119-s2094

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

    (IS) ]

<DOC>

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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