S. 2094: Basis Shifting is a Rip-off Act

The bill titled "Basis Shifting is a Rip-off Act" aims to update the Internal Revenue Code concerning how partnerships are taxed, particularly focusing on transactions between related parties. Here’s a breakdown of its main components:

Key Provisions

• Modification of Gain Recognition: The bill changes the rules for partners in a partnership when they receive distributions. It aims to clarify when gains or losses are recognized, particularly in cases of distributions involving partnerships where partners are related. Generally, a partner will not recognize a gain unless the cash or property received exceeds their adjusted basis in the partnership.
• Related-Party Transactions: If property is distributed to a partner from an "applicable partnership" (where partners are related), the partner must recognize additional gain based on the increase in the basis of partnership properties. This is aimed at preventing tax avoidance strategies that could exploit related-party distributions.
• Adjustments to Property Basis: The bill ensures that if a partnership distributes property and there’s a gain recognized, that gain will affect the basis of the property received by the partner, requiring appropriate adjustments in tax reporting.
• Regulatory Guidance: The bill mandates that the Secretary of the Treasury provide guidance and regulations to ensure proper implementation of these changes, especially to prevent misuse of tax rules through dubious transactions.
• Increased Penalties: The bill introduces higher penalties (from 20% to 40%) for understatements of tax resulting from related-party distributions. This is intended to discourage manipulative practices and ensure compliance with tax regulations.

Exceptions for Small Partnerships

Partnerships that qualify as small businesses, meeting certain gross receipts thresholds, may be excluded from these regulations to reduce the compliance burden on smaller entities.

Implementation Timeline

The amendments proposed in the bill would apply to distributions and transfers occurring after June 11, 2025, indicating a defined timeline for the enactment of these changes.

Impact on Partnerships

This legislation primarily targets partnerships with related parties to ensure that they pay their fair share of taxes and do not evade tax responsibilities through strategic distributions.

Relevant Companies

None found.