to Partnership A, and Partnership A making distributions to Sub 1 and Sub 2, of property with specific Federal income tax attributes, and the allocation of Federal income tax items in accordance with § 704(b) and (c). Such contributions, distributions, and allocations were undertaken with a view to creating a disparity between Sub 1’s share of Partnership A’s inside basis and Sub 1’s outside basis in Partnership A.

On Date 1, Sub 1 transfers its interest in Partnership A to Partnership B in a contribution that qualifies for nonrecognition of gain or loss under § 721(a) (Sub 1 Contribution). The stated business purpose for the Sub 1 Contribution is to achieve cost savings for C and the C Subsidiaries by cleaning up intercompany accounts, reducing administrative complexity, and achieving other administrative efficiencies.

Immediately after the Sub 1 Contribution, Partnership B’s outside basis in its interest in Partnership A is $100x under § 723 while its share of Partnership A’s inside basis is $20x (without regard to § 743(b)). Under § 743(b), Partnership A increases the adjusted basis of its property by $80x (the excess of Partnership B’s $100x outside basis over its $20x proportionate share of inside basis) with respect to Partnership B only.² Partnership A allocates substantially all of this $80x basis increase to its depreciable or amortizable property (Basis-Adjusted Property) under § 755 and § 1.755-1(b)(5). The Sub 1 Contribution on Date 1 was undertaken with a view to exploiting the disparity between Sub 1’s share of Partnership A’s inside basis and Sub 1’s outside basis in Partnership A created before Date 1 and increasing Partnership B’s share of Partnership A’s inside basis in the depreciable or amortizable property.

The cost savings resulting from the Sub 1 Contribution are insubstantial in relation to the reduction in the aggregate Federal income tax liability of the C Subsidiaries resulting from the $80x increase in Partnership A’s basis in the Basis-Adjusted Property, which results in Partnership B being allocated increased amounts of deductions for depreciation or amortization or reduced amounts of gain (or increased amounts of loss) upon the sale of the Basis-Adjusted Property. C reports the relatively small cost savings in the C Financial Statements.

Situation 2. C indirectly owns more than 50 percent of the stock of Sub 1 and Sub 2, both domestic corporations. Sub 1 and Sub 2 are the only partners in Partnership C with each having a 50 percent interest in the capital, profits, and losses of Partnership C. Partnership C owns 100 percent of the stock of Sub 3, a domestic corporation, a depreciable asset, and $100x of money deposited in a bank account.

Prior to Date 2, Partnership had a valid election in place under § 754. Also prior to Date 2, Partnership C held the Sub 3 stock with an adjusted basis of $90x and fair market value of $100x and held the depreciable asset with an adjusted basis of $10x and fair market value of $100x. Also, Sub 1’s outside basis in Partnership C was $100x and Sub 2’s outside basis in Partnership C was $10x as a result of Sub 1 and Sub 2 making contributions to Partnership C, and Partnership C making distributions to Sub 1 and Sub 2, of property with specific Federal income tax attributes, and the allocation of Federal income tax items in accordance with § 704(b) and (c). Such contributions, distributions, and allocations were undertaken with a view to creating a disparity between Sub 2’s outside basis and Partnership C’s inside basis in the Sub 3 stock.

On Date 2, Partnership C distributes all of the Sub 3 stock to Sub 2 other than in liquidation of Sub 2’s interest in Partnership C (Sub 3 Stock Distribution). The stated business purpose for the Sub 3 Stock Distribution is to achieve cost savings for C and the C Subsidiaries by cleaning up intercompany accounts, reducing administrative complexity, and achieving other administrative efficiencies.

Immediately after the Sub 3 Stock Distribution, Sub 2’s adjusted basis in the Sub 3 stock is $10x under § 732(a)(2), the same as Sub 2’s outside basis in Partnership C prior to the Sub 3 Stock Distribution. In addition, the Sub 3 Stock Distribution reduces Sub 2’s outside basis in Partnership C from $10x to zero under § 733(2). Following the Sub 3 Stock Distribution, Partnership C increases the inside basis of its assets by $80x under § 734(b)(1)(B). Under § 755 and § 1.755-1(c)(2)(i), Partnership C increases the adjusted basis of its remaining depreciable asset from $10x to $90x.³ The Sub 3 stock Distribution on Date 2 was undertaken with a view to exploiting the disparity between Sub 2’s outside basis in Partnership C and Partnership C’s inside basis in the Sub 3 stock created before Date 2 and transferring basis from nondepreciable Sub 3 stock to Partnership C’s remaining depreciable asset.

The cost savings resulting from the Sub 3 Stock Distribution are insubstantial in relation to the reduction in the aggregate Federal income tax liability of the C Subsidiaries resulting from the $80x increase in Partnership C’s inside basis in the remaining depreciable asset, which results in Sub 1 and Sub 2 being allocated increased amounts of deductions for depreciation or reduced amounts of gain (or increased amounts of loss) upon the sale of Partnership C’s remaining depreciable asset. C reports the relatively small cost savings in the C Financial Statements.

Situation 3. C indirectly owns more than 50 percent of the stock of Sub 1 and Sub 2, both domestic corporations. Sub 1 and Sub 2 are the only partners in Partnership D with each having a 50 percent interest in the capital, profits, and losses of Partnership D.

Prior to Date 3, Partnership D owned two assets: a depreciable asset with an adjusted basis of $20x and a fair market value of $100x and nondepreciable land with an adjusted basis of $90x and fair market value of $100x. Also prior to Date 3, Sub 1’s outside basis in Partnership D was $100x, and Sub 2’s outside basis in Partnership D was $20x as a result of Sub 1 and Sub 2 making contributions to Partnership D, and Partnership D making distributions to Sub 1 and Sub 2, of property with specific Federal income tax attributes, and the allocation of Federal income tax items in accordance with § 704(b) and (c). Such contributions, distributions, and allocations were undertaken with a view to creating a disparity between Partnership D’s inside basis in the depreciable asset and Sub 1’s outside basis in Partnership D.

On Date 3, Partnership D liquidates by distributing the depreciable asset to Sub 1 and the nondepreciable land to Sub 2 (Partnership D Liquidation). The stated business purpose for the Partnership D Liquidation is to achieve cost savings for C and the C Subsidiaries by cleaning up intercompany accounts, reducing administrative complexity, and achieving other administrative efficiencies.

Immediately after the Partnership D Liquidation, Sub 1’s adjusted basis in the depreciable asset is $100x under § 732(b), the same as Sub 1’s outside basis in Partnership D prior to the Partnership D Liquidation, reflecting an increase of $80x to the adjusted basis of the depreciable asset in the hands of Sub 1. Also immediately after the Partnership D Liquidation, Sub 2’s adjusted basis in the nondepreciable land is $20x under § 732(b), the same as Sub 2’s outside basis in Partnership D prior to the Partnership D Liquidation, reflecting a decrease of $70x to the adjusted basis of the nondepreciable land in the hands of Sub 2. The distribution of the depreciable asset to Sub 1 as part of the Partnership D Liquidation on Date 3 was undertaken with a view to exploiting the disparity between Partnership D’s inside basis in the depreciable asset and Sub 1’s outside basis in Partnership D created before Date 3 and transferring basis from nondepreciable land distributed to Sub 2 to the depreciable asset distributed to Sub 1.

The cost savings resulting from the Partnership D Liquidation are insubstantial in relation to the reduction in the aggregate Federal income tax liability of the C Subsidiaries resulting from the $80x increase in Sub 1’s adjusted basis in the depreciable asset, which results in increased deductions for depreciation or reduced amounts of gain (or increased amounts of loss) upon the sale of the depreciable asset for Sub 1. C reports the relatively small cost savings in the C Financial Statements.

Section 267(a) generally disallows deductions in respect of any loss from the sale or exchange of property, directly or indirectly, between persons specified in any of the paragraphs of § 267(b), other than any loss of a distributing corporation (or the distributee) in the case of a distribution in complete liquidation. Section 267(b)(3) provides that two corporations that are members of the same controlled group (as defined in § 267(f)) have a relationship referred to in § 267(a). Section 267(f)(1) provides that a controlled group has the meaning given by § 1563(a), except that “more than 50 percent” is substituted for “at least 80 percent” each place it appears in § 1563(a), and the determination is made without regard to § 1563(a)(4) and (e)(3)(C). In addition, § 267(b)(10) provides that a corporation and a partnership owned by the same persons have a relationship referred to in § 267(a) if the same persons own more than 50 percent of both the value of the outstanding stock of the corporation and the capital interest, or the profits interest, in the partnership.

Section 707(b)(1)(A) disallows any deduction for losses from sales or exchanges of property (other than an interest in the partnership) directly or indirectly, between a partnership and a partner owning, directly or indirectly, more than 50 percent of the capital interest, or the profits interest, in such partnership. Section 707(b)(1)(B) disallows any deduction for losses from sales or exchanges of property (other than an interest in the partnership) directly or indirectly, between two partnerships in which the same persons own, directly or indirectly, more than 50 percent of the capital interests or profits interests.

Section 721(a) provides that no gain or loss is recognized to a partnership or to any of its partners on the contribution of property to the partnership in exchange for an interest in the partnership. Section 723 provides that the basis of property contributed to a partnership by a partner is the adjusted basis of such property to the contributing partner at the time of the contribution increased by the amount of gain (if any) recognized under § 721(b) to the contributing partner at such time.

Section 731(b) provides that no gain or loss is recognized to a partnership on the distribution to a partner of property, including money. Section 732(a)(1) generally provides that the basis of property (other than money) distributed by a partnership to a partner other than in liquidation of the partner’s interest is its adjusted basis to the partnership immediately before the distribution. However, § 732(a)(2) limits the basis to the distributee partner to the adjusted basis of that partner’s interest in the partnership reduced by any money distributed in the same transaction. Section 732(b) provides that the basis of property (other than money) distributed by a partnership to a partner in liquidation of the partner’s interest equals the adjusted basis of the partner’s interest in the partnership reduced by any money distributed in the same transaction. Section 732(c) provides rules for the allocation of basis among properties received in a distribution to which § 732(a)(2) or § 732(b) applies.

Section 733 provides that the adjusted basis of a distributee partner’s interest in a partnership following a non-liquidating distribution is reduced (but not below zero) by (1) the amount of any money distributed to the partner, and (2) the adjusted basis of distributed property (other than money), as determined under § 732.

Section 734(a) provides that the basis of partnership property is not adjusted as the result of a distribution of property to a partner unless an election provided in § 754 is in effect or there is a substantial basis reduction (as defined in § 734(d)) with respect to such distribution. Section 734(b) provides that a partnership, with respect to which an election provided in § 754 is in effect or with respect to which there is a substantial basis reduction, increases or decreases the adjusted basis of partnership property to take into account the gain or loss recognized by a distributee partner under § 731(a) or changes in the basis of distributed property under § 732. Under § 734(b)(1)(B), in the case of distributed property to which § 732(a)(2) applies, the amount of increase includes the excess of the adjusted basis of the distributed property immediately before the distribution over the basis of the distributed property to the distributee. If § 734(b) is applicable, § 734(c) provides that the allocation of basis among partnership properties is made in accordance with the rules provided in § 755. Section 734(d) provides that there is a substantial basis reduction with respect to a distribution if, had an election provided in § 754 been in effect, there would be a negative net basis adjustment to partnership property of more than $250,000.

Section 743(a) provides that the basis of partnership property is not adjusted as the result of a transfer of an interest in a partnership by sale or exchange or on the death of a partner unless an election provided in § 754 is in effect or there is a substantial built-in loss (as defined in § 743(d)) immediately after such transfer. Section 743(b) provides that, in the case of a transfer of an interest in a partnership by sale or exchange or upon the death of a partner, a partnership with respect to which an election provided in § 754 is in effect or a partnership that has a substantial built-in loss immediately after such transfer, increases the adjusted basis of the partnership property by the excess of the basis to the transferee partner of the transferee partner’s interest in the partnership over such partner’s proportionate share of the adjusted basis of the partnership property, or decreases the adjusted basis of the partnership property by the excess of the transferee partner’s proportionate share of the adjusted basis of the partnership property over the basis of such partner’s interest in the partnership. Section 743(b) further provides that, under regulations prescribed by the Secretary of the Treasury or her delegate (Secretary), such increase or decrease constitutes an adjustment to the basis of partnership property with respect to the transferee partner only. If § 743(b) is applicable, § 743(c) provides that the allocation of basis among partnership properties is made in accordance with the rules provided in § 755.

Section 754 provides, in part, that if a partnership files an election, in accordance with the regulations prescribed by the Secretary, the basis of partnership property is adjusted, in the case of a distribution of property, in the manner provided in § 734, and, in the case of a transfer of a partnership interest, in the manner provided in § 743. A § 754 election applies with respect to all distributions of property by the partnership and to all transfers of interests in the partnership during the taxable year with respect to which the election was filed and all subsequent taxable years.

Section 755(a) provides that a basis adjustment under § 734(b) or § 743(b) is allocated among partnership properties in a manner that reduces the difference between the fair market values and adjusted bases of those properties or in any other manner permitted by the regulations prescribed by the Secretary. Section 755(b) provides that in applying the allocation rules of § 755(a), increases or decreases in the adjusted basis of partnership property arising from a distribution of, or a transfer of an interest attributable to, capital assets and property described in § 1231(b), or any other property of the partnership, are allocated to partnership property of like character. The allocation of basis adjustments under §§ 743(b) and 734(b) among partnership property is provided in § 1.755-1(b) and (c), respectively.

Section 7701(o)(1) provides that, in the case of any transaction to which the economic substance doctrine is relevant, the transaction is treated as having economic substance only if (i) the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer’s economic position, and (ii) the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction. For this purpose, achieving a financial accounting benefit is not taken into account as a purpose for entering into a transaction if the origin of such financial accounting benefit is a reduction of Federal income tax. Section 7701(o)(4).

Section 7701(o)(5)(A) provides that the “economic substance doctrine” means the common law doctrine under which tax benefits under subtitle A of the Code with respect to a transaction are not allowable if the transaction does not have economic substance or lacks a business purpose.

Section 7701(o)(5)(C) provides that the determination of whether the economic substance doctrine is relevant to a transaction is made in the same manner as if § 7701(o) had never been enacted.

Section 7701(o)(5)(D) provides that the term “transaction” includes a series of transactions.

Section 7701(o)(2)(A) provides that if a taxpayer relies on profit potential to help prove that a transaction has economic substance, profit potential will only be taken into account if the present value of the reasonably-expected pretax profit of that transaction is substantial in relation to the present value of the expected net tax benefits of the transaction that would be allowed if the Federal income tax effects of the transaction were not disregarded.

Section 6662(b)(6) provides that a 20 percent penalty applies to an underpayment attributable to a transaction lacking economic substance under § 7701(o) or failing to meet the requirements of any similar rule of law. Under § 6662(i), the penalty is increased to 40 percent on any portion of an underpayment that is attributable to one or more nondisclosed noneconomic substance transactions. Under § 6664(c)(2), there is no reasonable cause exception to the penalties described in § 6662(b)(6) or (i).

The basis adjustment rules under §§ 732(b), 734(b), and 743(b) are intended to reduce disparities between inside and outside basis that would otherwise result from a distribution of property or transfer of a partnership interest. In each of Situations 1-3, however, the parties engaged in a concerted effort to create disparities between inside and outside basis through various methods, such as the contribution or distribution of property with specific Federal income tax attributes or the allocation of Federal income tax items in accordance with § 704(b) and (c). They then exploited the created disparities by engaging in transfers resulting in basis adjustments under the mechanical rules of § 732(b), 734(b), or 743(b) to inappropriately reduce taxable income through increased deductions or reduced gain (or increased loss).

In Situation 1, the actions of the parties creating a disparity between Sub 1’s outside basis and share of Partnership A’s inside basis, the transfer of Sub 1’s interest in Partnership A to Partnership B in the Sub 1 Contribution, and the resulting positive basis adjustment to Partnership B’s share of inside basis of Partnership A’s property under § 743(b) were undertaken with a view to increasing Partnership B’s share of Partnership A’s inside basis in depreciable or amortizable property by $80x while avoiding recognition of gain or loss under § 721(a) through a nonrecognition transaction. Additionally, the $80x basis increase was relatively large in amount compared to the cost savings to C and the C Subsidiaries.

In Situation 2, the actions of the parties creating a disparity between Sub 2’s outside basis and Partnership C’s inside basis in the Sub 3 stock, the distribution of Sub 3 stock (a high-inside basis asset) to Sub 2 (a partner with a low outside basis in its partnership interest) and the resulting adjustment to the inside basis of Partnership C’s remaining property were undertaken with a view to transferring $80x of basis from nondepreciable Sub 3 stock to Partnership C’s remaining depreciable asset while avoiding recognition of gain or loss under § 731 through a nonrecognition distribution. Additionally, the $80x basis increase was relatively large in amount compared to the cost savings.

In Situation 3, the actions of the parties creating a disparity between Sub 1’s outside basis and Partnership D’s adjusted basis in the depreciable asset, the liquidating distribution of the depreciable asset (a low-inside basis asset) to Sub 1 (a partner with a high outside basis in its partnership interest) in the Partnership D Liquidation and the resulting adjustment to the adjusted basis of the depreciable asset to Sub 1 under § 732(b) were undertaken with a view to transferring basis from nondepreciable land distributed to Sub 2 to the depreciable asset distributed to Sub 1 while avoiding recognition of gain or loss under § 731 through a nonrecognition distribution. Additionally, the $80x basis increase was relatively large in amount compared to the cost savings to C and the C Subsidiaries.

Situations 1-3 all involve persons related to each other under § 267(b) or § 707(b)(1). A transaction among related parties to avoid Federal income tax by generating inflated basis adjustments falls outside the plain intent of §§ 732(b), 734(b), 743(b), and 754. While the differing economic interests of unrelated parties generally make it less likely that unrelated partners will engage in transactions such as those in Situations 1-3, partnerships composed of related partners have no such disincentive.⁴

Congress intended that the provisions of subchapter K apply to transactions between partnerships and their partners to preserve parity between inside and outside basis “so as to prevent any unintended tax benefit or detriment to the partners.” H.R. Rep. No. 1337, 83d Cong., 2d Sess. A225 (1954); S. Rep. No. 1622, 83d Cong., 2d Sess. 384 (1954). Congress also expressed its desire to prevent related parties from exploiting the rules of subchapter K to avoid tax “through the realization of fictitious losses or increasing the basis of property for purposes of depreciation.” H.R. Rep. No. 1337, at A226; S. Rep. No. 1622, at 386-87.

Congress did not intend that taxpayers be able to avoid or indefinitely defer taxation altogether by creating basis disparities through contributions or distributions of property or through allocations of tax items by reason of a § 743(b) basis adjustment after a nonrecognition transaction, such as the Sub 1 Contribution in Situation 1; by reason of a § 734(b) basis adjustment after distribution of property, such as the Sub 3 Stock Distribution in Situation 2; or by reason of a § 732(b) basis adjustment after a liquidating distribution of property, such as the Partnership D Liquidation in Situation 3. The shared economic interests of related parties make them more likely than unrelated parties to attempt to generate such tax benefits in a manner not intended by Congress by entering into transactions with no meaningful economic change.

Unless a “meaning plainly appears” that Congress intended a provision to grant a tax benefit to transactions without economic substance or business purpose, such an intent “will not [be] attribute[d] to Congress.” Knetsch v. United States, 364 U.S. 361, 367-69 (1960). The economic substance doctrine is intended to apply “despite literal compliance with the statute.” Coltec Indus., Inc. v. United States, 454 F.3d 1340, 1354 (Fed. Cir. 2006); see Gregory v. Helvering, 293 U.S. 465, 470 (1935). The economic substance doctrine was developed to address transactions such as these, which follow the literal words of the Code but lie outside of Congress’s plain intent. Gregory, 293 U.S. at 469-70.

Each series of transactions described in Situations 1-3 lacks economic substance. In each of those situations, the economic substance doctrine is applied to basis adjustments generated by the following series of connected transactions involving related parties, which may occur over the course of several taxable years: (i) the parties generate basis disparities through various methods, such as contributions of property with specific Federal income tax attributes to the partnership, the allocation of Federal income tax items in accordance with § 704(b) and (c), or distributions of property with specific attributes to the partners, and (ii) either (1) a partner transfers its partnership interest in a nonrecognition transaction while there exists an inside/outside basis disparity, or (2) the partnership distributes property with specific Federal income tax attributes (for example, high inside basis) to one or more partners with specific Federal income tax attributes (for example, low outside basis) in a current or liquidating distribution. The resulting basis adjustments, if allowed, would permit the parties to shift basis in a manner that enables the parties to claim increased cost recovery deductions or reduced gain (or increased loss) upon the sale of the basis-adjusted property.

In applying the conjunctive test of § 7701(o)(1), each of two prongs must be met for the transactions described in Situations 1-3 to have economic substance. First, under § 7701(o)(1)(A), the transaction must change in a meaningful way (apart from Federal income tax effects) the taxpayer’s economic position. Second, under § 7701(o)(1)(B), the taxpayer must have had a substantial purpose (apart from Federal income tax effects) for entering into the transaction.

With respect to the first prong under § 7701(o)(1)(A), the transactions in Situations 1-3 have a negligible effect on C’s economic position because the transactions shift ownership of property among commonly controlled entities without “effect[ing] any real change in the ‘flow of economic benefits,’ or provid[ing] any real ‘opportunity to make a profit’ . . . .” Coltec, 454 F.3d at 1360; see Reddam v. Commissioner, 755 F.3d 1051, 1060-62 (9th Cir. 2014). The transactions fail to “appreciably affect the [taxpayer’s] beneficial interest except to reduce . . . tax”; that is, the transactions do not appreciably affect C’s beneficial interests in the C Subsidiaries or their assets, except to reduce the aggregate Federal income tax liability of the related persons involved. Knetsch, 364 U.S. at 366 (quoting Gilbert v. Commissioner, 248 F.2d 399, 411 (2d Cir. 1957) (Learned Hand, J., dissenting)) (emphasis added). The only potential economic gains are derived from purported cost savings from cleaning up intercompany accounts between the C Subsidiaries, reducing administrative complexity, and achieving administrative efficiencies. However, any such cost savings do not change C and the C Subsidiaries’ economic position in a meaningful way because any economic benefits attributable to purported cost savings (apart from the Federal income tax effects) are insubstantial compared to the $80x in Federal income tax benefits from the basis adjustments attributable to these transactions. The basis increases of $80x resulting from the transactions in Situations 1-3 can be used to reduce taxable income of the C Subsidiaries through depreciation, amortization, or other deductions or reduce gain recognized upon the sale of the property. The transactions were “designed to generate” basis increases, and those basis increases “would always . . . have overshadowed” the economic gain, including gain derived from cost savings. Reddam, 755 F.3d at 1061-62. Even if there had been “some prospect of profit” from transferring a partnership interest or partnership property among related parties, the calculable Federal income tax benefits would have “far exceeded any independent potential for economic return.” Bank of New York Mellon Corp. v. Commissioner, 801 F.3d 104, 117-18, 120 (2d Cir. 2015); Salem Fin., Inc. v. United States, 786 F.3d 932, 949 (Fed. Cir. 2015) (citing Knetsch, 364 U.S. at 365-66). Thus, any change in economic position (apart from the Federal income tax effects) in the transactions described in Situations 1-3 is not meaningful within the meaning of § 7701(o)(1)(A).

With respect to the second prong of the conjunctive test under § 7701(o)(1)(B), the transactions described in Situations 1-3 demonstrate a lack of any substantial purpose (apart from Federal income tax effects) to enter into these transactions. The stated business purpose of achieving cost savings from cleaning up intercompany accounts between the C Subsidiaries, reducing administrative complexity, and achieving administrative efficiencies may be a legitimate nontax economic purpose. However, any such business purpose is not substantial compared to the Federal income tax purposes the transactions were designed to carry out. See Reddam, 755 F.3d at 1061. Many of the facts in these transactions demonstrating a lack of meaningful change in economic position (apart from Federal income tax effects) also demonstrate a lack of substantial purpose (apart from Federal income tax effects) for these related parties to enter into these transactions. Reasonable inferences into a taxpayer’s purpose for entering a transaction can be drawn from the facts and circumstances surrounding such transaction, including results from a transaction that the taxpayer could have reasonably anticipated as well as results from a transaction that were by design. The fact that the cost savings were insubstantial compared to relatively large basis increases of $80x, that there was no appreciable effect on the parties’ economic ownership of the property allocated the basis increases, and that the transactions were structured to guarantee basis increases of $80x to depreciable or amortizable property while carrying a de minimis risk of economic loss compared to the designed Federal income tax benefit, Altria Grp., 658 F.3d at 290-91, “indicate[] that the taxpayer’s true motivation for the transaction is tax avoidance.” See Bank of New York Mellon Corp. v. United States, 140 T.C. 15, 38 (2013). Therefore, C lacked a substantial purpose (apart from Federal income tax effects) for causing its subsidiaries to enter into the transactions described in Situations 1-3 within the meaning of § 7701(o)(1)(B).

If a transaction or series of transactions lacks economic substance, it may be disregarded for Federal income tax purposes. See Gregory, 293 U.S. 465; Coltec, 454 F.3d at 1352; ACM P’ship v. Commissioner, 157 F.3d 231, 247-48 (3d Cir. 1998). While a transaction might meet the literal requirements of the Code, courts will not recognize a transaction that is not within the intent of the Code. Gregory, 293 U.S. at 469-70. The series of transactions described in Situations 1-3—related-party contributions or distributions of property or allocations of tax items and the subsequent transfer of a partnership interest or distribution of property to generate a basis adjustment to property that is eligible for cost recovery (or is held for future sale)—failed both prongs under § 7701(o)(1) and, therefore, lack economic substance. As a result, their Federal income tax effects must be disregarded. The transactions did not change in a meaningful way (apart from Federal income tax effects) the economic position of C or the C Subsidiaries within the meaning of § 7701(o)(1)(A), and C lacked a substantial business or other purpose (apart from Federal income tax effects) for causing the C Subsidiaries to enter into these transactions within the meaning of § 7701(o)(1)(B).

In addition, under § 6662(b)(6), the transactions described in Situations 1-3 give rise to a 20 percent penalty applicable to an underpayment attributable to a transaction lacking economic substance under § 7701(o). The penalty is increased to 40 percent on any portion of the underpayment attributable to one or more nondisclosed noneconomic substance transactions. See § 6662(i). Under § 6664(c)(2), a reasonable cause exception to the penalties described in § 6662(b)(6) and (i) may not be asserted.

The series of transactions described in Situations 1-3 may also be subject to the partnership anti-abuse rule under § 1.701-2 or the § 704(c) anti-abuse rule under § 1.704-3(a)(10). Other anti-abuse doctrines including, but not limited to, the substance-over-form doctrine and step-transaction doctrine may apply, depending on the facts and circumstances of a specific transaction or series of transactions.

(1) The series of transactions in Situations 1-3 lack economic substance under § 7701(o). The transactions did not change the economic position of C or the C Subsidiaries in a meaningful way (aside from the Federal income tax effects). Additionally, neither C nor the C Subsidiaries had a substantial purpose for entering the transactions (aside from Federal income tax effects).

(2) In Situation 1, the basis adjustment under § 743(b) is disregarded. As a result, Partnership B is not entitled to an increase of $80x in its share of the inside basis of Partnership A’s assets, and Partnership B’s share of the inside basis of Partnership A’s assets remains $20x.

(3) In Situation 2, the basis adjustment under § 734(b) is disregarded. As a result, Partnership C is not entitled to an increase of $80x to the inside basis of the remaining depreciable asset, and the inside basis of the depreciable asset remains $10x.

(4) In Situation 3, the basis adjustment to Sub 1 under § 732(b) is disregarded. As a result, Sub 1 is not entitled to an increase of $80x to the adjusted basis of the depreciable asset, and the adjusted basis of Sub 1’s depreciable asset remains $20x.

(5) C and/or the C Subsidiaries, as applicable, are subject to the 20 percent penalty under § 6662(b)(6) or the 40 percent penalty under § 6662(i) for a nondisclosed noneconomic substance transaction, as applicable.

The principal author of this revenue ruling is Anthony P. Sacco of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling, contact Anthony P. Sacco at (202) 317-5805.

¹ Unless otherwise specified, all “Section” or “§” references are to sections of the Code or the Income Tax Regulations (26 CFR part 1).

² This section shows a mechanical application of the rules of subchapter K of chapter 1 of the Code (subchapter K). The tax effect will be disregarded if the economic substance doctrine applies. Later sections of this revenue ruling address whether the economic substance doctrine applies.

³ The distribution of Sub 3 stock (controlled corporation) to Sub 2 (corporate partner) meets the requirements of § 732(f) because Partnership C’s adjusted basis in the Sub 3 stock prior to the Sub 3 Stock Distribution exceeds the adjusted basis of the stock in the hands of the corporate partner (Sub 2). Under § 732(f), the aggregate adjusted bases of Sub 3’s property must be reduced by $80x, subject to the limitations in § 732(f)(3). Additionally, this revenue ruling does not address the application of § 751(b) to the facts of Situations 2 and 3.

⁴ This revenue ruling does not address the application of § 7701(o) to transactions among unrelated partners. Depending on the specific facts, § 7701(o) may apply to transactions among unrelated partners.

⁵ This revenue ruling makes no interpretations regarding which audit procedures (for example, the application of subchapter C of chapter 63 of the Code) might apply to effectuate the substantive interpretations of the Holdings section. Any such interpretations would require facts that are outside the scope of this revenue ruling.

.01 This notice announces that the Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) intend to publish two sets of forthcoming proposed regulations that would address certain basis-shifting transactions involving partnerships and related parties. These transactions, referred to as “covered transactions” in this notice, (1) involve partners in a partnership and their related parties, (2) result in increases to the basis of property under § 732, § 734(b), or § 743(b) of the Internal Revenue Code (Code),¹ and (3) generate increased cost recovery allowances or reduced gain (or increased loss) upon the sale or other disposition of the basis-adjusted property.

First, the Treasury Department and the IRS intend to propose regulations under §§ 732, 734(b), 743(b) and 755 (forthcoming Proposed Related-Party Basis Adjustment Regulations) that would (1) provide the required method of recovering adjustments to the bases of property held by a partnership, property distributed by a partnership, or both, arising from the covered transactions described in section 3 of this notice, (2) provide rules governing the determination of gain or loss on the disposition of such basis-adjusted property, and (3) include similar transactions involving tax-indifferent parties (for example, certain foreign persons, a tax-exempt organization, or a party with tax attributes that make it tax-indifferent) rather than related parties.

Second, the Treasury Department and the IRS intend to propose regulations under § 1502 (forthcoming Proposed Consolidated Return Regulations) to clearly reflect the taxable income and tax liability of a consolidated group (as defined in § 1.1502-1(h)) whose members own interests in a partnership. More specifically, the Treasury Department and the IRS anticipate that the forthcoming Proposed Consolidated Return Regulations would provide for single-entity treatment of members that are partners in a partnership, so that covered transactions cannot shift basis among group members and distort group income.

.02 Section 2 of this notice provides a summary of relevant law. Section 3 of this notice provides an overview of the need for the forthcoming proposed regulations² and a description of the covered transactions. Sections 4 and 5 of this notice describe the forthcoming Proposed Related-Party Basis Adjustment Regulations and the forthcoming Proposed Consolidated Return Regulations, respectively. Section 6 of this notice describes the proposed applicability dates of the forthcoming proposed regulations. Section 7 of this notice contains a request for comments.

.01 Basis adjustments under subchapter K

(1) In general. Under subchapter K of chapter 1 of the Code (subchapter K), 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 § 732(a), (b), or (d). In the case of a distribution of partnership property to a partner by a partnership with an election under § 754 (§ 754 election) in effect, or with respect to which there is a substantial basis reduction as described in § 734(d), the distribution may also result in an adjustment to the basis of the partnership’s remaining partnership property under § 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 § 754 election in effect or has a substantial built-in loss with respect to the transfer of the partnership interest as described in § 743(d), the transfer may result in an adjustment to the basis of partnership property under § 743(b) with respect to the transferee partner.

Section 754 provides that if a partnership makes an election in accordance with regulations prescribed by the Secretary of the Treasury or her delegate (Secretary), the basis of partnership property shall be adjusted, in the case of a distribution of property, in the manner provided in § 734, and in the case of a transfer of a partnership interest, in the manner provided in § 743. Unless the election is revoked in accordance with the regulations under § 754, the § 754 election applies with respect to all distributions of property by the partnership and to all transfers of interests in the partnership during the taxable year with respect to which the election was filed and all subsequent taxable years.

(2) Basis adjustments under § 732. Section 732 governs a distributee partner’s basis in distributed property other than money. In the case of a current distribution, and except as provided under § 732(a)(2), § 732(a)(1) provides that the distributee partner’s basis in distributed property (other than money) is equal to the partnership’s adjusted basis in the distributed property immediately before the distribution. Under § 732(a)(2), however, a distributee partner’s basis in distributed property is limited to the adjusted basis of the distributee partner’s partnership interest reduced by any money distributed to such partner in the same transaction.

In the case of a liquidating distribution, § 732(b) provides that the distributee partner’s basis in distributed property (other than money) is equal to the adjusted basis of the distributee partner’s partnership interest reduced by any money distributed to such partner in the same transaction.

In the case of a distribution of more than one property from a partnership, the basis of the distributed properties to which § 732(a)(2) and (b) apply must be allocated among the distributed properties under the rules of § 732(c) and the regulations thereunder.

(3) Basis adjustments under § 734. In the case of a distribution of property by a partnership with a § 754 election in effect, and for which either the distributee partner recognizes gain or loss on the distribution, or for which the basis of the distributed property in the distributee partner’s hands, as determined under § 732, differs from the partnership’s adjusted basis in the distributed property immediately before the distribution, § 734(b) requires the partnership to increase or decrease (as applicable) the basis of its remaining partnership property. Also, in the case of a distribution of property by a partnership that results in a substantial basis reduction under § 734(d), the basis of remaining partnership property must be adjusted under § 734(b), even if the partnership does not have a § 754 election in effect.

Section 734(b)(1) requires a partnership to increase the basis of its remaining property if a distribution of property by the partnership results in the distributee partner recognizing gain under § 731(a)(1), or if property (other than money) to which § 732(a)(2) or (b) applies is distributed to the distributee partner and the property’s adjusted basis to the partnership immediately before the distribution is greater than the distributee partner’s basis in the distributed property as determined under § 732. Section 731(a)(1) requires a distributee partner to recognize gain in a current or liquidating distribution to the extent that any money distributed to that partner in the distribution exceeds the adjusted basis of that partner’s partnership interest immediately before the distribution. The amount of the basis increase to the partnership’s remaining property under § 734(b)(1) following a distribution of partnership property to a partner is equal to the amount of gain recognized by the distributee partner in the distribution under § 731(a)(1) and the excess of the partnership’s adjusted basis in the distributed property immediately before the distribution over the distributee partner’s basis in the distributed property as determined under § 732.

Section 734(b)(2) requires a partnership to decrease the basis of its remaining property if a distribution of property by the partnership results in the distributee partner recognizing loss under § 731(a)(2), or if property (other than money) to which § 732(b) applies is distributed to the distributee partner in a distribution and the property’s adjusted basis to the partnership immediately before the distribution is less than the distributee partner’s basis in the distributed property as determined under § 732. Under § 731(a)(2), a distributee partner may recognize a loss in a liquidating distribution of that partner’s interest in the partnership to the extent that such partner received only money, unrealized receivables described in § 751(c), or inventory items described in § 751(d) in the distribution. In such a case, the distributee partner is required to recognize a loss to the extent that such partner’s adjusted basis in the partnership interest exceeds the sum of any money distributed to that partner in the distribution and the basis to the distributee partner (determined under § 732) of any unrealized receivables or inventory received by that partner in the distribution. The amount of the basis decrease to the partnership’s remaining property under § 734(b)(2) following a distribution of partnership property to a partner is equal to the amount of loss recognized by the distributee partner in the distribution under § 731(a)(2) and the excess of the distributee partner’s basis in the distributed property as determined under § 732 over the partnership’s adjusted basis in the distributed property immediately before the distribution.

A partnership without a § 754 election in effect is subject to a mandatory basis adjustment under § 734(b)(2) if there is a substantial basis reduction with respect to a distribution of partnership property. Under § 734(d), a substantial basis reduction with respect to a distribution of partnership property occurs if the sum of the amount of loss recognized to the distributee partner on the distribution, plus any increase in basis in the distributed property to the distributee partner under § 732(b), exceeds $250,000.

(4) Basis adjustments under § 743(b). Generally, if a partnership interest is transferred in a sale or exchange or on the death of a partner, the transferee partner’s basis in the transferred partnership interest is determined under § 742 and the basis of partnership property is determined under § 743(a). Section 742 provides that the transferee partner’s basis in a partnership interest acquired other than by contribution is determined under part II of subchapter O of chapter 1 of the Code, beginning at § 1011 and following. Thus, for example, a transferee partner’s basis in a partnership interest acquired by purchase generally is cost basis under § 1012.

Section 743(a) provides that, in the case of a transfer of a partnership interest by sale or exchange or on the death of a partner, the basis of partnership property is not adjusted unless either the partnership has a § 754 election in effect or the partnership has a substantial built-in loss with respect to the transfer of the partnership interest.

Under § 743(b), in the case of a transfer of a partnership interest by sale or exchange or on the death of a partner, a partnership with a § 754 election in effect or that has a substantial built-in loss with respect to the transfer of the partnership interest must increase or decrease (as applicable) the adjusted basis of partnership property with respect to the transferee partner.

Section 743(b)(1) provides that the adjusted basis of partnership property is increased by the excess of the transferee partner’s basis in the transferred partnership interest over the transferee partner’s proportionate share of the adjusted basis of partnership property.

Section 743(b)(2) provides that the adjusted basis of partnership property is decreased by the excess of the transferee partner’s proportionate share of the adjusted basis of partnership property over the transferee partner’s basis in the transferred partnership interest.

A partnership without a § 754 election is subject to a mandatory basis adjustment under § 743(b) with respect to a transfer of a partnership interest if the partnership has a substantial built-in loss with respect to the transfer of the partnership interest. Under § 743(d)(1), a partnership has a substantial built-in loss with respect to a transfer of an interest in the partnership if either the partnership’s adjusted basis in its property exceeds the fair market value of such property by more than $250,000, or the transferee partner would be allocated a loss of more than $250,000 if the partnership assets were sold for cash equal to their fair market value immediately after the transfer.

Under regulations prescribed by the Secretary, a basis adjustment under § 743(b) is an adjustment to the basis of partnership property with respect to the transferee partner only. The transferee partner’s proportionate share of the partnership’s adjusted basis in its property generally is determined in accordance with the transferee partner’s interest in the partnership’s previously taxed capital (including the transferee partner’s share of partnership liabilities) under regulations prescribed by the Secretary.

(5) Allocation of § 734(b) or § 743(b) basis adjustments. Section 734(c) states that a basis adjustment under § 734(b) is allocated among partnership properties under the rules of § 755. Section 743(c) states that a basis adjustment under § 743(b) is allocated among partnership properties under the rules of § 755.

Section 755(a) generally requires basis adjustments under § 734(b) or § 743(b) to be allocated in a manner that has the effect of reducing the difference between the fair market value and the adjusted basis of partnership properties or in any other manner permitted by regulations. In addition, § 755(b) requires these basis adjustments to be allocated to partnership property of a like character or to subsequently acquired partnership property of a like character if such property is not available or has insufficient basis at the time of the basis adjustment (because a decrease in the adjusted basis of the property would reduce the basis of such property below zero). Section 755(c) provides a special rule that prohibits allocating a basis decrease under § 734(b) to the stock of a corporation that is a partner of the partnership (or that is related to a partner of the partnership within the meaning of § 267(b) or § 707(b)(1)).

(6) Common terminology for bases with respect to a partnership interest. A partner’s adjusted basis in its partnership interest commonly is referred to as the partner’s “outside basis” in its partnership interest. A partnership’s adjusted basis in its property commonly is referred to as the “inside basis” of the partnership’s property. Each partner has a share of inside basis. For ease of explanation, this terminology is used in section 3 of this notice.

.02 Affiliated group of corporations filing a consolidated return. Section 1501 grants an affiliated group of corporations the privilege of making a consolidated return, in lieu of separate returns, for Federal income tax purposes. Section 1502 authorizes the Secretary to prescribe consolidated return regulations for an affiliated group of corporations that join in filing (or that are required to join in filing) a consolidated return (that is, a consolidated group as defined in § 1.1502-1(h)) to clearly reflect the Federal income tax liability of the consolidated group and to prevent avoidance of such tax liability (§ 1502 regulations). For purposes of carrying out those objectives, § 1502 also permits the Secretary to prescribe rules that may be different from the provisions of chapter 1 of the Code that would apply if the corporations composing the consolidated group filed separate returns. Terms used in the § 1502 regulations generally are defined in § 1.1502-1.

The § 1502 regulations provide rules to clearly reflect the Federal income tax liability of both the consolidated group and each of its members. Therefore, these regulations reflect a mix of single- and separate-entity treatment. For example, the intercompany-transaction rules in § 1.1502-13(c) generally respect the existence of intercompany transactions between the separate members but recompute and redetermine the members’ tax items from the transaction to produce the same effect on the group as if the transacting members were divisions of a single corporation.

.03 Basis-adjustment reporting for consolidated groups

Form 1120, U.S. Corporation Income Tax Return, includes a new question on Schedule K, Question 31, applicable to certain large, consolidated groups for any taxable year ending on or after December 31, 2023. This question asks consolidated groups with gross receipts or sales of $1 billion or more to report certain subchapter K basis adjustments, as described in the Instructions to the 2023 Form 1120 (released for public comment on December 20, 2023). The intent of this question is for taxpayers to identify certain related-party basis adjustment transactions that were entered into by members of the consolidated group in consolidated years ending on or after December 31, 2023.

.01 Overview of the need for the forthcoming proposed regulations.

The Treasury Department and the IRS are aware of related persons using partnerships to engage in transactions that inappropriately exploit the basis-adjustment provisions of subchapter K applicable to distributions of partnership property or transfers of partnership interests discussed in section 2 of this notice. This awareness results from the IRS’s review of various partnership transactions involving related parties in which basis adjustments were created to artificially generate or regenerate Federal income tax benefits that resulted in significant tax savings without a corresponding economic outlay. These transactions were carefully structured to exploit the mechanical basis-adjustment provisions of subchapter K to produce significant tax benefits with little or no economic impact on the related parties, and in a manner that would not be a likely arrangement between partners negotiating at arm’s-length.

Generally, in a covered transaction, partnership property is distributed to a partner who is related to one or more other partners, and that distribution results in a person related to the distributee partner, the distributee partner, or both, receiving all or a share of a basis increase in the distributed property or remaining partnership property under § 732 or § 734(b) (as applicable); alternatively, a partnership interest is transferred between related persons or to a transferee partner who is related to an existing partner in the partnership, and that transfer results in an increase to the inside basis in partnership property with respect to the transferee partner under § 743(b).

The covered transactions generally are structured so that, under the applicable allocation rules (§§ 732(c), 734(c), 743(c), and 755), the basis increase is allocated to property that is eligible for cost recovery allowances (or eligible for a shorter cost recovery period) or that the partnership or the distributee partner disposes of in a taxable sale or exchange. Accordingly, the basis increase results in related partners decreasing their overall taxable income through additional or accelerated cost recovery allowances or decreasing their taxable gain or increasing their taxable loss on the subsequent taxable disposition of the property subject to the basis increase.

The related partners receive these tax benefits directly in the case of a distribution of property in which the basis of the distributed property is increased in the distributee partner’s hands under § 732(b) or § 732(d). They receive these benefits indirectly in the case of a transfer of a partnership interest in which the inside basis of partnership property is increased for the transferee partner under § 743(b) or in the case of a distribution of property that results in an increase to the common basis of partnership property under § 734(b). Whether the tax benefits are received directly or indirectly, the resulting decrease in taxable income or gain (or increase in taxable loss) benefits the related-party group as a whole. Further, because the partners are related, the distributions or transfers may have little or no effect on the overall economic ownership of the property yet produce significant tax benefits shared by the related partners.

A related partner’s partnership interest must have certain characteristics to create the opportunity for a covered transaction. In general, these characteristics are (1) a partner’s outside basis in its partnership interest that is low compared to the partnership’s basis in property it distributes to such partner, (2) a partner’s outside basis in its partnership interest that is high compared to such partner’s share of the partnership’s basis in the partnership property (that is, the partner’s share of inside basis), or (3) a partner’s outside basis in its partnership interest that is high compared to the partnership’s basis in property it distributes to such partner in liquidation of the partner’s interest. Partnerships with related parties can create these characteristics through orchestrated contributions and distributions, as well as allocations under § 704(b) and (c). In most commercial transactions involving unrelated parties, the opportunity for abuse is limited because each party has separate, and often competing, economic and tax interests, and the parties transact at arm’s length. In contrast, for related parties, basis can be manipulated to provide a material net tax benefit to the related parties. Such basis shifting is contrary to congressional intent in enacting subchapter K. Congress intended that the provisions of subchapter K apply to transactions between partnerships and their partners to preserve parity between inside and outside basis “so as to prevent any unintended tax benefit or detriment to the partners.” H.R. Rep. No. 1337, 83d Cong., 2d Sess. A225 (1954); S. Rep. No. 1622, 83d Cong., 2d Sess. 384 (1954). Congress also expressed its desire to prevent related parties from exploiting the rules of subchapter K to avoid tax “through the realization of fictitious losses or increasing the basis of property for purposes of depreciation.” H.R. Rep. No. 1337, at A226; S. Rep. No. 1622, at 386-87.

.02 Covered transactions under § 734(b).

In a covered transaction under § 734(b), a partnership with a § 754 election in effect and two or more partners that are related to each other makes a current or liquidating distribution of property to one or more of the related partners. Immediately before the distribution, the partnership’s basis in the distributed partnership property exceeds the distributee partner’s basis in its partnership interest (that is, the partnership distributes property with a relatively high inside basis to a distributee partner with a relatively low outside basis). Under § 732(a)(2) or (b), the low-outside basis partner takes a basis in the distributed property that is lower than the inside basis of the property immediately before the distribution.

As a result of the basis decrease to the distributed property in the hands of the distributee partner under § 732(a)(2) or (b), the partnership increases the basis of its remaining properties under § 734(b) by an amount equal to the excess of the partnership’s basis in the distributed property immediately before the distribution over the basis of the distributed property in the hands of the distributee partner immediately after the distribution. Under §§ 734(c) and 755, the partnership allocates this basis increase among remaining partnership properties.

.03 Covered transactions under § 743(b).

In a covered transaction under § 743(b), (1) a partner transfers an interest in a partnership that has a § 754 election in effect or a substantial built-in loss immediately after such transfer (2) to a related transferee or a transferee that is related to one or more of the partners (3) in a nonrecognition transaction within the meaning of § 7701(a)(45) in which the gain recognized, if any, and for which tax imposed by subtitle A of the Code (subtitle A) is required to be paid, is less than the aggregate amount of the increase(s) in the basis of partnership property with respect to the transferee partner under §§ 743(b) and 755.

In order for the transfer to give rise to a basis adjustment under § 743(b), the transferee partner must have an inside-outside basis disparity with respect to its partnership interest so that the transferee partner’s outside basis does not equal the transferee partner’s share of inside basis. Because a § 754 election is in effect for the taxable year of the transfer or the partnership or a substantial built-in loss immediately after such transfer, a basis adjustment is made under § 743(b) or (d) to partnership property with respect to the transferee partner to eliminate the inside-outside basis disparity of the transferee partner. As a result of the transfer, the partnership allocates one or more basis increases to partnership property with respect to the transferee partner under §§ 743(c) and 755.

.04 Covered transactions under § 732.

In a covered transaction under § 732, a partner (distributee partner) receives a liquidating distribution of property resulting in a basis increase in the distributed property under § 732(b) and (c), and either—

(1) The partnership liquidates and distributes the partnership’s remaining partnership property to one or more parties related to the distributee partner (related distributee partner) resulting in a basis adjustment that reduces the basis (basis decrease) of such property to the related distributee partners under § 732(b) and (c), or

(2) The partnership continues, and a related party to the distributee partner is a continuing partner (related continuing partner) that has a share of the partnership’s basis decrease under § 734(b) or (d) resulting from the liquidating distribution or would have had a share of the partnership’s basis decrease under § 734(b) if the partnership had a § 754 election in effect.

.01. In general. The forthcoming Proposed Related-Party Basis Adjustment Regulations would provide special rules that would apply to the cost recovery of basis adjustments arising from the covered transactions described in section 3 of this notice, as well as rules that would govern whether and how a basis adjustment arising from a covered transaction would be taken into account upon the disposition of such basis-adjusted property. These proposed regulations would be mechanical rules applicable to all covered transactions without regard to the taxpayer’s intent and without regard to whether the transactions could be abusive or lacking in economic substance. Additionally, these proposed regulations would apply only if, and to the extent that, property has been allocated a basis increase. If, and to the extent, property has been allocated a basis decrease, the proposed rules would not apply.

.02 Related persons; cost recovery. In general, for purposes of the forthcoming Proposed Related-Party Basis Adjustment Regulations, partners and other persons would be considered as related if they have a relationship described in § 267(b) (without regard to § 267(c)(3)) or § 707(b)(1) immediately before or immediately after a transaction. For purposes of the forthcoming Proposed Related-Party Basis Adjustment Regulations, the term “cost recovery” means an allowance for depreciation, amortization, or depletion under subtitle A.

.03 Related-party basis adjustments; cost recovery and disposition rules. Based on the authority provided in §§ 482, 732, 734(b), 743(b), 755, and 7805, as well as the provisions of the Code that otherwise permit cost recovery allowances with respect to basis increases under subchapter K, the forthcoming Proposed Related-Party Basis Adjustment Regulations would provide that a basis increase allocated to property retained or distributed by a partnership following a covered transaction (related-party basis adjustment, or RPBA) would be subject to specific rules providing the required method of recovering the basis adjustment and the treatment of the basis adjustment upon the disposition of the property to which the adjustment applies.

.04 Treatment of basis adjustments resulting from covered transactions under § 734(b).

The forthcoming Proposed Related-Party Basis Adjustment Regulations would provide that an RPBA arising from a covered transaction described in section 3.02 of this notice (§ 734(b) RPBA) would be recovered using the cost recovery method and remaining recovery period, if any, of the corresponding distributed property that gave rise to such § 734(b) RPBA. In addition, the partnership would not be eligible to take the § 734(b) RPBA into account upon the sale or other disposition of partnership property to which a § 734(b) RPBA applies, subject to the rules described below. After a qualifying disposition of a corresponding distributed property, the basis adjustment would cease to be a § 734(b) RPBA. A qualifying disposition would mean a disposition of a corresponding distributed property to an unrelated person in an arm’s-length transaction in which taxable gain or loss is fully recognized. Except as otherwise provided, if a basis adjustment ceases to be a § 734(b) RPBA, the remaining basis attributable to the former RPBA would be treated as giving rise to newly placed in service property that is subject to the cost recovery period and method of the property to which it was allocated, to the extent the property is eligible for cost recovery allowances, and the basis adjustment would be taken into account in computing gain or loss upon the sale or other disposition of the property. These rules would not apply to the share of any § 734(b) basis adjustment of a partner that is unrelated to the distributee partner. For purposes of this rule, a partner’s share of a basis adjustment under § 734(b) would be determined under principles similar to those in § 1.197-2(h)(12)(iv)(D).

If a partnership distributes to a partner property with respect to which there is a § 734(b) RPBA in place, the partner would take into account the § 734(b) RPBA in determining the basis of the property in the partner’s hands and the partner’s outside basis in the partnership, and the basis adjustment would remain a § 734(b) RPBA until the basis adjustment ceases to be a § 734(b) RPBA, as described above.

If a partnership disposes of property to which a § 734(b) RPBA applies (other than in a distribution to a partner) or a partner disposes of property to which a § 734(b) RPBA applies, the amount of the § 734(b) RPBA would be reallocated to other property of the partnership or the partner (under rules similar to the rules of § 1.755-1(c)) and would remain a § 734(b) RPBA. If the partnership or partner cannot reallocate a § 734(b) RPBA to any asset under the preceding sentence because the partnership or partner does not own property of a like character, the reallocation would be made when property of a like character is subsequently acquired.

.05 Treatment of basis adjustments resulting from covered transactions under § 743(b).

The forthcoming Proposed Related-Party Basis Adjustment Regulations would provide that an RPBA arising from a covered transaction described in section 3.03 of this notice (§ 743(b) RPBA) would be ineligible for cost recovery until the transferee partner becomes unrelated to both the transferor partner and to all existing partners as described below. In addition, the transferee partner would not be eligible to take the § 743(b) RPBA into account upon the sale or other disposition of partnership property to which a § 743(b) RPBA applies, subject to the rules described below. If a transferee partner that has a § 743(b) RPBA in place ceases to be related to both the transferor and all persons who were partners immediately before or immediately after the covered transaction, then the basis adjustment would cease to be a § 743(b) RPBA. Except as otherwise provided, if a basis adjustment ceases to be a § 743(b) RPBA, the basis attributable to the former RPBA would be treated as giving rise to newly placed in service property that is subject to the cost recovery period and method of the property to which it was allocated, to the extent the property is eligible for cost recovery allowances, and the basis adjustment would be taken into account in computing gain or loss upon the sale or other disposition of the property.

If a partnership distributes to a transferee partner property with respect to which there is a § 743(b) RPBA in place, the transferee partner would take into account the § 743(b) RPBA in determining the basis of the property in the partner’s hands as well as in determining the partner’s outside basis in the partnership, and the basis adjustment would remain a § 743(b) RPBA until the basis adjustment ceases to be a § 743(b) RPBA, as described above. That is, the § 743(b) RPBA would be taken into account for purposes of applying § 732 but would remain ineligible for cost recovery and would not be used in computing gain or loss on the sale or disposition of the distributed property by the transferee partner.

If a partnership disposes of property to which a § 743(b) RPBA applies (other than in a distribution to the transferee partner) or a transferee partner disposes of property to which a § 743(b) RPBA applies, then the amount of the § 743(b) RPBA would be reallocated to other property (under rules similar to the rules of § 1.755-1(c)) and would remain a § 743(b) RPBA. If the partnership or transferee partner cannot reallocate a § 743(b) RPBA to any asset under the preceding sentence because the partnership or transferee partner does not own property of a like character, the reallocation would be made when property of a like character is subsequently acquired. If any gain is recognized in a covered transaction described in section 3.03 of this notice, and tax imposed by subtitle A is required to be paid on such gain, the portion of each basis increase attributable to the gain would not be treated as a § 743(b) RPBA.

.06 Treatment of basis adjustments resulting from covered transactions under § 732.

The forthcoming Proposed Related-Party Basis Adjustment Regulations would generally require that a basis increase to distributed property under § 732(b) and (c) be treated as a § 732 RPBA to the extent such increase corresponds to a basis decrease of a related partner (or the basis decrease a related partner would have had if the partnership had a § 754 election in effect). In the case of a covered transaction described in section 3.04(1) of this notice (complete liquidation of the partnership), if a partnership makes liquidating distributions to all partners, a basis increase under § 732(b) and (c) to property distributed to the distributee partner would be treated as one or more § 732 RPBAs to the extent of a basis decrease under § 732(b) and (c) to property distributed to a related distributee partner. In the case of a covered transaction described in section 3.04(2) of this notice (continuation of the partnership), if a partnership makes a liquidating distribution to one partner and there is a resulting basis decrease under § 734(b), including a basis decrease that is suspended under § 1.755-1(c)(4) (or there would have been if the partnership had a § 754 election in effect), a basis increase under § 732(b) and (c) to property distributed to the distributee partner would be treated as one or more § 732 RPBAs to the extent of a related continuing partner’s share of a resulting basis decrease under § 734(b) (or the basis decrease under § 734(b) that would have resulted if the partnership had a § 754 election in effect).

The forthcoming Proposed Related-Party Basis Adjustment Regulations would require that a § 732 RPBA arising from a covered transaction described in section 3.04(1) of this notice resulting in a basis increase under § 732(b) and (c) to the property of the distributee partner would be recovered using the cost recovery method and remaining recovery period, if any, of the corresponding property the basis of which a related distributee partner reduced. In addition, the distributee partner would not be eligible to take the § 732 RPBA into account upon the sale or other disposition of the property to which the § 732 RPBA applies, subject to the rules described below. These rules would not apply to any portion of the basis increase that corresponds to a basis decrease to property distributed to an unrelated partner.

The forthcoming Proposed Related-Party Basis Adjustment Regulations would require that a § 732 RPBA arising from a covered transaction described in section 3.04(2) of this notice and resulting in a basis increase under § 732(b) and (c) to the property of the distributee partner would be recovered using the cost recovery method and remaining recovery period, if any, of the corresponding property the basis of which the partnership reduced under § 734(b), or would have reduced under § 734(b) if the partnership had a § 754 election in effect. In addition, the distributee partner would not be eligible to take the § 732 RPBA into account upon the sale or other disposition of the property to which the § 732 RPBA applies, subject to the rules described below. These rules would not apply to any portion of the basis increase that corresponds to the share of any basis decrease under § 734(b) of a partner unrelated to the distributee partner (or the unrelated partner’s share of a basis decrease under § 734(b) if the partnership had a § 754 election in effect). For purposes of this rule, a partner’s share of a basis decrease under § 734(b) would be determined under principles similar to those in § 1.197-2(h)(12)(iv)(D).

For purposes of all covered transactions described in section 3.04 of this notice, in the case of multiple distributed properties, the proposed regulations would treat each distributed property as having a separate § 732 RPBA with respect to each basis decrease to corresponding property. The amount of a § 732 RPBA would be proportional to the share of the basis decrease to that § 732 RPBA’s corresponding property out of the aggregate basis decrease to all corresponding property. A § 732 RPBA would be recovered using the cost recovery method and remaining recovery period, if any, of that § 732 RPBA’s corresponding property. For purposes of this section 4.06, “corresponding property” would mean, in the case of a covered transaction described in section 3.04(1) of this notice, property distributed to a related distributee partner and allocated a basis decrease under § 732(b) and (c) and, in the case of a covered transaction described in section 3.04(2) of this notice, property allocated a basis decrease under § 734(b) of which a related continuing partner has a share (or would have a share if the partnership had a § 754 election in effect). In addition, the partner would not be eligible to take the § 732 RPBA into account upon the sale or other disposition of property to which a § 732 RPBA applies, subject to the rules described below.

For purposes of all covered transactions described in section 3.04 of this notice, upon a qualifying disposition of a corresponding property, any § 732 RPBA to which that property corresponds would cease to be a § 732 RPBA. If a basis adjustment ceases to be a § 732 RPBA, the remaining basis attributable to the former RPBA would be treated as giving rise to newly placed in service property that is subject to the cost recovery period and method of the distributed property, to the extent the property is eligible for cost recovery allowances, and the basis adjustment would be taken into account in computing gain or loss upon the sale or other disposition of the property. A qualifying disposition would mean a disposition of property to an unrelated person in a fully taxable, arm’s-length transaction.

.07 Special rules and tax-indifferent parties. Special rules in the forthcoming Proposed Related-Party Basis Adjustment Regulations would apply to covered transactions that involve other related subchapter K provisions, such as § 732(d) and (f), and additional steps, as well as to tiered-partnership structures. The forthcoming Proposed Related-Party Basis Adjustment Regulations would also treat as a covered transaction certain partnership arrangements involving taxable and tax-indifferent parties that would otherwise be a covered transaction if the relatedness requirement of section 3.02, 3.03, or 3.04 of this notice were satisfied. For example, if a partnership, in which no partners are related, makes a distribution to an organization exempt from tax imposed by subtitle A by reason of § 501(a) of property that results in a basis increase to remaining partnership property under § 734(b)(1), this transaction would be treated as a covered transaction described in section 3.02 of this notice. For purposes of the forthcoming Proposed Related-Party Basis Adjustment Regulations, a tax-indifferent party would be defined as a person that is either not liable for Federal income tax because of its tax-exempt or, in certain cases, foreign status or, also in certain cases, to which gain from the transaction would not result in Federal income tax liability for the person’s taxable year within which such gain is recognized.

.01 In general. As a result of the interplay between the § 1502 regulations and the rules of subchapter K, a consolidated group’s income from investments in partnerships often is not clearly reflected in the group’s consolidated taxable income (as determined under § 1.1502-11 and other applicable § 1502 regulations) and consolidated tax liability (as determined under § 1.1502-2 and other applicable § 1502 regulations). In particular, anomalous results arise in certain situations in which the group’s ownership interest in a partnership is split among members of the group, or in which a partnership interest is transferred from one member to another.

The Treasury Department and the IRS are concerned that some consolidated groups have attempted to alter consolidated taxable income or consolidated tax liability through basis adjustments to the property of partnerships owned by a group’s members simply by: (i) transferring partnership interests from one member to another; or (ii) separating the group’s ownership interest in a partnership between different members and causing the partnership to distribute property to one or more of the member partners. Such an alteration of consolidated taxable income or consolidated tax liability does not clearly reflect the income of the group, which files a single tax return for each taxable year and generally reports its income and tax liability as if it were a single corporation. See §§ 1501 and 1502.

To prevent distortion of a consolidated group’s income from investments in partnerships, the forthcoming Proposed Consolidated Return Regulations would apply a single-entity approach with respect to interests in a partnership held by members of a consolidated group. It is intended that the forthcoming Proposed Consolidated Return Regulations would prevent direct or indirect basis shifts among the members of the group resulting from the covered transactions described in section 3 of this notice. This approach would avoid many of the anomalous results that arise from split ownership of partnership interests among members of the group or from intercompany transfers of partnership interests.

.01 The Treasury Department and the IRS intend to propose that the Treasury decision that adopts the Proposed Related-Party Basis Adjustment Regulations described in section 4 of this notice as final regulations would apply to taxable years ending on or after June 17, 2024. That is, once finalized, the regulations would govern the availability and amount of cost recovery deductions and gain or loss calculations for taxable years ending on or after June 17, 2024 even if the relevant covered transaction was completed in a prior taxable year.

.02 The applicability date for the Treasury decision that adopts the forthcoming Proposed Consolidated Return Regulations described in section 5 of this notice will not relate to the issuance of this notice but will be proposed in the notice of proposed rulemaking containing the forthcoming Proposed Consolidated Return Regulations.

.01 Request for comments. The Treasury Department and the IRS request comments on the approaches to addressing distortions of income from partnership related-party basis shifting transactions described in sections 4 and 5 of this notice.

.02 Procedures for submitting comments.

(1) Deadline. Written comments should be submitted by July 17, 2024. However, consideration will be given to any written comments submitted after July 17, 2024, if such consideration will not delay the issuance of the proposed regulations.

(2) Form and manner. The subject line for the comments should include a reference to Notice 2024-54. All commenters are strongly encouraged to submit comments electronically. However, comments may be submitted in one of two ways:

(a) Electronically via the Federal eRulemaking Portal at https://www.regulations.gov (type IRS-2024-0027 in the search field on the regulations.gov homepage to find this notice and submit comments); or

(b) By mail to: Internal Revenue Service, CC:PA:01:PR (Notice 2024-54), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, D.C., 20044.

(3) Publication of comments. The Treasury Department and the IRS will publish for public availability any comment submitted electronically and on paper to its public docket on https://www.regulations.gov.

The principal authors of this notice are Kevin I. Babitz and Anthony P. Sacco of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this notice, contact Elizabeth V. Zanet at (202) 317-6007 or Anthony P. Sacco at (202) 317-5805. Regarding the forthcoming Proposed Consolidated Return Regulations, contact Jeremy Aron-Dine at (202) 317-6847.

¹ Unless otherwise noted, all “section” or “§” references are to sections of the Code or the Income Tax Regulations (26 CFR part 1).

² References in this notice to the “forthcoming proposed regulations” are references to the forthcoming Proposed Related-Party Basis Adjustment Regulations and the forthcoming Proposed Consolidated Return Regulations, collectively.

This notice provides guidance on the application of the exceptions to the 10 percent additional tax under section 72(t)(1) of the Internal Revenue Code (Code) for emergency personal expense distributions and domestic abuse victim distributions. The Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) anticipate issuing regulations under section 72(t) of the Code, and section IV of this notice solicits public comments with respect to all aspects of section 72(t).

Section 72(t)(1) of the Code generally provides for a 10 percent additional tax on a distribution from a qualified retirement plan, as defined in section 4974(c), unless the distribution qualifies for one of the exceptions listed in section 72(t)(2). The 10 percent additional tax applies only to the portion of the distribution that is includible in gross income. For purposes of section 72(t), the term “qualified retirement plan,” as defined in section 4974(c), means a plan described in section 401(a) that includes a trust exempt from tax under section 501(a), an annuity plan described in section 403(a), an annuity contract described in section 403(b), an individual retirement account described in section 408(a), or an individual retirement annuity described in section 408(b).¹

Section 72(t)(2) provides several exceptions to the 10 percent additional tax imposed by section 72(t)(1), including, for example, exceptions for distributions:

On December 29, 2022, Division T of the Consolidated Appropriations Act, 2023, Public Law 117-328, 136 Stat. 4459 (2022), known as the SECURE 2.0 Act of 2022 (SECURE 2.0 Act), was enacted. Sections 115 and 314 of the SECURE 2.0 Act amended section 72(t) of the Code to add exceptions to the 10 percent additional tax, and this notice provides guidance on those sections.

The Treasury Department and the IRS invite comments on all matters discussed in this notice. In particular, the Treasury Department and the IRS invite comments on whether the Secretary should adopt regulations providing exceptions to the rule that a plan administrator may rely on an employee’s certification relating to emergency personal expense distributions and procedures to address cases of employee misrepresentation.

In addition, as mentioned in the Purpose section of this notice, the Treasury Department and the IRS anticipate issuing regulations under section 72(t) and invite general comments on section 72(t). In particular, because the anticipated proposed regulations would address repayments of certain distributions under section 72(t)(2) (for example, qualified birth or adoption distributions under section 72(t)(2)(H), emergency personal expense distributions under section 72(t)(2)(I), domestic abuse victim distributions under section 72(t)(2)(K), and terminal illness distributions under section 72(t)(2)(L)), the Treasury Department and the IRS request comments relating to repayments. For example, comments are requested on the implementation of the requirement that any repayment made within the 3-year period beginning on the day after the date the distribution was received will be treated as a direct trustee-to-trustee transfer within 60 days of the distribution. Comments are also requested on procedures for determining whether a repayment meets the applicable requirements under section 72(t)(2), particularly whether it would be helpful if the anticipated proposed regulations would permit an administrator to rely on an individual’s certification that any requested repayment meets the requirements under section 72(t)(2), is made within the applicable 3-year time period,⁷ and does not exceed the amount of the distribution with respect to which a repayment is being made.

Comments should be submitted in writing on or before October 7, 2024, and should include a reference to Notice 2024-55. Comments may be submitted electronically via the Federal eRulemaking Portal at www.regulations.gov (type “IRS Notice 2024-55” in the search field on the Regulations.gov home page to find this notice and submit comments). Alternatively, comments may be submitted by mail to: Internal Revenue Service, Attn: CC:PA:LPD:PR (Notice 2024-55), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044.

The Treasury Department and the IRS will publish for public availability any comment submitted electronically or on paper to its public docket.

The collection of information contained in this notice has been submitted to the Office of Management and Budget in accordance with the Paperwork Reduction Act (PRA) (44 U.S.C. 3507) under control number 1545-2317. 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 OMB control number. The information collection requirements in section III.A and B will be submitted to OMB for review and approval in accordance with 5 CFR 1320.10.

Pursuant to section 72(t)(2)(I)(iv), Q&A A-9 of this notice provides that, in determining whether an employee is eligible for an emergency personal expense distribution, an administrator of an applicable eligible retirement plan is permitted to rely on an employee’s written certification that the employee is eligible for an emergency personal expense distribution.

Q&A B-9 of this notice provides that, to meet the certification requirements of section 72(t)(2)(K)(vi)(III), an individual could check the box on the distribution request form to certify that (1) the employee or participant is eligible for a domestic abuse victim distribution and (2) the distribution is made during the 1-year period beginning on any date on which the individual is a victim of domestic abuse. The certification must be provided in writing and the employee or participant may use the electronic delivery rules in §1.401(a)-21(d) to provide the certification.

According to the Bureau of Labor and Statistics, determined as of March 2023, approximately 45 percent of civilian workers in the United States participated in defined contribution plans. The population of civilian workers represented by the March 2023 National Compensation Survey (NCS) was 145,300,100. Using 45 percent of the population reported in the NCS survey, approximately 65,385,045 civilian workers participated in defined contribution plans in March 2023.

Sections 115 and 314 of the SECURE 2.0 Act became effective January 1, 2024. The IRS does not have all the data necessary for determining paperwork for certifications of emergency personal expense and domestic victim abuse distributions. At this point, the IRS does not know how many applicable eligible retirement plans will offer these distributions or how many employees will request these distributions from applicable eligible retirement plans. Therefore, the paperwork burden is based on an estimated range of the number of employees who would apply for either an emergency personal expense distribution or a domestic abuse victim distribution from an applicable eligible retirement plan that permits such distributions.

The collection of information is required to obtain a benefit. For Q&A A-9 of this notice, the likely respondent is an individual who is requesting an emergency personal expense distribution from an applicable eligible retirement plan, as described in section 72(t)(2)(I)(iv), and self-certifying that the individual is eligible for an emergency personal expense distribution.

Estimated total annual reporting burden: 3,750 to 7,500 hours.

Estimated average annual burden per respondent: 3 minutes.

Estimated number of respondents: 75,000 to 150,000 respondents.

Estimated frequency of responses: 1 per distribution request.

For Q&A B-9 of this notice, the likely respondent is an individual who is requesting a domestic abuse victim distribution from an applicable eligible retirement plan, as defined in section 72(t)(2)(K)(vi)(I), and self-certifying that the individual is eligible for a domestic abuse victim distribution and that the distribution is made during the 1-year period beginning on any date on which the individual is a victim of domestic abuse.

Estimated total annual reporting burden: 3,750 to 7,500 hours.

Estimated average annual burden per respondent: 3 minutes.

Estimated number of respondents: 75,000 to 150,000 respondents.

Estimated frequency of responses: 1 per distribution request.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by section 6103 of the Code.

The principal authors of this notice are Naomi Lehr, Vernon Carter, and Pamela R. Kinard of the Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes). For further information regarding this notice, please contact Mr. Vernon Carter at (202) 317-6799, Ms. Naomi Lehr at (202) 317-4102, or Ms. Pamela Kinard at (202) 317-6000 (not toll-free numbers).

¹ For purposes of this notice, the term “IRA” includes an individual retirement account described in section 408(a) and an individual retirement annuity described in section 408(b).

² The term “employee” includes any participant in an employee retirement plan, and in the case of an IRA, the individual for whose benefit the IRA was established. See generally section 72(t)(5).

³ This $1,000 amount is not indexed for inflation.

⁴ Section 72(t)(2)(I)(v) applies the controlled group definition in section 72(t)(2)(H)(iv)(II), which defines “controlled group” as any group treated as a single employer under section 414(b), (c), (m), or (o).

⁵ For purposes of this notice, a “permissible distribution” means a distribution that meets the distribution restriction requirements in sections 401(k)(2)(B)(i), 403(b)(7)(A)(i), 403(b)(11), and 457(d)(1)(A) and is permissible under the plan. Thus, for example, a participant in a plan that does not permit emergency personal expense distributions may meet the requirements for a hardship distribution if the plan permits hardship distributions. In addition, a participant who terminated service with an employer with an accrued benefit under a section 401(k) plan that does not permit emergency personal expense distributions may meet the distribution restrictions for severance from employment.

⁶ The written certification may be provided using the electronic delivery rules in §1.401(a)-21(d).

⁷ But see section 311(b)(2) of the SECURE 2.0 Act for a special temporary rule on the effective date of the 3-year rule for repayments relating to qualified birth or adoption distributions made on or before the date of enactment of the SECURE 2.0 Act.

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The Internal Revenue Service has revoked its determination that the organizations listed below qualify as organizations described in sections 501(c)(3) and 170(c)(2) of the Internal Revenue Code of 1986.

Generally, the IRS will not disallow deductions for contributions made to a listed organization on or before the date of announcement in the Internal Revenue Bulletin that an organization no longer qualifies. However, the IRS is not precluded from disallowing a deduction for any contributions made after an organization ceases to qualify under section 170(c)(2) if the organization has not timely filed a suit for declaratory judgment under section 7428 and if the contributor (1) had knowledge of the revocation of the ruling or determination letter, (2) was aware that such revocation was imminent, or (3) was in part responsible for or was aware of the activities or omissions of the organization that brought about this revocation.

If on the other hand a suit for declaratory judgment has been timely filed, contributions from individuals and organizations described in section 170(c)(2) that are otherwise allowable will continue to be deductible. Protection under section 7428(c) would begin on July 08, 2024, and would end on the date the court first determines the organization is not described in section 170(c)(2) as more particularly set for in section 7428(c)(1). For individual contributors, the maximum deduction protected is $1,000, with a husband and wife treated as one contributor. This benefit is not extended to any individual, in whole or in part, for the acts or omissions of the organization that were the basis for revocation.

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and public hearing.

SUMMARY: This document contains proposed regulations that would identify certain partnership related-party basis adjustment transactions and substantially similar transactions as transactions of interest, a type of reportable transaction. Material advisors and certain participants in these transactions would be required to file disclosures with the IRS and would be subject to penalties for failure to disclose. The proposed regulations would affect participants in these transactions as well as material advisors. This document also provides a notice of a public hearing on the proposed regulations.

DATES: Comments due: Written or electronic comments must be received by August 19, 2024.

Public hearing: A public hearing on this proposed regulation has been scheduled for Tuesday, September 17, 2024, at 10 a.m. ET. Requests to speak and outlines of topics to be discussed at the public hearing must be received by August 19, 2024. If no outlines are received by August 19, 2024, the public hearing will be cancelled. Requests to attend the public hearing must be received by 5 p.m. ET on September 13, 2024. The public hearing will be made accessible to people with disabilities. Requests for special assistance during the public hearing must be received by 5 p.m. ET on September 12, 2024.

ADDRESSES: Commenters are strongly encouraged to submit public comments electronically via the Federal eRulemaking Portal at https://www.regulations.gov (indicate IRS and REG-124593-23) 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-124593-23), room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Elizabeth Zanet of the Office of Associate Chief Counsel (Passthroughs and Special Industries), (202) 317-6007; concerning the submission of comments or the hearing, Vivian Hayes at (202) 317-6901 (not toll-free numbers) or by email at publichearings@irs.gov (preferred).

SUPPLEMENTARY INFORMATION: