[Congressional Bills 119th Congress]
[From the U.S. Government Publishing Office]
[S. 2094 Introduced in Senate (IS)]

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119th CONGRESS
  1st Session
                                S. 2094

 To amend the Internal Revenue Code of 1986 to modify the partnership 
  rules for taxation of basis-shifting transactions involving related 
                    parties, and for other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                             June 17, 2025

   Mr. Wyden introduced the following bill; which was read twice and 
                  referred to the Committee on Finance

_______________________________________________________________________

                                 A BILL


 
 To amend the Internal Revenue Code of 1986 to modify the partnership 
  rules for taxation of basis-shifting transactions involving related 
                    parties, and for other purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Basis Shifting is a Rip-off Act''.

SEC. 2. RULES FOR BASIS-SHIFTING TRANSACTIONS INVOLVING RELATED 
              PARTIES.

    (a) Distributions.--
            (1) Recognition of gain.--Section 731 of the Internal 
        Revenue Code of 1986 is amended by striking subsections (a) and 
        (b) and inserting the following:
    ``(a) Partners.--
            ``(1) In general.--In the case of a distribution by a 
        partnership to a partner--
                    ``(A) gain shall not be recognized to such partner, 
                except to the extent that any money distributed exceeds 
                the adjusted basis of such partner's interest in the 
                partnership immediately before the distribution, and
                    ``(B) loss shall not be recognized to such partner, 
                except that upon a distribution in liquidation of a 
                partner's interest in a partnership where no property 
                other than that described in clause (i) or (ii) is 
                distributed to such partner, loss shall be recognized 
                to the extent of the excess of the adjusted basis of 
                such partner's interest in the partnership over the sum 
                of--
                            ``(i) any money distributed, and
                            ``(ii) the basis to the distributee, as 
                        determined under section 732, of any unrealized 
                        receivables (as defined in section 751(c)) and 
                        inventory (as defined in section 751(d)).
        Any gain or loss recognized under this paragraph shall be 
        considered as gain or loss from the sale or exchange of the 
        partnership interest of the distributee partner.
            ``(2) Exception for certain related-party partnership 
        distributions.--Notwithstanding paragraph (1)(A)--
                    ``(A) In general.--In the case of any distribution 
                of property to which section 732(a)(2) or (b) applies 
                which is made from an applicable partnership to a 
                partner (including as part of the termination of such 
                partnership), such partner shall, in addition to any 
                amount which would be recognized without regard to this 
                subparagraph, recognize gain in an amount equal to the 
                applicable basis increase.
                    ``(B) Applicable basis increase.--For purposes of 
                this paragraph, the term `applicable basis increase' 
                means, with respect to any distribution of any property 
                described in subparagraph (A) to a partner, the 
                aggregate increases in basis to one or more partnership 
                properties under section 734(b)(1)(B) (without regard 
                to whether any such increase is suspended under section 
                755) with respect to such distribution.
                    ``(C) Basis adjustment.--In the case of each 
                distributed property with respect to which gain is 
                recognized by reason of subparagraph (A), the basis of 
                such property after the distribution shall be the basis 
                determined under section 732, increased by the amount 
                of such gain with respect to such property.
                    ``(D) Character of gain.--
                            ``(i) In general.--If a distribution of any 
                        property to which subparagraph (A) applies 
                        results in any portion of any applicable basis 
                        increase in partnership property under section 
                        734(b)(1)(B), gain under subparagraph (A) with 
                        respect to such distributed property shall have 
                        the same character as gain from the sale or 
                        exchange of the partnership property to which 
                        such portion is allocated under section 755.
                            ``(ii) Special rule where basis increase 
                        suspended.--
                                    ``(I) In general.--If the 
                                allocation under section 755 of any 
                                portion of an applicable basis increase 
                                described in clause (i) is suspended 
                                under such section by the absence of 
                                property, or insufficient adjusted 
                                basis in property, to which such 
                                portion is to be so allocated, gain 
                                under subparagraph (A) with respect to 
                                such distributed property shall be 
                                treated as ordinary income.
                                    ``(II) Secretarial authority.--The 
                                Secretary may provide that subclause 
                                (I) shall not apply in cases where the 
                                Secretary determines necessary and 
                                appropriate to carry out, or prevent 
                                avoidance of, the purposes of this 
                                paragraph.
                    ``(E) Coordination with marketable securities 
                rules.--If any property described in subparagraph (A) 
                consists of marketable securities (as defined in 
                subsection (c)(2))--
                            ``(i) this paragraph shall apply to such 
                        property before the application of subsection 
                        (c), and
                            ``(ii) in applying subsection (c), the 
                        basis of such property shall be the basis 
                        determined after the application of 
                        subparagraph (C).
                The Secretary shall provide rules for the application 
                of this subparagraph, including coordination of the 
                application of this subparagraph with subsection (c) 
                and the other provisions of this subchapter.
    ``(b) Partnerships.--
            ``(1) In general.--Except as provided in paragraph (2), no 
        gain or loss shall be recognized to a partnership on a 
        distribution to a partner of property, including money.
            ``(2) Exception for certain related-party partnership 
        distributions.--
                    ``(A) In general.--In the case of any distribution 
                of property from an applicable partnership to a partner 
                which under section 732(c) results in an increase in 
                basis in one or more properties so distributed, gain 
                shall be recognized to the partnership in an amount 
                equal to the aggregate amount of such increases in 
                basis.
                    ``(B) Basis adjustment.--In the case of each 
                partnership property with respect to which gain is 
                recognized by reason of subparagraph (A), the basis of 
                such property after the distribution shall be the basis 
                determined under section 734, increased by the amount 
                of such gain with respect to such property.
                    ``(C) Character of gain.--Any gain recognized under 
                this paragraph which is allocable to a portion of any 
                basis increase in distributed property described in 
                subparagraph (A) shall have the same character as gain 
                from the sale or exchange of such property.''.
            (2) Applicable partnership.--Section 731 of such Code is 
        amended by adding at the end the following new subsections:
    ``(e) Applicable Partnership.--For purposes of this section--
            ``(1) In general.--The term `applicable partnership' means 
        any partnership in which two or more partners are related 
        persons immediately before or after any distribution to a 
        partner.
            ``(2) Small business exception.--
                    ``(A) In general.--A partnership shall not be 
                treated as an applicable partnership with respect to 
                any distribution made during a taxable year if such 
                partnership meets the gross receipts test under section 
                448(c) (determined with the modification described in 
                subparagraph (C)) for such taxable year.
                    ``(B) Exception not to apply to partnerships 
                previously failing test or tax shelters.--
                            ``(i) Partnerships failing test 
                        disqualified prospectively.--If a partnership 
                        fails to meet the gross receipts test described 
                        in subparagraph (A) for any taxable year which 
                        begins after the date of the enactment of this 
                        subsection, subparagraph (A) shall not apply to 
                        such partnership (or any successor) for such 
                        taxable year or any succeeding taxable year.
                            ``(ii) Tax shelters.--Subparagraph (A) 
                        shall not apply to a tax shelter prohibited 
                        from using the cash receipts and disbursements 
                        method of accounting under section 448(a)(3), 
                        except that, for purposes of applying this 
                        clause, a syndicate (as defined in section 
                        1256(e)(3)(B)) shall not be treated as a tax 
                        shelter.
                    ``(C) Modification.--In applying section 52(b) to 
                section 448(c)(2) for purposes of this paragraph, the 
                term `trade or business' shall include any activity 
                treated as a trade or business under paragraph (5) or 
                (6) of section 469(c) (determined without regard to the 
                phrase `To the extent provided in regulations' in such 
                paragraph (6)).
            ``(3) Related person.--A person shall be treated as related 
        to another person if they bear a relationship to such other 
        person described in section 267(b) (without regard to section 
        267(c)(3)) or 707(b)(1).
    ``(f) Regulations Relating to Related-Partnership Basis-Shifting 
Transactions.--The Secretary shall prescribe such regulations or other 
guidance as may be necessary or appropriate to carry out the purposes 
of subsection (a)(2), subsection (b)(2), and section 743(g), including 
regulations or other guidance addressing distributions and transfers 
that are substantially similar to the distributions and transfers 
described in such provisions or which have substantially similar 
results (including through the participation of tax-indifferent 
parties). In the case of tax-indifferent parties, such regulations may 
provide for equivalent methods for the recognition of gain, including 
through the recognition of gain by the partner with an increase in 
basis under section 732 or by reason of section 734(b)(1).''.
            (3) Mandatory adjustments to applicable partnership 
        property when partnership distributes property.--Section 734(a) 
        of such Code is amended--
                    (A) by striking ``distribution of property to a 
                partner unless the election'' and inserting 
                ``distribution of property to a partner unless--
            ``(1) the election'',
                    (B) by striking ``with respect to such partnership 
                or unless there is'' and inserting ``with respect to 
                such partnership,
            ``(2) there is'',
                    (C) by striking the period at the end and inserting 
                ``, or
            ``(3) if paragraph (1) and (2) do not apply, such 
        distribution is a distribution from an applicable partnership 
        (as defined in section 731(e)) but only to the extent the 
        application of this section to such distribution results in a 
        decrease in basis to partnership property under subsection 
        (b)(2).''.
            (4) Conforming amendments.--
                    (A) Section 731(c)(1) of such Code is amended by 
                striking ``subsection (a)(1)'' and inserting 
                ``subsection (a)(1)(A)''.
                    (B) Section 734(b) of such Code is amended--
                            (i) in the matter preceding paragraph (1)--
                                    (I) by striking ``or'' after 
                                ``effect'' and inserting a comma, and
                                    (II) by inserting ``or to which 
                                subsection (a)(3) applies,'' after 
                                ``reduction,'',
                            (ii) in paragraph (1)(A), by striking 
                        ``section 731(a)(1)'' and inserting ``section 
                        731(a)(1)(A)'', and
                            (iii) in paragraph (2)(A), by striking 
                        ``section 731(a)(2)'' and inserting ``section 
                        731(a)(1)(B)''.
    (b) Transfers of Partnership Interests.--Section 743 of the 
Internal Revenue Code of 1986 is amended by adding at the end the 
following new subsection:
    ``(g) Special Rules for Related-Party Transactions.--
            ``(1) In general.--If subsection (b)(1) applies to an 
        applicable transfer--
                    ``(A) any increase to the adjusted basis of 
                partnership property under subsection (b)(1) shall not 
                exceed the total gain (determined without regard to any 
                loss) recognized on such transfer, and
                    ``(B) the adjusted basis of partnership property 
                with respect to the transferee partner immediately 
                after the transfer shall be equal to the sum of--
                            ``(i) the adjusted basis of partnership 
                        property with respect to the transferor partner 
                        immediately before such transfer, plus
                            ``(ii) the increase in the adjusted basis 
                        of the partnership property under subsection 
                        (b)(1) by reason of such transfer (determined 
                        after application of subparagraph (A)).
            ``(2) Applicable transfer.--For purposes of this 
        subsection--
                    ``(A) In general.--The term `applicable transfer' 
                means any transfer of a partnership interest if--
                            ``(i) two or more partners of the 
                        partnership are related persons immediately 
                        before or after the transfer, and
                            ``(ii) any amount of gain on the transfer 
                        is not recognized under this chapter.
                Such term shall not include any transfer of a 
                partnership interest from a partner to the partner's 
                estate or a deemed transfer from a grantor trust owned 
                by the partner to a trust that becomes a separate 
                entity for purposes of this chapter by reason of the 
                partner's death.
                    ``(B) Related person.--For purposes of subparagraph 
                (A), a person shall be treated as related to another 
                person if they bear a relationship to such other person 
                described in section 267(b) (without regard to section 
                267(c)(3)) or 707(b)(1).''.
    (c) Application of Accuracy Related Penalties.--
            (1) In general.--Section 6662(b) of the Internal Revenue 
        Code of 1986 is amended by adding at the end the following new 
        paragraph:
            ``(11) Any related-party partnership distribution 
        understatement.''.
            (2) Rules regarding related-party partnership transaction 
        understatements.--Section 6662 of such Code is amended by 
        adding at the end the following new subsection:
    ``(m) Related-Party Partnership Distribution Understatement.--
            ``(1) Related-party partnership distribution 
        understatement.--For purposes of this section, the term 
        `related-party partnership distribution understatement' means, 
        for any taxable year, the portion of the understatement for 
        such taxable year which is attributable to gain recognized 
        under section 731(a)(2) or 731(b)(2).
            ``(2) Increase in penalty.--In the case of any portion of 
        an underpayment which is attributable to a related-party 
        partnership distribution understatement, subsection (a) shall 
        be applied with respect to such portion by substituting `40 
        percent' for `20 percent'.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to distributions and transfers occurring after June 11, 2025.
    (e) No Inference.--The amendments made by this section shall not be 
construed to create any inference with respect to whether any 
distribution to which subsection (a)(2) or (b)(2) of section 731 of the 
Internal Revenue Code of 1986 (as added by this section) applies, or 
any applicable transfer (as defined in section 743(g)(2) of such Code, 
as added by this section), has economic substance for purposes of 
applying the economic substance doctrine (as defined in section 7701(o) 
of such Code).
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