Treasury, IRS unveil plan to close ‘major tax loophole’ used by large partnerships.

The U.S. Department of the Treasury and the IRS on Monday unveiled a plan to “close a major tax loophole” used by large, complex partnerships, which could raise more than an estimated $50 billion in tax revenue over the next 10 years.

The plan targets so-called “related party basis shifting,” where single businesses operating through different legal entities trade original purchase prices on assets to take more deductions or reduce future gains, according to the Treasury.

“These tax shelters allow wealthy taxpayers to avoid paying what they owe,” IRS Commissioner Danny Werfel told reporters on a press call Friday.  

After a year of studying the basis-shifting issue, the agencies announced their intent to issue proposed regulations. They also released a revenue ruling on related-party partnership transactions involving basis shifting without “economic substance” for the parties or “substantial business purpose.”    

The plan builds on ongoing IRS efforts to increase audits on the wealthiest taxpayers, large corporations and complex partnerships.

“Treasury and the IRS are focused on addressing high-end tax abuse from all angles, and the proposed rules released today will increase tax fairness and reduce the deficit,” U.S. Secretary of the Treasury Janet Yellen said in a statement.

Pass-through business filings with more than $10 million in assets increased 70% between 2010 and 2019, but the audit rate for these partnerships fell from 3.8% to 0.1% during that period, according to the Treasury. 

This has contributed to an estimated $160 billion a year tax gap — the shortfall between what is owed and collected — attributed to the top 1% of tax filers, the agency said.

The battle over IRS funding

The announcement comes less than one week after President Joe Biden’s top economic advisor unveiled his “key principles” for tax policy, including sustained IRS funding.  

“We should ensure ultra-wealthy taxpayers pay what they owe and play by the same rules by maintaining the President’s investment in the IRS,” White House National Economic Council advisor Lael Brainard told reporters Wednesday during a press call.

IRS funding has been a target for Republicans since Congress approved nearly $80 billion in funding via the Inflation Reduction Act.

With monthly inflation down to its lowest point in more than two years and heading toward the Federal Reserve's target, the Biden administration on Wednesday celebrated "welcome progress."

But an analysis from Accountable.US showed how more than 100 million people who rent their homes in the U.S. are not seeing the benefits of what one Biden spokesperson called "the great American comeback" in their housing costs, particularly millions of people whose homes are owned by corporate landlords.

The government watchdog found that the six largest corporate landlord companies brought in close to a combined $300 million in increased profits in the first quarter of 2024, with the profits mostly stemming from rent hikes.

Overall in the U.S., rent prices have skyrocketed by 31.4% since 2019 while wages have increased by just 23%, meaning tenants need to earn nearly $80,000 per year to keep from being rent-burdened and spending 30% or more of their income on rent.

The six companies included in the Accountable.US analysis on Wednesday have more than rent increases in common: They have all faced lawsuits regarding their use of the property management software company RealPage, which is alleged to have used an algorithm to fix rent prices, impacting about 16 million rental units in the United States.

The largest net income increase Accountable.US found among the six corporate landlords was that of Camden Property Trust, which increased its net income by 97% in the first quarter of this year to $85.8 million. The company spent $50 million on stock buybacks that it said were made possible by its "weighted average monthly rental rate," which went up nearly 2% year over year.

"Big corporate landlords have kept right on raising rent on everyday families regardless of how high their profits have grown."

Essex Property Trust increased its net income by 76% year over year to more than $285 million, also raising rents by 2.1%, while Equity Residential's income jumped 39% to $305 million as it increased its rental rates by 3.4%, with tenants paying an average of $3,077.

AvalonBay Communities saw its net income increase 18% to $173.6 million, apparently owing both to its "rental and other income" revenue going up by 5.6% and its "management, development, and other fees" for tenants soaring by 68.4% to nearly $1.8 million.

"Big corporate landlords have kept right on raising rent on everyday families regardless of how high their profits have grown. Adding insult to injury, many landlords rewarded a small group of wealthy investors with new handouts at the expense of struggling tenants," said Liz Zelnick, director of the economic security and corporate power program at Accountable.US.

The group's analysis was released weeks after the Federal Bureau of Investigation conducted a raid on an Atlanta-based property management firm in the Department of Justice's antitrust investigation into RealPage regarding "allegations of a nationwide conspiracy to artificially inflate apartment rents."

As Competition Policy International (CPI) reported earlier this month, "RealPage's system, which provides rental price recommendations based on real-time data from landlords, is alleged to be a key tool in manipulating the rental market. The firm's influence covers 70% of multifamily apartment buildings."

"The scheme purportedly operated by encouraging landlords to adopt RealPage's pricing recommendations, a practice they follow 80-90% of the time," reported CPI. "This coordinated approach reduces the availability of rental units, driving up prices. One of the architects of RealPage's system reportedly stated that the aim is to prevent landlords from undervaluing their properties, ensuring consistently higher rents across the board."

Zelnick said it was "unsurprising that some of the same companies that needlessly inflated housing costs have worked closely with a software company accused of helping landlords coordinate a massive price fixing scheme. Through-the-roof rent hikes based on greed—not need—have kept many Americans from getting ahead, which is why Congress must do more to support the Biden administration's affordable housing actions."

President Joe Biden has urged Congress to pass legislation to stop price gouging by landlords and to build millions of affordable rental units.