Tax

On January 14, 2025, the U.S. Treasury Department and IRS published final regulations (T.D. 10028) (the “Final Regulations”) classifying certain partnership related-party basis adjustment transactions (and substantially similar transactions) as “transactions of interest” (TOIs), a type of reportable transaction subject to disclosure. Unfortunately, the Final Regulations as drafted apply to certain ordinary course commercial transactions undertaken by private funds. While basis adjustments may be a feature of such a transaction, in our experience, private fund sponsors are motivated by economics and commercial deal terms rather than tax outcomes tied to tax basis adjustments.

Examples of private fund transactions that may be implicated by the Final Regulations include liquidations of a partnership/carry splitter that is a subsidiary of a blocker when a private fund sells a blocker, transfers of partnership interests and distributions of property through a chain of partnerships, as often occurs in the context of “GP Led” continuation vehicle transactions.

The Final Regulations specify a six year look-back period as the applicable period of review to determine whether a transaction of interest was undertaken. If such a transaction occurred during the look-back period, certain disclosures are required to be filed by the taxpayer and material advisors to the transaction. The look-back period is measured as seventy-two months before the first month of the taxpayer’s most recent taxable year that began before the date of the Final Regulations. For calendar year taxpayers, the Final Regulations cover transactions occurring on or after January 1, 2019. This look-back period will require private funds and their advisors to review prior transactions to determine whether disclosure is required under the Final Regulations.

Partnership basis transactions requiring disclosure are limited to those generating a basis adjustment benefit of at least $25M for look-back transactions and $10M for go-forward transactions (calculated on the basis of certain rules specified in the Final Regulations).

If a transaction is covered by the Final Regulations, the resulting disclosure obligations apply to the partnership, related-party partners and material advisors. The deadline for disclosure was extended by an additional 90 days in the Final Regulations. While it is certainly possible that the new Administration and Congress may limit or completely override the Final Regulations, as it currently stands, taxpayers have until mid-July to disclose any participation in any such prior related-party transactions. The consequence for non-compliance could be penalties up to $50,000 per transaction for each participant.

Please reach out to your Weil Tax contacts if you have questions or would like to discuss how these regulations may impact your specific circumstances.