Economic Substance Coming for Partnerships
The Economic Substance Doctrine is a nifty-little tool the IRS has to disallow certain tax transactions based on intent over form. In those instances, they say those transactions lack “economic substance” and are down purely as a tax-avoidance scheme with no other purpose.
One form of this the IRS is combatting is in the form of “basis-shifting” in Partnerships. There are three different ways the IRS is seeing this in audits they are conducting:
Transfer of a partnership interest to a related party.
Distribution of property to a related party.
Liquidation of related partnership of partner.
In all of these, partners are shifting around assets that aren’t getting them tax benefits, to related parties in a way that will generate tax benefits. Outside of the tax benefits, there is no purpose to the shifting of the assets. The technical term being used for these types of transactions is “basis-stripping”, and the IRS has put tax preparers on notice that these types of transactions are going to be heavily scrutinized and challenged with the Economic Substance Doctrine.
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Source: Mad Woman Media