Beginning with tax year 2023, partnerships that sell or exchange partnership interests must report additional information to the IRS, both on Form 8308 “Report of a Sale or Exchange of Certain Partnership Interests” and on their Schedule K-1 disclosures. The additional information is intended to help partners determine their tax liability when selling or exchanging their interests.
In October 2023, the IRS released a revised version of Form 8308 that adds a new part IV requiring calculations of gain or loss on the sale or exchange of certain partnership interests. The completed Form 8308, including the new part IV, must be sent to the transferor and transferee partners by January 31, 2024. Commentators have expressed concern to the IRS because, in many cases, partnerships will not have all of the information required to complete part IV of Form 8308 by the January 31, 2024, deadline.
As a result, in mid-January 2024 IRS Notice 2024-19 granted penalty relief for taxpayers who are unable to furnish a completed copy of Form 8308 to the transferor and transferee partners by the January 31 deadline. However, the completed form is still due to the IRS on that date. Below offers guidance on Form 8308 and the new penalty relief.
What Information Is Needed on Form 8308 When a Partnership Sells or Exchanges an Interest?
Partnerships must generally file Form 8308 to report the sale or exchange by a partner of all of part of their partnership interest where any money or other property received in the sale or exchange is attributable to unrealized receivables or inventory items as defined in Section 751(a), more commonly referred to as “hot assets.” The partnership must attach the completed Form 8308 to its timely filed tax return (including extensions) and furnish copies to the transferor and transferee partners of the transaction.
The October 2023 revision to Form 8308 affects transfers occurring on or after January 1, 2023, and has expanded the reporting requirements of parts I and II, and added new parts III and IV:
- Parts I-III require the partnership to disclosure more information about the transferor and transferee partners, the record holder and beneficial owner of the partnership interest immediately before and after the transaction, and the date and type of transfer.
- Part IV requires the partnership to report three specific gains or losses that would be taxed to the transferor partner at rates higher than capital gains:
- Section 751(a) for “hot assets,” taxed at ordinary rates up to 37%;
- Section 1(h)(5) for collectibles, taxed at higher capital gain rates up to 28%; and
- Unrecaptured 1250 gain for real property, taxed at 25%.
In addition, the partnership must disclose the above gains on the transferor partner’s 2023 Schedule K-1 that is filed with the partnership’s Form 1065 tax return. The amounts are disclosed in Boxes 20AB, 20AC and 20AD, respectively.
If a partnership is required to file Form 8308 due to a sale or exchange described in Section 751(a) and its regulations, the partnership must furnish a statement to the transferor and transferee involved in the transaction by the later of:
- January 31 of the year following the calendar year in which the exchange occurred, or
- 30 days after the partnership has received notice of the exchange.
Generally, a partnership must use a completed Form 8308 as the required statement. However, the partnership can also furnish a separate statement to the transferor and transferee that includes the required information to be shown on Form 8308 with respect to the Section 751(a) transaction.
What Type of Penalty Relief Does Notice 2024-19 Provide for Form 8308?
Notice 2024-19 acknowledges the concerns taxpayers have with being able to timely furnish the information required in part IV of Form 8308 to the transferor and transferee partners. Therefore, the IRS will not impose penalties under Section 6722 for failure to furnish a completed Form 8308 to the transferor and transferee partners of a Section 751(a) exchange by the January 31, 2024, due date.
However, keep in mind this penalty relief applies only to the partnership furnishing the Form 8308 to the transferor and transferee partners, not to attaching a completed Form 8308 to the partnership’s timely filed tax return (including extensions).
How Does My Partnership Qualify for Relief Under Notice 2014-19?
To qualify for relief under Notice 2024-19, the partnership must do the following:
- Timely and correctly furnish the transferor and transferee partners a copy of Form 8308 with parts I, II and III completed, or a statement that includes the same information, by the later of January 31, 2024, or 30 days after the partnership is notified of the Section 751(a) exchange; and
- Provide the transferor and transferee partners a copy of the complete Form 8308, including part IV, or a statement that includes the same information, by the later of the due date of the partnership’s Form 1065 (including extensions) or 30 days after the partnership is notified of the Section 751(a) exchange.
Taxpayers that were involved in a sale or exchange of their partnership interest should notify their tax professional of the transaction and determine if filing Form 8308 is required, then discuss next steps to comply with the new reporting requirements for tax year 2023.
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Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.