The AICPA submitted on Oct. 3 a comment letter to the Treasury Department and the IRS about their guidance package that addressed certain basis-shifting transactions involving partnerships and related parties.
On June 17, both agencies issued guidance that targeted related parties as defined by section 267(b) of the Internal Revenue Code and partnerships that structure transactions to take advantage of the basis-adjustment provisions of subchapter K.
In its letter, the AICPA said it supports the efforts to identify abusive transactions. However, the AICPA warned that the current version of the guidance package will exceed its intended scope by including real and substantive transactions that will result in undue hardship to taxpayers. A lot of the additional hardship is due to the proposed rules' retroactive nature without having a corresponding compliance benefit.
Additionally, the AICPA cited that earlier this year, the Supreme Court overturned the “Chevron deference” doctrine, which led to agency interpretations that statutes are no longer entitled to deference. Instead, courts must now determine the best interpretation of statutes without presuming that the agency’s interpretation is right.
Thus, the AICPA said that, given that there is no specific regulation-writing grant of authority in sections 732, 734(b), 743(b), and 755, the association is asking the Treasury and the IRS to consider whether, without the Chevron deference, the guidance represents the best interpretation of those respective statutes under their authority granted in § 7805.
AICPA's letter addressed four areas related to the guidance package's broad scope.
The first is eliminating the rules' retroactive nature. The AICPA recommends that the Treasury and the IRS issue final regulations that remove the proposed guidance's retroactive application and suggest that the rules apply prospectively for participating parties as well as material advisors. Alternatively, the AICPA also suggested expanding the reporting window under the proposals beyond 90 days for participants. For material advisors, the expansion should go beyond the last day of the month after the end of the calendar quarter when the proposed regulations are finalized. They also recommend that the disclosure requirements under the proposed regulations only apply in the year of the transaction of interest (TOI).
The second is about excluding certain types of transactions. The AICPA recommends that the agencies issue final regulations that considerably narrow the scope of the proposed regulations so that they only capture "carefully structured" transactions that "exploit the mechanical basis adjustments provisions of subchapter K.” By so doing, the final regulations will exclude common transaction and normal basis adjustments captured under the proposed rules.
The third area that AICPA addressed is that transactions are subject to a $5 million threshold. The AICPA recommends that the final regulations reflect a threshold of at least $50 million, although $100 million is more appropriate, apply the threshold on a transaction-by-transaction basis and look to gain recognition by any party. The AICPA also recommended that the agencies consider the impacts related to the threshold to non-recognition transactions that create basis adjustments that are computed or re-computed based in whole or in part of a prior taxable transaction.
The fourth area relates to modifying the distribution transaction of interest related party definition. The AICPA recommended modifying the distribution TOI-related party definition so that in addition to being related to each other, the related partners must also have a minimum relationship with the partnership. The treatment is consistent with the agencies' purpose of identifying transactions where related persons use partnerships to engage in transactions that inappropriately apply basis adjustments.