[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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