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IRS Targets Basis Shifting: New Reporting Requirements for Partnership Distributions 

IRS.gov

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    The IRS released a new form that mandates the reporting of all distributions of property that a partner receives from a partnership. Draft Form 7217, Partners Report of Property Distributed by a Partnership, will be used for the 2024 tax year and beyond, and requires more detail than previously reported regarding the basis of distributed property.  

    The instructions state that any partner receiving a nonliquidating or liquidating property distribution from a partnership must file Form 7217, regardless of whether there is a basis adjustment in the hands of the partner as a result. The form does not need to be filed for distributions that consist of only money or marketable securities treated as money. 

    The instructions highlight the Sec. 732 rules for basis: 

    • The general rule is that basis in distributed property equals the partnership’s adjusted basis in the property immediately before the distribution.
    • When the partnership’s adjusted basis in distributed property exceeds a partner’s remaining outside basis after reducing it by any money distributed, the partner’s basis in the distributed property is limited to outside basis.
    • When basis is limited by Sec. 732 and a distribution consists of multiple properties, the aggregate basis of the distributed properties must be reduced, and the reduced aggregate basis must be allocated among the distributed properties.

    The form asks questions applicable to these rules, including: whether any part of the distribution was treated as a sale or exchange; the fair market value of distributed property; the partnership’s aggregate basis in the distributed property immediately before the exchange; and whether any special basis adjustments have been made.  

    IRS Basis-Shifting Initiative

    It appears that one use of the new form will be to gather information for the IRS’s focus on “basis shifting” by related partnerships and consolidated groups that hold partnership interests. It was announced in June 2024 that a dedicated group in the IRS Chief Counsel’s Office will work with a pass-through group in the IRS Large Business and International (LB&I) division to develop guidance and assist examiners in curbing these transactions. 

    The IRS is seeking comments on the new form, and it may be revised before the agency finalizes it. Expect to see more form revisions requiring detailed information from different types of taxpayers related to IRS’s strategic compliance initiatives. 

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