I am back to blogging the news again today!

So in news that smells bad, President Trump just had the IRS revoke a rule that was preventing wealthy partnerships from using the ‘basis shifting’ loophole to avoid billions in taxes. President Trump has been doing so many headline-grabbing things – like starting wars in the Middle East, kidnapping foreign heads of state, detaining/kidnapping law-abiding Americans (and sometimes killing them) – that we forget the relentlessness of the smaller actions. These things add up, and they matter.

To set the stage for this one, here is an excerpt from the June 2024 Biden administration IRS public notice announcing their crackdown on abusive related party basis shifting:

“Shutdown of Abusive Related Party Basis Shifting Transactions Estimated to Raise More than $50 Billion Over the Next Decade

WASHINGTON – Today, the U.S. Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) announced a new regulatory initiative to close a major tax loophole exploited by large, complex partnerships. This initiative is one step in ongoing efforts to close loopholes and shut down abusive transactions using existing regulatory authority and ensure wealthy individuals, complex partnerships, and large corporations pay taxes owed.”

The Biden administration imposed this rule, intended to stem the abusive use of basis shifting, which involves moving assets like stocks or property, on paper from one corporate entity to another when the entities had common owners.

The 2024 Biden rule had these 3 parts:

1. You had to report certain transactions, deemed Transactions of Interest (TOI), to the IRS so that the Government could know if the rule was being violated (This is the part that Trump just revoked);
2. The IRS increased the number of wealthy partnerships that it audited (also reversed by Trump); and
3. Basis shifting was made illegal if the only purpose was to avoid taxation.

The relevant section of the tax code that is being changed is 26 CFR 1.6011-18, in case you are interested. The rule calls for reporting any tax basis change within one tax year where the amount of the change is $10 million or more and the transaction is among “related parties”. I won’t bore you with all the rest of it, which, trust me, there is a lot of. Related parties could be a wealthy family as well as a corporation organized as multiple partnerships with overlapping owners. (FYI, Trump’s company is organized this way.) This would suggest that some very wealthy families have been avoiding taxes by creating dummy legal entities and then re-assigning ownership of things from one to the other, with the result that the tax basis for things is reset.

At this point in the essay I am desperate for a visual or graphic of some sort. I have been looking all over; the announcement of the Biden crackdown had plenty of coverage among tax accounting firms, but no splashy press conferences. Ditto the Trump repeal. I feel that I have failed in finding something – anything! – that would pep up the essay and make it more visual and compelling to ordinary Americans. The best I could do is this picture of Janet Yellen, the Treasury Secretary just prior to June 2024 when this basis-shifting rule was announced:

The fact that I could not find any more directly relevant or compelling images reinforces my larger theme that this is an executive action that has significant impact on all Americans, but which almost none of us was even aware. For the very wealthy, the impact is massive; under Biden, they would pay their share of taxes, but under Trump they don’t. For the rest of us, the basis shifting loophole is causing the Treasury to lose $50 billion over 10 years, which will need to be made up as an increased tax on everyone.

So the Biden clamp-down on related-party basis shifting applies to the owners of very large companies that are organized as partnerships, and to uber-wealthy families. Think the Waltons, the Trumps, the Mars family, the Bezos family, the Musk family, the Kochs, and so forth. An analysis of Forbes wealth data concluded that there were about 840 billionaires in the US as of the end of 2024. They are all eligible for this tax loophole; most of us are not.

I don’t know whether these specific families have used this tax method, I just wanted to make it more concrete in the essay. It is likely, but wealthy families don’t make their own tax returns public.

The Trump tax revision is retroactive to January 2025, the date when the Biden rule went into effect. Trump essentially cancelled the Biden tax rule.

Basis-shifting really makes me think of Mom and Dad! They famously told me, more than once, that a general rule regarding how you know something was illegal on your 1040 was that if there was no purpose for it other than to avoid taxes, then yes, it was illegal.

Having inherited some money, I totally understand the incentive to shift the basis of an asset. My inherited investments from my parents came over as stock funds that were purchased a long time ago – like, 40 years and more. Basis shifting would save me money in taxes. 

Here’s how it works. The tax rule for selling assets is that you pay taxes on the amount they have increased since they were purchased. In other words, if your portfolio goes up, you only pay tax on the increase, not on the full amount of the asset, and only when you sell. For example, if I bought a stock fund for $10,000 40 years ago and then sold it at its current value of $50,000, I would owe taxes on the difference, which in this case is $40,000. This would be at the capital gains rate, which is 20%. In round numbers, this would be $8,000 that I would owe the IRS. With me so far? Good.

However, if I could magically shift the basis to $50,000 at the time of the sale, then the capital gain would be $0 instead of $40,000. I would now owe nothing to the IRS. This is a huge savings for me! It’s wonderful! But a loss for the Federal Government.

In a large and complex partnership with multiple legal entities, you can move an asset from one LLC to another one that you control and under some circumstances, the basis can be shifted to the current value instead of what it cost when you acquired it. This essentially wipes out the tax on the income from selling the asset. There can be legitimate business reasons for moving assets within a complex partnership, but this is a move that is easy to abuse. Which is why the Biden administration put the kibosh on it.

Various wealthy people’s accountants have been complaining that the ‘Transaction of Interest’ reporting rule is horribly burdensome, requiring a lot of work by companies who are just trying to conduct normal business. I suppose if I were an accountant at an uber-wealthy partnership I would do the same thing.

Also I am thinking that leaving the basis shifting law on the books but at the same time making it clear that it won’t be enforced sounds like what happens in Communist China. I know, I know, this is an inflammatory thing to say. But it does sound a lot like Communist China. The laws are not enforced on members of the Party.

While revoking the basis-shifting rule is not as earth-shaking as an undeclared Middle Eastern war, we should not lose sight of these smaller things. They smell bad, and they add up. This one is essentially our administration giving a green light to billionaires to steal $50 billion from the US treasury.

How many other things like this have occurred that we are not talking about?