This bill closes a tax loophole involving partnerships where partners are related to each other. Currently, partners can shift the tax basis of partnership assets between themselves without recognizing taxable gains—a practice that allows them to reduce their tax bills. The bill requires partners in related-party partnerships to recognize gains when they receive distributions that increase their asset basis, and it applies the same rule to partnerships themselves when they distribute property. The legislation includes a small business exemption for partnerships with less than $26.4 million in gross receipts per year, and it imposes a stricter 40 percent accuracy-related penalty (rather than the standard 20 percent) on related-party partnership distribution understatements. The changes take effect for distributions and transfers occurring after June 11, 2025.
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