The magnitude of the change that the new administration has brought to tax enforcement is difficult to overstate. But while mainstream media have widely reported changes in leadership — the Internal Revenue Service (IRS) is now on its fourth acting Commissioner since the beginning of the year — and reductions in force, a more subtle change is occurring with respect to the reportable transaction regime. This regime, in its current form, has been a cornerstone of tax enforcement for decades.  In short, the IRS has started rolling back the rules that require taxpayers and their advisors to report transactions the IRS views (or perhaps viewed) as presenting a heightened risk of abuse. 

Reportable Transactions in a Nutshell

In 2004, Congress overhauled the requirements for reporting transactions to the IRS's Office of Tax Shelter Analysis (OTSA) as part of the American Jobs Creation Act (AJCA). The new regime had two parts: 

• Taxpayers who participated in a "reportable transaction" are required to both disclose their participation on their tax return and report it separately to OTSA. Failure to do either can result in significant civil penalties. 
• Separately, so-called "material advisors" to taxpayers that participate in reportable transactions are required to disclose the transactions on which they advised (without the names of participating taxpayers), as well as maintain a "list" of advisees, to be furnished to the IRS on request. Again, failure to do so is subject to civil penalties. 

There are five categories of reportable transactions currently described in Treas. Reg. § 1.6011-4: (1) listed transactions (those which the IRS identifies in published guidance or regulations as having potential for tax avoidance); (2) transactions with conditions of confidentiality (those where the advisor places contractual limitations on disclosure); (3) transactions with contractual protection (those in which fees are refundable if the tax benefits are not sustained, or are contingent on the realization of tax benefits); (4) loss transactions (those with certain losses claimed under section 165 that exceed certain thresholds); and (5) transactions of interest (those which the IRS has identified in published guidance or regulation). Unique among reportable transactions, listed transactions can trigger enhanced penalties for failure to comply with the reporting regime. 

Since 2004, the IRS has periodically designated new listed transactions and transactions of interest through notice guidance and not always successfully. In recent years, the government has lost cases to taxpayers who argued that merely designating transactions as reportable transactions by notice published in the Internal Revenue Bulletin violated the Administrative Procedure Act (APA). See, for example, Green Rock LLC v. IRS, 104 F.4th 220 (11th Cir. 2024) (syndicated conservation easements); Mann Construction Inc. v. United States, 27 F.4th 1138 (6th Cir. 2022) (cash value life insurance policies); Green Valley Investors LLC v. Commissioner, 159 T.C. 80 (2022) (syndicated conservation easements). The IRS acquiesced to these decisions on December 23, 2024 (AOD-2024-01), stating that it would "no longer defend post-AJCA reportable transaction notices." That is, any designation as a listed transaction or transaction of interest would need to be through a duly promulgated regulation.

Shifting Basis and Priorities 

Notwithstanding the court losses and the acquiescence, the IRS quickly signaled that it was not giving up on reportable transactions. On January 10, 2025 the Department of Treasury and IRS issued final regulations designating certain partnership related party basis-shifting transactions as transactions of interest, and therefore reportable transactions. The designation was accompanied by a rule that required reporting through a six-year lookback period if the transaction met certain thresholds. Because the designation was done through regulation that underwent notice-and-comment procedures under the APA, Treasury and the IRS would avoid the validity argument that prevailed in Green Rock, Mann Construction, and Green Valley. 

So-called basis-shifting transactions involve complex provisions in subchapter K, the detail of which is beyond the scope of this article. However, a simple example can illustrate the issue: When a partnership distributes property (other than cash or marketable securities) to a partner in a non-liquidating distribution, section 732 says the partner takes a basis in the property distributed equal to the partnership's basis in that property, but only to the extent of its outside basis. Outside basis is then reduced by the amount of basis the partner receives in the distributed property.

Let's suppose that AB partnership has two assets, land (basis $90, value $100) and depreciable machinery (basis $10, value $100), and two related partners, A and B, with outside bases of $10 and $90, respectively. If the partnership distributes the land to partner A in a non-liquidating distribution, A takes a basis in the land of $10 (section 732(a)) and reduces its outside basis to zero (section 733). If the partnership had made an election under section 754, however, the $80 of "lost" basis in the land can be added to the basis of the machinery and generate depreciation deductions for the partnership under section 734(a)(1)(B). 

Although transactions like this have been around for years and may follow the literal language of the Code, the IRS considers (or considered) such transactions, and others that take advantage of elections under section 754, to have the potential for abuse, and has held that in certain circumstances they are subject to challenge on economic substance grounds (see Rev. Rul. 2024-14). Hence the regulatory reportable transaction designation, which was proposed simultaneously with the issuance Rev. Rul. 2024-14, would have allowed the IRS to identify and scrutinize taxpayers who participated in these transactions, along with their material advisors. 

The final regulations on basis-shifting transactions were vocally criticized and came at the end of the previous administration, so perhaps it was not too surprising when the IRS issued an about face. On April 17, 2025, the IRS issued Notice 2025-23, which announced Treasury and the IRS's intention to issue proposed regulations to eliminate the final regulations in accordance with the February 19 executive order titled "Ensuring Lawful Governance and Implementing the 'President's Department of Governmental Efficiency' Deregulatory Initiative." Notice 2025-23 also provides immediate penalty relief for taxpayers and material advisors who do not comply with the reporting requirements of the final basis-shifting regulations. It gave a hat tip to critics of the final regulations, observing that "[t]axpayers and their material advisors have criticized the Basis Shifting [Reportable Transaction] Regulations as imposing complex, burdensome, and retroactive disclosure obligations on many ordinary-course and tax compliant business activities, creating costly compliance obligations and uncertainty for businesses."

Nevertheless, it is noteworthy that the IRS did not take this opportunity to revoke Rev. Rul. 2024-14 as well. That ruling held that certain related party basis-shifting transactions may be challenged under the economic substance doctrine. That appears to remain the IRS's position and is being actively litigated in Tax Court. Otay Project LP v. Commissioner, Docket No. 6819-20 (simultaneous post-trial reply briefs filed April 11, 2025).

Basket Case

The IRS had already said in AOD 2024-01 that it would no longer defend notices designating reportable transactions in court. On April 11, 2025, it published Notice 2025-22, which stated that the IRS was revoking Notice 2015-73, which had purported to designate "basket option contracts" as listed transactions This is significant, as AOD 2024-01 expressly prohibited taxpayers from relying on it and stated that it had "no precedential value," though the holdings in Green Rock, Mann Construction, and Green Valley invalidating listing notices that did not go through APA notice and comment procedures obviously do.

Notice 2015-73 had identified as a listed transaction (and therefore a reportable transaction) a type of "structured financial transaction in which a taxpayer attempts to defer and treat ordinary income and short-term capital gain (earned under a contract denominated as an option contract that references a basket of securities) as long-term capital gain." Imagine a taxpayer enters into a derivative contract with a bank linked to the performance of a group, or "basket" of securities that the taxpayer selects or specifies using the outcome of an algorithm in exchange for an up-front fee. The contract is structured as an option over a fixed period of some years, which the taxpayer may exercise at any time, with the price depending on the performance of the securities in the basket. A common payout formula on the basket option contract generally gives the taxpayer a return equal to the upfront payment, plus net basket gain or minus net basket loss, less fees charged by the bank. During this period the taxpayer has the right to change the securities in the basket (or change the algorithm). 

If the taxpayer owned the basket of assets directly, they generally would generate ordinary income, or short-term capital gains and losses if sold. Here, the taxpayer takes the position that the capital gain on the basket option is long-term when exercise occurs more than one year after entering the contract. Economically, the taxpayer could be said to be in the same position as if he owned the assets directly (which the bank may acquire to hedge its risk), though that does not take into account the bank's fees, its risk, or how that risk is shared in the contract with the taxpayer. In designating the transactions following the above description that met certain criteria as listed transactions, the IRS stated that it believed the "the basket option contract… is a tax avoidance transaction."

Notably, five days after the IRS published Notice 2025-22 delisting basket option transactions, the Tax Court issued a memorandum opinion in GWA LLC v. Commissioner, T.C. Memo. 2025-34, largely sustaining the IRS's arguments for disallowing favorable tax treatment for the formerly listed transaction. Similar to its merits position in Rev. Rul. 2024-14 on related party basis-shifting transactions, notwithstanding the de-listing of basket options transactions, once identified, the IRS can be expected to continue to challenge them on the merits.

Microcaptive, Micro-Relief 

On the same day the IRS released the notice delisting basket options transactions, it also released Notice 2025-24, providing relief from reportable transaction penalties to participants in and material advisors to microcaptive insurance transactions who failed to file the required reports that would have been due on April 15, 2025. To obtain the relief, participants and material advisors must file their disclosures by July 31, 2025. 

The microcaptive insurance arrangements subject to reporting are, as the Treasury and the IRS describe them, "certain… transactions in which a taxpayer attempts to reduce the aggregate taxable income of the taxpayer, related persons, or both, using contracts that the parties treat as insurance contracts and a related company that the parties treat as an insurance company." The IRS designated these contracts as transactions of interest (and reportable transactions) in Notice 2016-66. Mindful of AOD 2024-01, Treasury and the IRS issued final regulations on January 14, 2025, designating certain microcaptive transactions as listed transactions and others as transactions of interest.

Given that Treasury and the IRS only finalized the regulations at issue in January 2025, the relief Notice 2025-24 offers is relatively minor in scope, though the final regulations did include a lookback provision commensurate with the section 6501 statute of limitations on assessment. Significantly, the IRS has not announced that these transactions will no longer be reportable transactions, unlike the aforementioned basis shifting and securities basket designations. 

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Taken together, the April notices connote a clear step back on the part of Treasury and the IRS on the reportable transaction regime. How many more steps there will be and when they will come remains to be seen. 

For more information, please contact:

Michael J. Desmond, mdesmond@milchev.com, 202-626-1575

Andy L. Howlett, ahowlett@milchev.com, 202-626-5821

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