Individual Finds Fault With Basis-Shifting Transaction Rules

Submitter Information

Submitter Name: Monte Jackel
City: Silver Spring
Country: United States
State or Province: Maryland
Comment ID: IRS-2024-0027-0002
Received Date: June 18, 2024

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Comment

Some points (not in any particular order of priority):

1. I continue to believe that a legislative solution is required and that given that there will be legal challenges to both the notice (2024-54) and the revenue ruling (2024-14), I do not believe that the guidance issued yesterday will end up significantly helping the IRS in its tax gap process in the interim before legislative reform. There will be an in terrorem effect of the guidance to be sure but I do not think it justifies the guidance in the notice and ruling because the well advised, who are the targets of the guidance, will challenge the conclusions.

2. The notice prescribes a detailed set of basis adjustments that, on a purely mechanical basis, seem to work. I do note that some of the adjustments in the notice as well as the revenue ruling may have an impact on sec on 704(b) capital accounts but that is not specified in either the notice or the ruling. Under the current regulations, reg. 1.704-1(b)(2)(iv)(n) would mandate that book treatment follow tax. How is that to work with reg. 1.704-1(b)(2)(iv)(m)? Not allowing depreciation or a basis offset for tax can create distortions in the book accounts.

3. There is a conundrum looking at the notice and the revenue ruling collectively because the ruling says that the transactions relating to the basis shifts are disregarded (they never happened) but the proposed 755 regulations say they are mechanical and not based on taxpayer intent or abuse. Are these reconcilable?

4. The sec on 755 proposed regs described in the notice may be vulnerable to challenge. First, the 1954 committee reports that are cited in both the revenue ruling and the notice do not relate to sections 732, 734, 743 and 755; they relate exclusively to sections 705 and 707. I thought that was misleading. Second, sec on 755 itself mandates regulations that eliminate built in gains and losses except as the IRS provides otherwise in regulations. Yes, these new 755 regs could be what sec on 755(a) prescribes. However, I checked the 1954 committee reports on 755 and they do nothing other than to repeat the statute. Thus, I expect authority challenges here.

5. The notice cites sec on 482 as authority to issue the 755 regulations. But other than reg 1.704-1(b)(1)(iii), where is the regulatory authority to apply 482? Such authority is not proposed to be added to the sec on 482 regulations. And the revenue ruling does not even cite sec on 482 when it mentions other avenues for the IRS to challenge the transaction. Any negative inference there? There was a prior attempt to impose sec on 482 on partnership allocations in Notice 2015-54 but the proposed and final 721(c) regulations dropped the concept without a men on.

5. On the consolidated return to be issued regulations, if consolidated group members are treated as one tax person in testing for the existence of a partnership, how do the intercompany transaction rules (reg. §1.1502-13), and other rules of the sec on 1502 regulations, work? Is a partnership, all of the members of which are consolidated group members, treated as a disregarded entity (DE)? How are partnerships whose members include both consolidated and non-consolidated members treated? Does the quantum of related party ownership mater? Is the treatment different if a non-consolidated member holds a de minimis interest in the partnership otherwise held exclusively by consolidated group members? Treating the partnership as a DE would also raise the ques on of whether 1504 affiliation still exists if you interpose such a partnership.

6. On the revenue ruling, it is completely retroactive and yet penal es will be imposed for the economic substance strict liability penalty. Is that a viola on of due process? The to be issued proposed regs under 755 are also retroactive in part but no specific reference is made to sec on 7805(b)(3). Does there need to be such a specific reference?

7. The ruling fails to address whether the ESD is "relevant" and also fails to specifically address what the "transaction is" applying a Coltec analysis. The ruling just comes to a conclusion.

8. The ruling cites the 1954 legislative history for not allowing inside-outside basis disparities to distort income. However, there is no such legislative history at all. That is misleading.

9. The revenue ruling fails to cite or discuss Countryside. See htps://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/tax-court-finds-legitimate-business-purpose-in-partnerships-distribution/1pq0f. It is the only ESD partnership authority, although it is a memo decision. But it is s ll authority under sec on 6662. I wrote a Tax Notes article on this in 2010, citing Countryside. See htps://www.taxnotes.com/tax-notes-federal/partnership-taxa on/subchapter-k-and-codified-economic-substance-doctrine/2010/07/19/ql2t?highlight=Countryside. Why was the case not cited and distinguished?